Jindal Steel & Power Rating buy: Operating performance a cause for cheer

We are positive on JSPL’s efforts to deleverage balance sheet.

Jindal Steel & Power’s (JSPL’s) Q1FY21 domestic operating performance came in line with our estimate. Key highlights: (i) Domestic sales jumped 9% y-o-y, 11% q-o-q to 1.56mt; (ii) domestic demand woes resulted in higher reliance on exports; (iii) Oman operations sprung a major surprise with 22% volume surge despite tough operating conditions. We expect JSPL to outperform peers in Q1FY21 due to: (i) superior volume growth; and (ii) lower cost of iron ore owing to inventory drawdown of Sarda fines. Maintain Buy with TP of Rs 190 on an exit multiple of 6x FY22e Ebitda.

Volume growth in challenging times

We are upbeat on JSPL’s operating performance as the company managed to deliver not only sales volume growth even in the COVID-19 hit Q1FY21, but also the highest-ever production of 626kt in June. We see three positives: (i) Higher sales volume will spur operating leverage benefits;
(ii) limited inventory build-up compared to peers; (iii) consistent shipments of high-margin railway products will limit the dent on margin due to higher exports. On Oman front, the 22% y-o-y uptick in Shadeed volumes is a major surprise. Going ahead, we expect JSPL to be the first beneficiary of a possible revival in steel demand.

Deleveraging effort adds to delight

We are positive on JSPL’s efforts to deleverage balance sheet. The recently announced divestment of Jindal Shadeed for $1 bn is a significant step in this direction. Furthermore, ongoing restructuring efforts in Australia and potential divestment in Botswana are additional triggers which should aid significant debt reduction.

Outlook: In a sweet spot

We like JSPL as it is reaping the twin benefits of cash accretion through higher sales volume and deleveraging of balance sheet despite extremely challenging times for the sector. We maintain ‘BUY/SO’ with TP of Rs 190 with an option value of Rs 20/share owing to divestment of Jindal Shadeed. The stock is currently trading at 5.2x FY22e Ebitda.