On the path to deleveraging
Strong show amid challenging times
* Jindal Steel and Power (JSP)’s 1QFY21 result highlights the benefit of cost reduction in its steel operations. 1QFY21 consolidated adj. EBITDA was up 2% QoQ to INR22.6b (est.: INR18.9b).
* We raise JSP’s FY21/FY22 EBITDA estimates by 6%/5% to factor cost reduction demonstrated by the company. We expect JSP to reduce its net debt by INR83b (INR81/sh) to INR296b over FY20–22E. The Oman divestment would reduce debt by an additional ~INR60b. Reiterate Buy.
Higher volumes and cost reduction boost EBITDA
* Consolidated: JSP’s 1QFY21 consolidated adj. EBITDA (adj. of insurance claim of INR1.2b) of INR22.6b (est.: INR18.9b) was up 2% QoQ (4% YoY), led by higher volumes and cost reduction in standalone operations. The beat on estimates was led by lower-than-expected costs in standalone operations. Adj. PAT stood at INR1.0b (v/s est. loss of INR1.1b).
Standalone: Cost reduction and higher volumes drive 9% QoQ EBITDA growth
* Revenue / adj. EBITDA / adj. PAT came in at INR61.6b/INR17.1b/INR4.1b, +4%/+9%/+47% QoQ and +2%/+20%/+158% v/s our est. The company received an insurance claim of INR1.2b during the quarter, which we have considered as an exceptional gain.
* Steel sales (excl. pig iron) grew 4% YoY / 11% QoQ to 1.48mt, driven by exports (58% of total volumes), as domestic sales declined ~40% YoY.
* Steel NSR declined ~INR4,600/t QoQ due to higher exports and lower valueadded sales. However, decline in derived blended realization was lower at INR3,020/t (7%) QoQ to INR41,569/t (our est.: INR40,705/t) due to higher sales of traded goods (~+INR1,100 QoQ).
* Unitary cost declined 9% QoQ to INR30,044/t (-9% QoQ) (est.: INR31,129/t), largely due to lower cost of iron ore and thermal coal.
* With lower cost nearly offsetting lower realization, EBITDA/t declined only 2% QoQ to INR11,525/t (est.: INR9,576/t).
* Adj. PAT increased 47% QoQ to INR4.1b (est.: INR1.6b).
JPL: Lower coal cost drives EBITDA growth, but volumes weaken further
* EBITDA increased 11% QoQ to INR3.7b (est.: INR2.9b) on lower coal cost, implying EBITDA/unit of INR1.9 (+23% QoQ).
* Gross volumes, however, declined to 2,179 MUs (-10% QoQ; -27% YoY), implying only 29% PLF.
Oman: Lower spreads impact EBITDA
* EBITDA declined 58% QoQ to INR1.9b (est.: INR2.3b) due to lower spreads; EBITDA/t stood at USD51/t v/s USD120/t QoQ.
* Sales volumes declined 6% QoQ to 500kt (+22% YoY).
* Consolidated net debt declined by INR13.0b QoQ to INR346b at 1QFY21- end.
Management confident on volume growth, deleveraging in FY21
* The company guided for sales volumes of 1.8mt in 2QFY21 and expects exports of 0.6mt. It guided for sales of 3.9mt in 2HFY21, thereby guiding for sales (incl. pig iron) of ~7.4mt in FY21.
* With lower exports and higher value-added product sales, the company expects Steel NSR to improve in 2QFY21.
* The company expects to repay debt of INR55b in FY21 through cashflow generation. The Oman divestment deal, if approved, would lead to an additional debt reduction of another INR60b. The company has scheduled the repayment of INR50b over the balance 9MFY21.
Deleveraging to continue, driven by strong FCF generation
* With JSP booking significant exports in 1HFY21 and an expected improvement in domestic demand in 2HFY21, we expect the company to achieve ~10% volume growth in FY21. We expect JSP to achieve ~10% EBITDA CAGR over FY20–22E to INR95.6b, driven by an expected 8% volume CAGR.
* We expect JSP to reduce its net debt by INR83b (INR81/share) over FY20–22E to INR296b (incl. acceptances) through strong FCF generation, led by higher EBITDA and lower capex. We expect JSP to refinance its overseas debt maturities (~USD800m). This would elongate the debt repayment schedule, thereby reducing the strain on standalone cash flows.
* The Oman divestment deal, if approved, with equity consideration of ~USD50m (net of inter-company loans of USD200m), would lead to an additional net debt reduction of ~INR60b (INR59/sh). We have not factored the deal in our estimates. The divestment of the Oman business would lead to improved focus on domestic operations.
* Reiterate Buy, with an SOTP-based TP of INR226, based on 5.0x FY22E EBITDA for the Steel business and DCF valuation for the Power business. At CMP, the stock trades attractively at 4.5x FY22E EV/EBITDA for the Steel business.
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