We visited Jindal Steel and Power’s (JSPL) Angul plant. The plant has evolved and improved a lot since our first visit in CY09. Availabilty of linkage coal allows steady quality of Syngas generation, and allows smooth operation of the DRI – current cost of Syn gas generation is $5-6/mmbtu. The current configuration of BF (4.2mtpa) and DRI (1.8mtpa) is mirrored to expand further by 6mtpa, taking Angul capacity to 12mtpa (Table 1). Downstream will have hot strip mill (HSM) and Thin Slab casting.
There are eventual plans (and adequate land availability) to take the capacity up to 30mtpa. 2300 acres of land on which 6mtpa are located has the infrastructure to expand capacity to 18mtpa. Adequate rail connectivity didn’t look like putting any stress to evacuation (contrary to Link). While management is looking to build up capacity through internal accruals and limiting net debt to 1.5x of EBITDA at all times, the execution is seldom as linear as the plan sounds. We upgrade JSPL to ‘add’ from ‘hold’.
Journey towards lower carbon emission: JSPL has reduced CO2 emissions from 2.76 te/tcs few years back to 2.5 te/tcs in FY21 and aims to reduce the same to 2 by CY30. The roadmap to achieve the same includes i) reduced flaring of gasses as more gases gets consumed in the steel plant. This measure, management guides can reduce equivalent to 1000tpd reduction in coal consumption. JSPL’s current daily consumption of coal is ~ 10000tpd; ii) JSPL is planning to increase DRI in the iron mix. Currently 70-80% is HM and 20% is DRI. The company is trying to increase DRI to 50%; iii) Also there are efforts to introduce Syn gas into BF. With introduction of Syn gas, company expects to reduce 50kg of coke consumption (15% less CO2 generation) iv) Introduction of pellet plant within the steel complex allows for better utilisation of BF and coke oven gases and further reduce LDL consumption and v) commissioning of the slurry pipeline from Barbil to Angul would allow for better Scope three emissions control through reduced requirement of transportation.
Key margin levers that management targets: With the introduction of slurry pipeline, JSPL can save ~
1,000/te of steel on transportation cost. Further, with the commissioning of hot strip mill (HSM), management expects to improve the mix and derive an additional EBITDA of5000/te on 3mtpa of HSM (to be commissioned by Feb 23) –
15 billion over ~ 13-14mtpa of steel volumes. JSPL is also setting up additional 12mtpa of pellet plant at Angul, which on commissioning of the next 6mtpa steel expansion will still allow JSPL ~ 5-6mtpa of incremental pellet exports. This will allow sustaining existing (derived) margins of1,000/te from external sale of pellets.
Valuation and key risks: We upgrade JSPL to ADD from HOLD with a revised target price of `433share (implied P/B of 1.1x on FY23E P/B). The improvement in P/B reflects the underlying improvement in the RoE as power business is divested. Upside risks are i) stronger for longer steel prices – antithesis to cyclicality and ii) Better than expected rampup in power operations. Both these factors can further accelerate the deleveraging that we expect now. Key downside risks are i) sharp price correction in steel prices ii) regulatory risks and iii) higher capex announcement.