Cost savings, higher volumes and lower valuations strengthen JSPL outlook

In the near term, JSPL has won contracts in Europe filling the gap caused by Ukraine War. In the longer term, it hopes capacity expansions will boost volumes, making up for possibly lower realisations

Jindal Steel & Power (JSPL) has seen a series of positive developments during the past few quarters. Most recently it won four captive coal mines in Odisha where it has ambitious plans of coal gasification to build a huge steel manufacturing complex using low emission technology. The mines are expected to produce 15 million tonnes (MT) per annum (PA) at full capacity, by FY 2023-24. JSPL already sources captive coking coal from mines abroad and once the Odisha mines are operating, it would free the company from dependence on coal sourced from e-auctions and it could lead to cost savings that may amount to Rs 143 per share. Although most analysts assume that the current super normal realisations from steel may not be sustainable, there should be steady demand that translates into sustainable profits. The company paid dividends this year for the first time since 2014.

In the near term, JSPL has secured a few contracts in Europe filling the gap caused by the Ukraine War. In the longer term, it hopes the capacity expansions will result in volumes compensating for possibly lower realisations. The company has been committed to deleveraging for several years and it targeted Net Debt-to-Ebitda of 3x before embarking on capex. Jindal Power's separation should also result in cash accrual of Rs 3,000 crore which may be used to pay down debt.

Most steel industry analysts expect steel prices to soften by the end of the calendar year. While 2022-23 may average out at slightly lower, steel prices in 2023-24 may drop. However, once the coal production kicks in, cost savings should lead to a stabilisation of Ebitda per tonne albeit at lower levels. Given higher volumes, and lower debt, the bottomline should improve.

Valuations for JSPL are on the lower side compared to peers on the metric of Enterprise Value (EV)/EBITDA. While Tata Steel and JSW Steel trade at EV/Ebitda of 5-6, JSPL is just over 4.4x. It has an historical average of 5.5x so there's an upside. Net Debt to Ebitda has dropped from 5x in 2019-20 to below 0.4x and the target is to stay below 1.5x through the entire capex cycle which should peak by 2022-23 and end by 2024-25. The ROE (return on equity) is at around 24 per cent, which is well below Tata Steel (41 per cent). In terms of PE, JSPL is at around 7x and this could drop to 4.5x discounted to 2023-24 earnings.

The stock has seen very positive action this year. It returned 41 per cent in the last 12 months and 24 per cent in the last month. Sentiment across the sector is positive and by the time steel prices are expected to soften, the cost savings will kick in. Analysts have target prices in the range of Rs 605 to 675, with current price of 542, offering a reasonable upside.