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Jindal Steel & Power (JSPL) reported lower-than-expected consol adj. EBITDA of ~Rs15.2bn (CentrumE: Rs20.3bn), down 49% QoQ and adj EBITDA/t of Rs7,557 (CentrumE: Rs10,714), down ~Rs9642/t QoQ. The decline is on account of lower realisation partially offset by higher volume and lower iron ore cost. We believe, EBITDA/t during the quarter has bottomed as benefit of lower coking coal prices and stable realisation will improve margins in H2FY23. JSPL prepaid its entire overseas long term debt and hence net debt reduced by Rs6.7bn QoQ to Rs7bn. The ongoing expansion of 6.3mtpa (capex of Rs180bn), will increase capacity to 15.9mtpa by FY25. It is expected to augur 11% volume CAGR over FY22-FY25. Besides, improved product mix, lower CoP should improve margins on structural basis. Further, rollback of export duty on steel products improves steel business outlook. We factor in higher steel prices than earlier estimated resulting 25% and 12% increase in FY23E and FY24E earnings respectively. Hence, we increase our target price to Rs583 (earlier: Rs467), valuing at 4.5x FY24E & FY25E average EV/EBITDA. A prudent capital allocation policy is awaited for re-rating in the stock. Till then we maintain cautious view and downgrade our rating to ADD (earlier: BUY).

Lower realisation offset higher volume resulting decline in EBITDA QoQ

JSPL consolidated EBITDA adjusted to one-off forex gains of Rs4.1bn stood at Rs15.2bn, down 49% QoQ. Sales volume was up 16% QoQ at 2.01mt mainly due to higher domestic sales. Exports volume accounted for 11% of total sales volume (vs 26% in Q1FY23), impacted by imposition of 15% export duty on steel products. Further, inventory writedown had adverse impact of Rs6bn in Q2FY23. The overseas subsidiaries reported lower EBITDA by 27% QoQ at Rs936mn due to lower coking coal prices and maintenance shutdown in South Africa. As a result, Adj consolidated EBITDA decline by 56% QoQ to Rs7557/t.

Net Debt further reduced to Rs7bn

During the quarter, the robust working capital management, resulted in release of Rs19.3bn. It helped in net debt reduction of Rs6.7bn to Rs7bn and fund ongoing capex (Q2: Rs15bn). We believe, JSPL should be net cash company in FY25 if no new capex or major cash outflow is announced. JSPL is in the process of cleaning up its balance sheet and is evaluating the investments made at its overseas subsidiary, Jindal Steel, Mauritius (JSPML). JSPL has invested INR5.75bn and has an outstanding loan of INR120.79bn at JSPML.

Downgrade to ADD with target price of Rs583

We maintain our positive view on stock owing to several growth levers like: 1) volume growth of 11% CAGR over FY22-FY25 2) increased raw material integration (commissioning of coal mine in FY24, slurry pipeline, and increased pellet volume) along with better product mix to augur well in earnings in next four years. Besides, we expect JSPL to be net cash company in FY25. We value stock at 4.5x average FY24E/FY25E EV/EBITDA and arrive at target price of Rs583. Downgrade to ADD rating

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