JSPL offers good opportunity for long-term investors, say analysts

Raising capacity at Angul steel plant leading to strong volume growth

Jindal Steel and Power (JSPL) has been in news recently, and for good reason. The most recent are the strong steel production and sales figures for the June quarter. A few days back, its power segment also received a ratings upgrade. Following these developments and an 18 per cent correction in its share price since record levels hit in January, analysts believe it offers a good opportunity for long-term investors.

To being with, JSPL on Tuesday said steel sales jumped 46 per cent year on year, and production grew 36 per cent, year on year, during the June quarter. This means, its steel segment will continue to post strong improvement in performance, aided by improving domestic demand and realisation as well as capacity expansion at its 6 million tonne Angul plant. Moreover, while its 3 million tonne basic oxygen furnace has started in December last year, the soon-to-be commissioned two MTPA direct-reduced iron plant at Angul will further improve its capacity utilisation from the current 60 per cent. Additionally, JSPL's cost of production, which has been improving, will see the per tonne cost decline by about Rs 2,000 as the plant goes on stream.

The power business, which has been a laggard, is also seeing improvement. The jump in merchant power rates, which has now stabilised at elevated levels, will add to profits and should also lead to new short to medium term power purchase agreements (PPAs).

JSPL is planning to increase plant utilisation to 50 per cent from the 2017-18 level of 37 per cent with a few short to medium term PPAs under negotiation. Recently, ICRA, too, upgraded the ratings outlook to stable for Jindal Power's (JSPL's power subsidiary) credit portfolio of Rs 98.88 billion. The revision in rating factors in the significant turnaround in JSPL's credit profile during the last few quarters and the improving revenue outlook of Jindal Power. Analysts believe merchant capacities with low variable cost such as those of Jindal Power will either be able to seek PPAs or realise better margins in merchant power sale. The biggest gain in equity value is likely to accrue to JSPL, according to analysts at Motilal Oswal Securities who also believe that riding a strong steel cycle, the company is the best play from a perspective of two to three years.