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Subsidiary performance and exceptions drag 4Q
Steel business ramping up, power outlook improving; Reiterate Buy
* 4QFY19 consolidated EBITDA at INR18.5b (-11% QoQ) came in 12% below our estimate due to (1) higher coal costs for Jindal Power, (2) low margins at Oman Steel, and (3) shutdown at Wongawalli mine. Interest cost increased 11% QoQ to INR11.6b on rising interest rates and LC discounting. Cash PAT (pre-tax and MI) declined 35% QoQ to INR6.8b (v/s. our estimate of INR10.6b).
* Non-cash exceptions drag reported performance: JSP incurred write-offs of INR17.3b related to (1) additional coal penalty (INR13.5b), (2) electricity duty dispute (INR3.1b), and (3) PGP plant at Barbil (INR0.7b). We, however, note that these charges are pertaining to previous years and are non-cash in nature. JSP has also impaired INR12.9b of assets given the Wongawalli mine shutdown.
* Standalone steel sales rose 24% QoQ (+20% YoY) to 1.51mt, but EBITDA/t declined 20% QoQ to INR9,931 due to lower spreads.
* For FY19, EBITDA increased ~30% YoY to INR84.1b, led by ~26% growth in steel sales (India + Oman). Cash PAT (pre-tax and MI) increased ~60% YoY.
Ramp-up in operations to facilitate FCF generation/debt reduction; Maintain Buy
* Angul continues to ramp up, highlighted by JSP’s 4Q exit run-rate of >6mtpa. We expect Indian steel volumes to rise 22% YoY to 6.2mt, helping to offset any weakness in steel prices.
* Outlook for the power business is improving. JSP is L1 in 515MW of bids and is well placed in the upcoming 3,000MW tender by Gujarat, given its proximity to coal mines.
* Net debt (excl. acceptances) has reduced ~INR34b YoY. With major capex now behind, FCF generation should continue and aid debt reduction (~INR48b in next two-years). The stock trades attractively at 10% FY20 FCF yield. We have cut consol. EBITDA estimate by 10%/12% for FY20/FY21E to INR79b/INR87b on lower margins in Oman and higher power cost in JPL. We value the stock at INR217/sh. based on SOTP (Exhibit 15). Re-iterate Buy
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