Near-term margin pressures for JSPL on likely tapering of steel prices

Captive coal availability and zero-debt target by the end of the year are positives

Jindal Steel & Power (JSPL) delivered a positive surprise in terms of higher-than expected operating profit in the first quarter of the 2022-23 financial year (Q1FY23). It has also received four capital coal blocks, which will ensure that it can meet demand for thermal coal from internal sources, once these are operational.

However, costs also escalated in Q1, and working capital costs rose, due to higher inventory levels. Given the expectations of lower steel prices going forward and the negative impacts of export duty, and rising inflation, some analysts are giving ‘reduce’ recommendations while others remain ‘positive’ on the stock.

JSPL reported a consolidated operating profit of Rs 2,999 crore primarily due to higher realisations per tonne. Inventory increased by Rs 1,780 crore during the quarter. The standalone profit was at Rs 2,866 crore (adjusted for forex gains of Rs 450 crore), which was down 8.4 per cent quarter-on-quarter (QoQ). The standalone reported steel sales (incl. pig iron) were of 1.74 million tonnes (down 16.3 per cent QoQ). The share of exports decreased to 26 per cent in Q1, vs 29 per cent in Q4FY22. The net profit increased 6.2 per cent QoQ to Rs 1,940 crore.

The management guidance was that JSPL would maintain an export mix at about 20 per cent, mainly via a value-added product mix, despite the export duty. JSPL maintains guidance of between 8.2 to 8.4 million tonnes of production during 2022-23.

The consolidated net debt reduced by Rs 1,150 cr to Rs 7,700 crore, down from Rs 8,900 crore in March 2021. There was a receipt of Rs 3,000 crore from the JPL divestment. But the working capital build of around Rs 3,000 crore prevented greater quantum of deleveraging. JSPL continues to target becoming net debt free by end of FY23. JSPL has also maintained capital expenditure guidance of Rs 22,400 crore (including GST) over the next two to three years with annual capex of Rs 6,000-7,000 crore.

Blended realisations are at Rs 73,842 per tonne, up 11 per cent QoQ but costs increased to Rs 57,378/tonne, which is 58 per cent higher year-on-year (YoY), and 11 per cent up QoQ. The profit from international subsidiaries, mainly coal mining, was up, QoQ, to $57 million from $27 million in Q4FY22.

The company has won four domestic coal blocks, and once operational, these will meet the entire thermal coal requirements. Timelines are around 12-15 months, with the first mine to become operational by the end of the current fiscal.

Domestic steel prices have corrected by over 20 per cent in the past two months. Further price corrections are expected. But the costs of iron ore and coal are also declining, which may lead to margins being maintained. It’s hard to answer the key question: Will steel prices correct more or less than the input cost deflation? For what it’s worth, this is a capital-intensive business and interest rates are rising, implying finance costs may rise, with elevated working capital needs, despite the deleveraging.

There’s good long-term prospects for JSPL given the ongoing expansions and the captive coal availability. But there will surely be near-term margin pressures. The share price has moved up from around Rs 315 a month ago to Rs 352 after the results came in. Target prices and valuations vary from Rs 360 to Rs 430.