We believe JSPL is better placed than peers in a challenging price environment owing to its imminent production ramp-up and product mix improvement.
In a subdued quarter, Jindal Steel & Power (JSPL) defied peers and the environment, posting Q1FY20 performance surpassing consensus forecast. Key highlights: (i) Standalone Ebitda/t spiked 13% q-o-q to `11,245 on volume growth of 20% y-o-y; (ii) impressive performance by the power and Mozambique divisions; and (iii) net debt fell by `14 bn in Q1FY20. Going ahead, we expect Jindal Steel & Power to continue to outperform peers due to: (i) FY20e volume growth of ~10%; (ii) niche value-added capacity being fully booked; (iii) and potential for further debt reduction via internal cash accruals and asset disposal. However, Street’s concerns about promoter pledge might remain an overhang. Maintain Buy with an unchanged target price of `150, implying an exit 5.6x FY21e Ebitda.
Steel division the key driver
JSPL posted an impressive Q1FY20. Key highlights: (i) The 5% y-o-y fall in Ebitda is much lower than peers; (ii) cost reduction of `2,100/t in Q1FY20; drivers in place for ~`2,000/t cut at Angul; (iii) the power division’s Ebitda came in at `3.6 bn with scope for further improvement on lower cost;
(iv) the Mozambique coal mine posted Ebitda of ~$6 mn. Going ahead, we expect standalone Ebitda at `10,000/t-plus; enhanced contribution by Jindal Shadeed; and further catalysts for the power division.
Delivering on deleveraging
JSPL pared its debt by another Rs 14.4 bn in Q1FY20. We expect further deleveraging aided by: internal accruals in the steel division; potential repayment of Rs 7 bn by the power division; and proceeds from monetisation of the Botswana asset ($150 mn).
Outlook and valuation
We believe JSPL is better placed than peers in a challenging price environment owing to its imminent production ramp-up and product mix improvement. Moreover, the FY20 deleveraging target of `40 bn is an additional value driver. The stock is trading at 5.1x FY21e Ebitda.