Analyst Corner: Jindal Steel & Power Rating ‘buy’ – Volume uptick in April beat sector trend

Jindal Steel & Power’s (JSPL’s) production volume uptick of 5% y-o-y in April in a challenging operating environment comes as a pleasant surprise. Key highlights: (i) Exports constituted 74% of sales volume; (ii) Angul blast furnace recorded highest-ever monthly production of 298kt; and (iii) Jindal Shadeed’s sales volume stood at 120kt.

Unlike peers, we see relatively lower impact on JSPL’s margin due to: (i) use of iron ore fines (negligible cost) from Sarda mine’s stock; and (ii) presence of rails & specialty plates. Despite our concerns on the leveraged ferrous space, we maintain our relative preference for JSPL. Maintain Buy with TP of Rs 130. The stock is currently trading at 4.4x FY22e Ebitda.

Volume uptick beats sector trend
Despite a challenging operating environment, where peers are operating at 40-45% capacity utilisation, JSPL’s volume uptick of 5% y-o-y stands out. Key highlights for April: (ii) Standalone sales volume stood at 365kt with additional sold quantity lying at port that could not be shipped owing to lockdown;
(ii) exports volume grew 109% y-o-y to 248kt; (iii) blast furnace at Angul operated at average production rate of 10kt per day; and (iv) despite business challenges in GCC countries, Jindal Shadeed recorded sales volume of 120kt with evident destocking. In our view, on operating front, JSPL is faring better compared to peers due to lower inventory build-up and better volume growth.

Cash generation aided by lower cost and product mix
We understand that management is focusing on tapping export markets in a bid to generate cash to the maximum extent possible. The positive verdict allowing JSPL to transport iron ore lying at Sarda mines came at an opportune time as it enables the company to lower cost significantly. Further, supply of rails blooms to France and rails to Indian Railways is likely to boost margin further.

Outlook: Operationally sound
Amidst challenging operating environment in April, we see JSPL standing out owing to focus on exports. Besides lower cost of iron ore will aid its margin compared to peers. We maintain ‘BUY/SO’ with TP of Rs 130 (exit multiple of 5.8x FY22e Ebitda).