JSPL's best is yet to come over rising steel output and pricing environment

Strong oversees performance amid favourable demand and pricing environment will drive earnings

The performance of Jindal Steel and Power (JSPL) continues to show improvement, led primarily by the steel segment. For the December 2017 quarter (Q3), even as domestic performance improved, the strong showing in its Oman operations pushed up overall numbers. The power segment also saw some improvement, with the start of coal mining at Wollongong in Australia. Further ramp-up of production at its Mozambique mines adds to the good news.

Overall consolidated sales at Rs 69.04 billion, up 14 per cent sequentially and 21 per cent over a year; better than the Bloomberg consensus estimate of Rs 66.3 billion. Earnings before interest, tax, depreciation and amortisation (Ebitda) jumped 17 per cent sequentially and 26 per cent over a year to Rs 16.1 billion, against the estimate of Rs 15.4 billion. Consequently, net losses declined from Rs 3 billion in the September quarter and Rs 4.22 billion a year ago to Rs 2.7 billion; the Street was expecting a loss figure of Rs 3 billion.

Cash profit (net profit plus depreciation) doubled sequentially to Rs 6.4 billion. As the company is expected to achieve break-even at the net level in FY19 and expansions at its Angul (Odisha) plant are over, the Street is now expecting a reduction in debt, too.

Moreover, the steel sector is seeing regular improvement in demand and realisation, also benefitting JSPL. Domestic sales grew 13 per cent sequentially (12 per cent over a year) to 940,000 tonnes, with operating profit (Ebitda) per tonne improving four per cent sequentially to Rs 9,800.

Analysts say the best is yet to come. They see JSPL’s domestic steel volume growing from 3.4 mt in FY16 and FY17 to 4.7 mt in FY18 and 6.5 mt in FY19, and Ebitda per tonne to improve Rs 2,000. Its Oman capacity of two mt is already at optimum levels; Ebitda increased 198 per cent over a year during Q3.

The power segment, with 3,400 Mw capacity, is gradually improving, with 37 per cent growth in sales and three per cent in Ebitda. The company now has 30 per cent of its capacities tied-up. As this figure improves, so should performance.

In this backdrop, analysts are positive. Those at Motilal Oswal Securities see domestic steel performance being led by improving long-product prices and say both steel and power operations are in a recovery phase and yet to achieve full operational potential. They reiterated ‘buy’ ratings on the stock, with a target price of Rs 363 after the results. Citi, after completion of the Angul expansions, had said the stock was trading below book value and conservatively estimated replacement cost of Rs 401 (target price Rs 375) for the stock trading at Rs 266.