Jindal Steel rated buy by Edelweiss

By: | Published: December 29, 2017 2:44 AM

We reiterate ‘buy’ on Jindal Steel & Power (JSPL) with an unchanged target price of Rs235 on the ensuing operating leverage benefits for the company with completion of its 3mtpa basic oxygen furnace (BOF) at Angul

Jindal Steel, Edelweiss, Jindal Steel & PowerWe reiterate ‘buy’ on Jindal Steel & Power (JSPL) with an unchanged target price of Rs235 on the ensuing operating leverage benefits for the company with completion of its 3mtpa basic oxygen furnace (BOF) at Angul

We reiterate ‘buy’ on Jindal Steel & Power (JSPL) with an unchanged target price of Rs235 on the ensuing operating leverage benefits for the company with completion of its 3mtpa basic oxygen furnace (BOF) at Angul in Q3FY18, in line with management’s guidance given during the Q2FY18 earnings call. As such, we see higher probability of our FY19E EBITDA of Rs90billion (10% ahead of consensus) being achieved due to volume ramp up and cost benefits at Angul plant. Besides, the stock is available at the lower-end of its 10-years trading band at 6.1x FY19E EBITDA. We expect JSPL to deliver domestic steel sales volume growth of 39% CAGR at 6.5mt through to FY19E following completion of the 3mtpa BOF at Angul. We believe that not only will the company utilise full capacity of its 3.2 mtpa blast furnace (commissioned earlier in August’17), but also achieve cost efficiencies estimated at Rs2,000/t on full ramp up. In our view, it is well poised to achieve an exit monthly rate of 300kt from Angul by FY18E end in line with management’s guidance given during the Q2FY18 earnings call. Our FY19E EBITDA at INR90billion is 10% ahead of consensus due to: 1) Higher steel sales volume of 4.7mt and 6.5mt in FY18E and FY19E, respectively; and 2) Cost savings of Rs2,000/t in FY19E on full ramp up. We believe that consensus EBITDA estimates would also move up as production ramps up. We reiterate our favorable view on JSPL as the operating leverage story is well set to play out. We believe that optimal downstream asset utilisation and cost benefits will enable the company to further improve profitability. We maintain ‘BUY/SO’ with an unchanged TP of INR235. At CMP, the stock is trading at 6.1x FY19E EBITDA, which is at lower end of its 10-years historic trading average and global peers.

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