Jindal Steel and Power (JSPL), is on the verge of a turnaround (after 4 years of losses), and will report profits FY19E onwards on the back of 28% CAGR in steel volumes over FY17-20e, in our view. We believe firm steel prices, improving operating performance in steel business and positive free cash flow (FCF) generation from Jindal Power (JPL – 96.4% subsidiary) and Jindal Shadeed (JSPL’s 100% Middle East subsidiary) will propel consolidated Ebitda to 34% CAGR over FY17-20E. We value the consolidated entity at Rs 315/share on sum of the parts (SoTP) basis — while the steel business is valued at Rs 218/sh (6.5x FY20E EV/Ebitda), JPL is valued on a DCF basis at Rs 97/share. We initiate coverage with an Outperformer rating.

Turnaround in FY19E on low capex and high utilisation: JSPL is at the fag end of its capex cycle. With the successful commissioning of the company’s 2.5mtpa Basic Oxygen Furnace (BOF) at Angul (Odisha), JSPL’s crude steel capacity has risen to 8.6mtpa. Higher volumes from enhanced capacity along with our estimate of firm steel prices and positive FCF will result in superior financial performance. We expect JSPL to report consolidated net profit of Rs 8.8 bn in FY19E and this increasing further to Rs 20.4 bn in FY20E, from Rs 25.4 bn loss in FY17. Monetising assets and raising equity further turns the tide for JSPL.

Deleveraging to start from FY19E onwards: Superior operating performance (34% consolidated Ebitda CAGR over FY17-20E) coupled with minimal capex will help JSPL deleverage from FY19E onwards. We expect consolidated net debt to reduce from Rs 453 bn (Rs 470/sh) in FY17 to Rs 384 bn (Rs 399/sh) in FY20E.

Initiate with Outperformer; target price of Rs 315: JSPL’s turnaround in FY19E will come on the back of volume growth and lower operating costs in the steel business, in our view. With the company deleveraging from FY19E onwards, we estimate net debt/Ebitda will reduce from 10.4x in FY17 to 3.7x in FY20E. Our SoTP-based target price is derived from Rs 218/sh valuation of the company’s steel business (6.5x FY20E EV/Ebitda) and from DCF-based value of Rs 97/sh for the power subsidiary (JPL). Key risks to our view are a delay in ramp-up of steel volumes at Angul and adverse court judgements against JSPL in coal block allocation cases and indirect ownership of Sarda mines.