Operational turnaround seen ahead for JSPL

Improving demand and expansion in steel segment is expected to drive profit growth

A strong December quarter performance and expectations of a turnaround for its businesses saw the Jindal Steel and Power Limited stock gain 7.8 per cent on Monday. Brokerages have been upgrading the stock over the last few days.

For the power business, improved coal availability, cost controls, and reduced supply to exchanges (where realisations from sale of each unit are lower) have helped improve the performance of the segment at a time when power demand continues to be weak. In the steel business, tailwinds such as anti-dumping duty and higher global prices should improve realisations, while cost reduction will aid margin gains. 

The company's December quarter sales at Rs 854 crore grew five per cent year over year and 16 per cent sequentially. However, profitability saw a sharper rebound, with operating (core) profit at Rs 302 crore, up 66 per cent year over year as well as on a sequential basis. Operating profit margin at 35 per cent have improved sharply from 22 per cent in the year-ago quarter and 25 per cent sequentially.

During the quarter, company's steel sales volumes at 1.16 million tonnes (mt) increased from 0.99 mt in the year-ago quarter and 1.08 mt in the previous quarter. Domestic sales volumes at 0.84 mt improved from 0.74 mt in the year-ago quarter and 0.81 mt in the previous quarter. In addition to higher sales volumes, segment profit at Rs 74 crore was much higher than Rs 46.68 crore in the September quarter and a loss of Rs 281 crore in the year-ago quarter. Ravi Uppal, the company's managing director and group chief executive, said concentration on enriched products, railways and others helped raise profitability. The company has exported about 25 per cent of its production volumes. Besides, cost-control is also drawing in gains.

The company has finished construction of its 3.2-mt blast furnace at Angul in Odisha, which is set to start soon. This will result in significant benefits and help the company sell about six million tonnes of steel in FY18, up 50 per cent from a year ago. The Raigarh operations may benefit from 2-mt coal linkages, helping control costs. Analysts at ICICI Securities say a tilt towards direct reduction of iron-ore technology could offset the increase in coking coal costs. Thus, steel operations should continue to see further benefits from government budgetary allocations and railway projects; housing and others will help drive steel demand by about five per cent in FY18.

The power demand in the country remains weak and the company sees challenges in securing power purchase agreements (PPAs). Against this backdrop, per-unit operating (core) profit at Rs 1.4 was the highest in the last seven quarters, much better than Rs 0.8 and Rs 0.9 a year ago and in September quarter, respectively. The power division is currently operating three units of 250 megawatts and one unit of 600 Mw. With Karnataka PPA (200 Mw from March and 150 Mw from October) the company may operate another 600 Mw. The company is also looking at opportunities offered by PPAs from Uttar Pradesh, Jharkhand, Bangladesh, and railways. 

(Operating profit is the profit earned from a firm's normal core business operations. This value does not include any profit earned from the firm's investments, such as earnings from firms in which the company has partial interest, and the before the deductions of applicable interest and taxes owed. Operating profit represents the earning power of the company with regard to revenues generated from ongoing operations. Operating profit serves as an indicator to the business’s potential profitability with all extraneous factors removed from the calculation. Income created through the sale of assets, outside of those assets created for the purpose of being sold as part of the core business, are not included in the operating profit figure. Additionally, interest earned through mechanisms such as checking or money market accounts are not included.)