Better volumes, led by expansion, to drive JSPL's future earnings: Analysts

Analysts expect better volumes, led by expansion and operating efficiencies, to drive future earnings

In a quarter that saw steel prices coming under pressure and falling to a one-year low, Jindal Steel and Power (JSPL) did well, reporting a 7.7 per cent sequential improvement in operating performance in its India business. For the quarter ended December 2019 (Q3), while rising volumes and improved operating efficiency at its Angul plant helped, declining raw material prices proved supportive. Notably, JSPL’s prospects are seen improving, and analysts say there are more gains for the stock, which has almost doubled in less than four months.
 
JSPL’s domestic steel sales volumes grew 21 per cent sequentially and 34 per cent year-on-year to 1.61 million tonnes (MT) in Q3. Steel realisations, as extrapolated by analysts by dividing revenues by sales volume, however, continued to decline and were down 16 per cent sequentially to Rs 39,023 per tonne. Yet, JSPL’s domestic operations reported an 8 per cent sequential rise in earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 1,352 crore. On a year-on-year basis, even though Ebitda was down 9 per cent, it came better than estimates of brokerages, such as Motilal Oswal Financial Services, which had pegged the number at Rs 1,220 crore.
 
Sales at its overseas subsidiary, Oman Steel, at 570,000 tonnes, too, were up 27 per cent sequentially, and its Ebitda of Rs 230 crore came way ahead of analysts’ estimate of Rs 150 crore.
 

 

JSPL’s power segment, however, disappointed as it was impacted by low coal availability. This meant power generation declined 27 per cent year-on-year in Q3. The power segment’s Ebitda, thus, was down 14 per cent sequentially and 5.8 per cent year-on-year. As a result, it also weighed on JSPL’s consolidated performance, which came slightly below the Street’s expectations.
 
At the net level, JSPL posted a consolidated adjusted loss of Rs 224 crore after accounting for Rs 1,000 crore each in interest and depreciation costs. The loss in the September quarter was Rs 300 crore.
 
Analysts are positive on JSPL’s prospects. While expanded capacity at the company’s Angul plant is helping improve volumes and operational efficiencies, the domestic steel price has now rebounded. The average steel price had dipped by about Rs 3,500 a tonne during the December quarter. It has seen a surge since December, and is likely to remain firm. So, expect JSPL to benefit from improving realisations, higher volumes, and better operating efficiencies. Its Angul plant has now become more cost efficient as compared to the Raigarh plant.
 
The start of its cost-efficient DRI plant (direct reduced iron; using coke-oven gas) will improve metal availability for steel production to 13,000 tonne per day (tpd) from this month, as against 10,000 tpd earlier, say analysts. This implies that annual steel production of 4 MT will be achievable at Angul plant at competitive costs. The fourth unit of JSPL’s 500,000 tonne per annum coke-oven battery will also supply coke to the Raigarh plant, substituting the high-cost purchased coke.
 
The power segment should also rebound in the current March quarter, led by better availability of linkage coal, says the company.
 
However, the bigger gains will be visible once JSPL finalises the power purchase agreements (PPAs). As demand recovers, visibility for medium-term contracts should reappear, say analysts. Over the next few years though, analysts expect improvement in PPAs as the oversupply situation in the power market is expected to reduce with lower capacity additions and old plants going off stream.
 
Post results, analysts at Motilal Oswal have maintained their ‘Buy’ rating on JSPL, led by visibility of strong volume growth, and have a target price of Rs 210. All seven analysts polled by Bloomberg post results have a Buy on the stock; their average target price is Rs 223.
 
The good Q3 numbers, which came over the weekend, helped the JSPL stock gain 1.6 per cent to Rs 179.25 on Monday as compared to 1 per cent fall in the Sensex, taking overall gains to over 93 per cent since September lows.