JSPL heads for turnaround next year

Completion of capacity expansions may drive volumes and profit, helping address its debt issues

Jindal Steel and Power (JSPL), which had underperformed larger peers Tata Steel and JSW Steel in recent years, has emerged as a strong performer on the bourses in FY18 so far.

The share price is up three-fold in a year, with 70 per cent gain coming in the current financial year, led by marked improvement in the steel business. Though its power segment remains a laggard, in the absence of long-term power purchase agreements (PPAs), improvement in its steel segment should be enough to lift sentiment further.

With the steel cycle turning favourable after implementation of minimum import prices (MIPs) and other government measures since February 2016, Jindal is already seeing improvement in financials. With recently expanded steel capacities, it is set to report strong improvement in volume and profit. So, and despite the gains this year, analysts see more upside in the stock.

Capacity boost

Completion of its blast furnace at Angul in Odisha this August was seen in a positive light. Completion since of the three million tonne per annum (mtpa) steel-making oxygen furnace there also marks completion of the six mtpa integrated project. With the Rs 33,000-crore capital expenditure ending, JSPL is also set to reap benefits on volumes and, say analysts at Edelweiss, cost efficiencies of Rs 2,000 a tonne.

Source: Edelweiss Research

All this should help grow earnings at a faster pace. The stock, which reached a 38-month high of Rs 203.9 on Thursday, has been an outperformer.

JSPL's domestic steel sales are expected to grow 39 per cent annually - from 3.4 mt in FY17 to 4.7 mt in FY18 to 6.5 mt in FY19. The volumes could overtake analyst estimates if the company is able to garner higher orders for value-added products. With capacity of 9.6 mt in India (6 mt at Angul and 3.6 mt at Raigad, Maharashtra), achieving production and sales of 7.6-8 mt, assuming 80 per cent or more capacity utilisation, might not be difficult, say analysts.

Data compiled by BS Research Bureau

Pellet sales are seen rising 40 per cent to 4.2 mt in FY19, after being about flat in FY18. Its Oman steel plant of 2 mt capacity is already working at optimum capacity and contributing well to consolidated earnings.

While volumes and profit are seen rising, so are steel demand and realisations. Declining export from China is benefiting Indian manufacturers, both at home and in export markets. Indian steel bar and rod export increased 95 per cent year-on-year during the first nine months of 2017, say analysts at ICICI Securities. Chinese steel export has been falling for some quarters due to rising demand at home and stricter measures by its government to curb pollution by eliminating low quality producers. All these augur well for steel producers here, including JSPL.

The power segment (3,400 Mw), however, is seeing low capacity utilisation in the absence of PPAs, especially for the 2,400 Mw capacity at Tanmar (Chhattisgarh). However, with 660 Mw long-term PPA continuing, commencement of a 150 Mw PPA with Kerala (October 17) and extension of a 200 Mw medium-term PPA with Tamil Nadu for another two years are expected to support the segment's performance, say analysts.

Further, with the restart of Russell Vale in Australia (closed for a long period; it is part of the assets JSPL acquired from Gujarat NRE Coke), a large part of the losses in Australian operations can be reversed, say analysts.

With the steel segment doing well, consolidated operating profit of JSPL is seen rising 42 per cent in FY19. This should help it adequately service debt. Focus will shift to loan repayment once JSPL starts posting profit in FY19, says analysts.

For now, those at Edelweiss say their favourable view on JSPL continues, as the operating leverage story is well set. While Edelweiss has a target price of Rs 235 for the stock, ICICI Securities' is higher at Rs 267. That's a lot of upside for a stock trading now at Rs 202.