Stepping on the gas: We visited JSP’s Angul steel plant; our key takeaways — (1) the existing operations are running at rated capacity and the recent approval for additional 1 mtpa BF capacity provides growth visibility for FY2023E, (2) the civil construction work on expansion projects has kicked off as per schedule and (3) the Angul site has a long-term potential to house 25 mtpa steel capacity, which provides long-term growth visibility at low capital cost. The management is working on capital allocation to define its shareholder payout strategy as it approaches a net debt-free status. BUY.
JSP’s Angul steel plant – pivotal to company’s growth plans: We visited JSP’s Angul steel plant and present our key takeaways from the plant visit and interaction with the management. (1) The existing operations are running smoothly with the 1.2 mtpa plate mill operating at rated capacity and gas-based DRI plant clocking stable output with mix of syngas and coke oven gas. (2) Post the consent to operate the blast furnace (BF) at additional 1 mtpa capacity, the ramp-up is underway and expected to run at rated 4.2 mtpa capacity in the coming quarters. (3) JSP plans to debottleneck and increase the existing capacity of DRI from 1.8 mtpa to 2 mtpa. (4) The company plans to secure a coal block for its coal gasification unit as the revised policy allows for 50% rebate (from 20% earlier) on royalty payout for such end-use. (5) The civil construction at expansion projects sites has kicked off and equipment ordering is as per schedule. The 6 mtpa pellet plant is scheduled to commission by September 2022 whereas the 4.2 mtpa BF and 5.5 mtpa HSM would commission by 2HCY23E.
Well-poised for re-rating with stronger balance sheet, maintain BUY: Despite growth capex, we note JSP’s deleveraging would continue with FCF yield of 17%/11% for FY2022/23E. With net debt/EBITDA of 0.4X/0.1X FY2022/23E, we note that JSP now has the strongest balance sheet among all primary steel producers. We note that JSP is trading at the lowest EV in the past 5 years despite significant deleveraging, divestment of non-core businesses and improved growth visibility. We maintain our Fair Value at ₹590/ share on September 2023E and retain BUY rating on attractive valuations at 3.2X FY2023E EV/EBITDA.