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Buy Jindal Steel and Power Ltd For Target Rs.495

Deleveraging to continue

JPL’s divestment to support a further decline in debt

* JSP’s 1QFY22 result was strong as expected, with the highest ever EBITDA/t of INR28,098/t (7% above our estimate). However, standalone EBITDA fell 7% QoQ to INR45.3b due to a 16% QoQ decline in volume. Adjusted for the JPL divestment, net debt fell only 4% QoQ to INR152b due to an increase in working capital.

* We raise our FY22E EBITDA by 13% on expectations of higher steel prices in the fiscal. Strong cash flows, coupled with cash proceeds of INR30.1b from the JPL divestment, should lead to a fall in net debt to INR34.5b by FY23E, implying 0.3x FY23E EBITDA. We reiterate our Buy rating.

Lower volumes led to a decline in EBITDA, margin stays strong

* Consolidated (excluding JPL) revenue/EBITDA/PAT was 6%/4%/3% higher than our estimate at INR106b/INR45.4b/INR25.2b (nil/-9%/-12% QoQ). JSP has classified JPL as discontinued operations as it has entered into an agreement to sell the asset to Worldone.

* Steel (standalone) revenue/EBITDA/PAT was 4%/5%/6% higher than our estimate at INR103.8b/INR45.3b/INR26.6b (nil/-7%/-4% QoQ).

* Steel sales declined by 16% QoQ to 1.61mt (-2% lower than our estimate) due to weak domestic demand and congestion at ports limiting exports.

* JSP surprised with 18% QoQ growth in blended steel realization to INR64,501/t (7% higher than our estimate of INR60,306/t). However, the increase in realization was offset by higher cost on account of higher iron ore prices and exhaustion of free of cost iron ore inventory in 1QFY22. As a result, EBITDA/t stood at INR28,098, up 10% QoQ (est. INR26,166).

* Consolidated net debt (excluding JPL) declined by ~4% QoQ to INR152.2b, implying a net debt/EBITDA of 0.96x (v/s 1.53x in 4QFY21).

Targets net debt of INR80b by FY22-end, CoP to increase

* The management expects to close the JPL divestment within 12 months.

* The reduction in net debt was limited by finished and raw material inventory build-up in 1QFY22. Working capital is expected to normalize in coming months. The management is targeting a net debt of INR80b by FY22-end, assuming the deal proceeds of INR30b from JPL would be received by then.

* Capex for FY22 is guided to remain in the INR20-25b range.

* Cost of production (CoP) is likely to rise in the coming quarters due to exhaustion of free of cost iron ore and sharp increase in coking coal prices. Higher coking coal cost would impact margin from 3QFY22 onwards as it has low-cost coking coal inventories, which would suffice till Sep’21.

Valuation catch up to drive upsides

* While margin for JSP is expected to drop in the near term due to exhaustion of zero cost Sarda iron inventory (in Apr’21) and higher coking coal prices, EBITDA/t should remain healthy ~INR12,000/t in FY23E (v/s an average of ~INR9,500/t in FY16-20).

* Our TP of INR495/share is based on 5x FY23E EV/EBITDA. At the CMP, the stock trades at an attractive 4.5x FY23E EV/EBITDA.

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