Stock corner: Reiterate ‘Buy’ on JSPL with target price of Rs 184

We visited Jindal Steel and Power’s (JSPL) Angul plant. Production ramp-up at Angul continues and is the key driver of volume growth this year (up 12% y-o-y in H1FY20). The next leg of growth at Angul is expected to be driven by recommencement of production at the 1.8 mtpa DRI plant (by end-Dec ’19), which would use the rich gas produced by the coke oven batteries. The fourth unit of the 500ktpa coke oven battery has also been commissioned, which will supply coke to Raigarh, substituting purchased coke. Management remains focused on deleveraging through FCF and monetisation of overseas assets. FCF generation should be strong with the focus on sweating existing assets and limited growth capex currently. The stock is trading attractively at FY21 cash P/E of 4x. Maintain Buy.

With restarting of the cost-efficient DRI plant (using coke oven gas), total metallic availability would increase to ~13,000tpd from Jan ’20 (from 10,000tpd currently), implying that annual steel production of ~4mt would be achievable at Angul at a competitive cost. We, therefore, increase our FY21 standalone steel sales volume estimate to 6.2mt, implying a 10% CAGR in FY19-21E. Lower raw material cost led by decline in coking coal and iron ore costs should partially offset the decline in steel prices seen in the past six months. Operating leverage and related efficiencies should also bring down the conversion cost.

JSP’s power business remains highly underutilised with PLF hovering around 35%. In the past few months, lower demand and declining merchant prices has led to withdrawal of medium- and long-term PPAs by discoms. However, as demand recovers, visibility for medium-term contracts should reappear. Over the next few years, we expect oversupply in the power market to reduce on tapering of capacity addition and retirement of old plants. JSP is well placed to secure PPAs as this plays out, which should boost its free cash flows.

The company remains focused on debt reduction. We expect JSP to generate significant consolidated free cash flow (as major capital expenditure is now behind), which will help reduce leverage – INR365b net debt as of Sep ’19 with ~5x net debt/Ebitda. JSP is also pursuing overseas asset monetisation (including stake sale in Oman), which when successful would aid further deleveraging. The stock trades at an attractive valuation of 5.7x FY21E EV/Ebitda and 4x FY21 cash P/E. Reiterate ‘Buy’ with a target price of INR184 based on SOTP.