Jindal Steel & Power’s (JSPL) Q1FY19 Ebitda (up 68% y-o-y) at Rs 22.7 billion came in line with consensus. Key highlights: (1) standalone steel division’s Ebitda at Rs 13,410/t (up 55% y-o-y) was the highest since Q3FY11; (2) sales volume jumped 47% y-o-y to 1.19 mt due to ramp up of BF-BOF at Angul; and (3) the power division continued to be a laggard with PLF at <50%.
We believe, JSPL is on a strong footing due to: (a) imminent ramp-up of rail mill following the Indian Railways order; (b) operating leverage benefits from Angul ramp up (FY18-20E shipments CAGR at 41% to 7.5 mt); and (c) sustained good performance of Oman division. At CMP, the stock is trading at 5.1x FY20E Ebitda, lower end of peers and 10-year band. Maintain ‘buy’ with a TP of `300 (exit multiple 5.9x).
JSPL’s 68% y-o-y EBITDA growth was led by sustained robust performance of the steel division: (1) standalone Ebitda jumped 2x y-o-y to `16.5 billion led by volume growth (up 47% y-o-y) and realisation uptick (up 22% y-o-y); and (2) Oman division continued its dream run with $162/t Ebitda — highest ever — on rebar mill ramp up and sustained prices. As a result, JSPL reported net profit for the first time since Q2FY15.
However, the power division continued to lag with low PLF (<50%) and Ebitda/unit stagnant q-o-q at Rs 1.24. While we expect the steel division to continue to drive performance, power division is envisaged to languish in absence of adequate PPAs and coal linkages.
We are upbeat on the stock as we see several green shoots: (1) product mix enrichment pursuant to rail mill ramp up on Indian Railways order; (2) expected volume uptick of 41% CAGR through to FY20 (highest among peers); (3) good performance of Oman operations with ramp up of rebar mill and volume expected to cross 2 mt; and (4) dip in interest cost post rating upgrade. We reiterate our favourable stance on JSPL as its operating leverage story in steel looks formidable with scope of product mix enrichment though concerns on power still persist.