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Weakest margin in three years…
…but expect sharp improvement in 4QFY20
* JSP’s result instills more confidence in the expected steel volume ramp-up with strong 34% YoY standalone volume growth to 1.6mt (+21% QoQ) in 3QFY20.
* Moreover, the sharp improvement in steel prices over the past two months, coupled with lower coking coal cost, has reinforced the near-term margins outlook. We estimate EBITDA/ton to improve ~30% QoQ to INR11,000/t in 4QFY20. Reiterating Buy with an SOTP-based target price of INR210.
Weak margin due to lower realization
* Consolidated: Consol. EBITDA of INR18.1b (+11% QoQ) in 3QFY20 was 5% above our estimate due to higher volumes in the standalone business. Interest cost declined 3% QoQ to INR10b. Cash profit (pre-tax and MI) was up 33% QoQ to INR8.17b. PAT loss stood at INR2.2b (our estimate: loss of INR3.3b). Net debt (excluding acceptances) reduced by ~INR10b QoQ to INR355b.
* Standalone: Steel sales volumes were strong at 1.6mt (+21% QoQ, +34% YoY). Implied steel realization dropped to INR39,023/t (-16% QoQ), resulting in an EBITDA margin of ~INR8,400/t (-32% YoY, 11% QoQ) – weakest in three years. EBITDA stood at INR13.5b (+8% QoQ, -9% YoY due to lower realizations), above our estimate of INR12.2b, due to lower-than-expected costs.
* Jindal Power: Generation was at 1.9b units (-27% YoY). Realization stood at INR4.56/kWh (+1% QoQ, +9% YoY). EBITDA fell 14% QoQ (-6% YoY) to INR2.6b (our estimate: INR2.2b). EBITDA/unit was at INR1.5 (+5% QoQ/32% YoY).
* Oman: Steel sales were at 570kt (+27% QoQ). EBITDA was at INR2.3b (our estimate: INR1.5b).
Management confident on steel volume ramp-up
* Management reiterated its volume target of 6.5mt for FY20 and 7.5mt for FY21 (+15% YoY), led by higher production at Angul – supported by the DRI plant.
* The focus remains on deleveraging with net debt guided to reduce further by INR40-50b in FY21 (declined by INR36b to INR355b in 9MFY20).
* 4QFY20 realization guided to be higher by INR2,000/t QoQ. Angul cost of production is also expected to decline further as volumes ramp up.
* The company hopes to get access to the 12.22mt iron ore fines inventory lying with Sarda mines, which should help tide over any expected disruption in the iron ore market in FY21.
Ramp-up in operations to drive FCF generation, valuation attractive
* Angul plant continues to ramp up well and the restart of the 1.8mnt DRI plant last week has improved visibility on management’s production guidance of 7.5mt (+15% YoY) in FY21.
* Management remains focused on deleveraging through FCF and monetization of overseas assets. FCF generation is likely to be strong with the focus on sweating existing assets and current limited growth capex. The stock trades attractively at FY21E cash P/E of 5x. Re-iterate Buy with a TP (SOTP) of INR210.
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