 "JSPL: Too much cheer for nothing?")
This article has been modified. Please see the clarification at the end.
The government’s decision to impose 20 per cent safeguard duty on import of certain steel products has worked in favour of companies such as Tata Steel, JSW Steel and SAIL. Stocks of these companies gained between 1.5 per cent and 3.5 per cent in trade on Monday. Even Jindal Steel & Power (JSPL) surged 3.7 per cent.
The safeguard duty will benefit companies manufacturing hot-rolled coils and the duty is for 200 days, though there is a suggestion to implement it for a longer term. Unlike import duty, safeguard duty applies to imports from all countries, including those under special treaties such as free trade agreements. Estimates suggest the safeguard duty could mean a potential increase of Rs 4,000 a tonne in domestic prices.
While analysts expect this to significantly increase the revenue and operating margins of steel manufacturers, they are not so enthusiastic on the outlook for JSPL. This is despite the stock appearing cheap due to its significant underperformance vis-à-vis other steel stocks through the past year. Analysts believe the stock’s 6.8 per cent gain in the past week may not sustain in near term. Though the company makes 1.2 million tonnes of HRC (hot rolled coil), it is just 21 per cent of its total 4.75 million tonnes per annum domestic capacity. Besides, there are other operations including global business, power, mines, etc. So, in the scheme of things, the gains from safeguard duty will be limited.
When contacted, Ravi Uppal, MD and Group CEO of JSPL, said a section of steel manufacturers have appealed to the Directorate General of Safeguards to extend the duty to imports of steel products other than HRC. If it is done, this will benefit JSPL, Uppal said.
On the power segment of JSPL, Uppal said the power plants are operating at 2,200 megawatts as against 3,400 megawatts of total capacity. The company, he said, is not facing any challenge as far as coal souring is concerned.
JSPL’s operational performance meanwhile remains subdued. Less than a week ago, ICRA had downgraded its rating on the company’s long-term and short-term borrowings. In its report, the rating agency indicated the downgrade was primarily due to weak revenue realisation on the back of a subdued environment for steel manufacturers; issues impending the sourcing of coal due to a Supreme Court order cancelling coal blocks allocated to JSPL; and the company’s inability to monetise some of its investments within a reasonable timeframe.
Through the past couple of years, things have taken a turn for the worse, especially with debt rising and coal blocks being de-allocated. During FY12-15, JSPL’s consolidated gross debt rose from Rs 17,091 crore to Rs 45,500 crore. While net sales remained in the Rs 18,900-20,400 crore band, operating profits fell from Rs 6,000 crore to Rs 4,065 crore.
Meanwhile, the company’s power business has also suffered, owing to lack of captive coal and a decline in merchant power rates. Generation declined 23 per cent year-on-year in the June quarter, while the profit after tax fell to Rs 26 crore from Rs 195 crore in the year-ago period.
For the company, operational challenges could grow if its move challenging a Supreme Court order (regarding coal block allocations) is stuck down.
Until conditions improve, the JSPL stock may not be a buy. In a Bloomberg poll, three of the 13 analysts have a ‘sell’ rating on the stock; the rest have a ‘neutral’ rating.
CLARIFICATION
An earlier version of this article had wrongly mentioned that JSPL did not manufacture hot-rolled steel. Some of the analysis that followed was based on this information, which has been corrected. The errors are regretted.
