No respite in sight for JSPL

Lack of offtake agreement puts pressure on power segment; lower realisations take toll on steel biz

Jindal Steel & Power (JSPL)’s performance for the September quarter was no better. While the June quarter had indicated some turnaround with operating profit being able to meet finance costs, the same wasn’t enough to cover interest costs in the September quarter leading to a net loss at the standalone level. With the steel segment seeing pressure owing to weak demand for long products and rising input costs, and the power segment under pressure in the absence of adequate power purchase agreements, the prospects of JSPL remain subdued. 

In steel, JSPL’s domestic volumes at 0.81 million tonnes (mt) came marginally better than 0.78 mt in the previous and year-ago quarters, and consolidated volumes at 1.08 mt grew nine per cent year-on-year led by the Oman-based operations. However, with lower realisations, revenues from the segment at Rs 3,624 crore were lower than Rs 3,700 crore in the year-ago quarter. Earnings before interest and tax (Ebit) also declined to Rs 70 crore from Rs 331 crore in the year-ago quarter. The segment, on the one hand, is seeing an increase in depreciation led by continued expansions, while weak demand for long products, rising input costs and decline in realisations are taking a bigger toll. Analysts say that Oman Steel’s Ebitda, too, has been under pressure due to weak demand.

In power, not only is demand weak, but the absence of PPAs has hurt production. Further, with merchant power (open market or spot) tariffs under pressure and given the company’s dependence on short-term PPAs, profitability remains subdued. The segment’s Ebitda at Rs 182 crore, though up eight per cent year-on-year, was flat sequentially. 

 

Power production at 2.3 billion units declined 15 per cent year-on-year, and plants operated at just 38 per cent of capacity (1,060 Mw compared to available operational capacity of 2,800 Mw) in the quarter. With synchronisation of 600 Mw of new capacities, the available capacity will rise to 3,400 Mw. JSPL currently has power offtake agreement for only 870 Mw, of which 150 Mw is from mid-2017. Thus, for the profitability to improve, it needs to secure more PPAs. 

Meanwhile, in steel, rising coal prices are a concern while demand for long products has taken a beating in domestic markets due to demonetisation. Thus, not much relief may be expected in the December 2016 quarter. Analysts at Kotak Institutional Equities said that poor demand for long products and higher raw material costs will continue to pressurise the second half FY17 earnings and believe the earnings trajectory can improve from better asset sweating, although recovery will be gradual and back-ended towards FY2018-19.