JSPL: Higher raw material costs a key concern

Surging coal prices impact operational performance in the September quarter

Jindal Steel and Power Ltd (JSPL)’s consolidated performance for the September quarter was marginally better than Street expectations. The stock on Monday closed with a gain of 2.5 per cent at Rs 81. Sales at Rs 4,880 crore and operating profit at Rs 976 crore were better than the Street’s estimates of Rs 4,572 crore and Rs 968 crore, respectively. However, the company reported losses of Rs 618 crore due to exceptional items that included an impairment loss of Rs 227 crore in a foreign subsidiary and a foreign exchange loss of Rs 212 crore.

Given the pressure on realisations, the steel segment’s performance was in line, while the power segment disappointed. Steel deliveries declined eight per cent sequentially to 780,000 tonnes, and long-product prices declined sharply. The segment revenue, however, increased three per cent sequentially at the standalone level. Overall earnings before interest and taxes (Ebit) at Rs 319 crore were better than the Rs 115 crore in the June quarter, though down 32 per cent over the year-ago period. At the consolidated level, international subsidiaries saw an improvement in earnings before interest, tax, depreciation, and amortisation (Ebitda)

However, the power segment Ebit at Rs 188 crore was lower than the Rs 217 crore in the June quarter and Rs 245 crore in the year-ago period, despite higher power production sequentially. During the June quarter, company shut down two 250-megawatt (Mw) units. Rising fuel costs due to a higher price for coal hit performance. Higher coal cost in the absence of captive mining is hurting performance and is a key concern of the Street.

The company is restructuring assets by selling power assets from a standalone entity to Jindal Power (96.4 per cent stake). This will include a 6x135-Mw power plant at Angul and 2x55-Mw power plant at Raigarh. However, analysts do not see much benefit from this exercise. Analysts at Kotak Institutional Equities cut their FY2016-18 Ebitda estimates by 23 to 38 per cent, due to lower steel price assumptions and higher costs in the power business. They say that after the cancellation of coal blocks and the suspension of iron mining, estimating earnings of the company is difficult. They have a cautious view, with a target price of Rs 79 for the stock. Other analysts polled by Bloomberg have neutral or hold ratings.