JSPL to gain from expansion in capacity, better pricing for steel

Blast furnace in Angul from March seen boosting production and improving cash flow

Jindal Steel and Power (JSPL) is set to accrue gains on account of various factors, following an improvement in outlook for steel prices. 

While the higher steel prices will translate to better margins and earnings, capacity expansions in the firm’s steel business will further boost its financials. JSPL’s DRI (direct-reduced iron) plant at Angul, with a capacity of 1.8 million tonnes per annum (mtpa), is expected to start production by mid-March. 

The company will also see its 3.2 mtpa blast furnace achieve 11,000 tonnes per day (tpda) of rated capacity by the end of FY19. While the blast furnace had already stabilised with a production rate of 8,500 tpda, the DRI plant has now resumed operations of its coal gasification unit. 

All these factors indicate good progress on its Angul plant achieving 5 mtpa production, say analysts who expect JSPL to achieve 5.8-6.5 mt of steel production during FY20, compared to an exit rate of 6 mt at the end of January 2019. The ramp-up in downstream capacity will also boost margins. Coupled with cost efficiencies, all this will likely result in savings of up to Rs 2,000 per tonne in FY20, say analysts at Edelweiss.

In fact, cost efficiencies and the volume ramp-up are already reflecting on financials. JSPL’s domestic steel operations had seen per-tonne profitability improve 9 per cent year-on-year to Rs 12,344 during the December quarter (Q3), helped by better product mix, despite softness in steel prices. 

Notably, the profitability has inched closer to levels reported by larger peers. JSW Steel, for instance, had seen per-tonne profitability of Rs 12,060 for its stand-alone operations during the December quarter, while Tata Steel’s fully integrated India business continued to lead, with per-tonne profitability of Rs 16,400. 

JSPL’s power business, though, continues to be the weak link. It had, however, seen better demand in Q3 with Plant Load factor (PLF) rising two percentage points to 35 per cent and realisations improve 3 per cent over the September quarter. Nevertheless, it is the steel business (contributing over 85 per cent to the consolidated top line) that continues to drive the overall prospects of JSPL. 

Analysts at Motilal Oswal Securities say the ramping up of its new blast furnace at Angul is expected to drive 29 per cent compounded annual growth in steel production over FY18-20. Even if steel prices soften, and assuming compression in per-tonne profitability by 20-25 per cent from current levels to Rs 9,500, analysts expect JSPL to generate significant free cash flow.