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India business (ex-power) becomes net debt free

Jindal Steel & Power (JSPL) becomes the first entity with zero domestic net debt in our Indian steel coverage. Current net debt of Rs150bn can be attributed to foreign operations. With divestment of Jindal Power (JPL), year-end net debt has been guided at Rs80bn – we have been slightly more conservative in our estimates.

Yet we see, the possibility of Rs80-90bn net debt by FY23E even after the commencement of Angul expansion capex. JSPL has announced 6mtpa expansion in Angul (from 6mtpa to 12mtpa) for a total capex of Rs 180bn (US$400/te). 2/3rd of the capex is driven towards growth projects while 1/3rd are driven towards counter cyclical margin expansion.

With divestment of JPL, we see a significant scope of RoE expansion. We increase our target P/B to 1.5x from 0.9x earlier. Book value will reduce post the JPL deal. We upgrade to ADD with a target of Rs450/share (Rs472/share earlier).

* Margins surprise, impending margin pressures ahead. Higher than expected realisations allowed for Rs2529/te QoQ increase in margins, despite a sharp increase in RM costs (~ Rs3239/te QoQ). We expect further cost increases driven by higher RM costs ( iron ore and coking coal) as realisations face headwind. Higher working capital didn’t allow deleveraging in the current quarter.

* Revised offer for JPL from promoter entity (Worldone) has better probability of acceptance from minority investors. Most of the investor feedbacks on of elimination of RPS and the ICDs from the deal structure has been accomodated in the revised offer for JPL. With ~ Rs30.2bn of upfront cash investment by Worldone for JPL purchase (at implied EV of ~ Rs100bn), year end net debt guidance is ~ Rs80bn. Current net debt at Rs150bn (ex JPL) implies that Indian business is net debt free. JSPL thus becomes the first entity with zero domestic net debt in our Indian steel coverage. Efforts towards i) ramping up production from overseas coal assets and ii) divestment of the Australian assets, continue.

* 6mtpa Angul expansion will hardly stretch the balance sheet. Even with Rs 180bn expansion plans, we expect to see Rs80-90bn as the upper bound of net debt given the currently assumed glide path of prices, and a Net Debt to EBITDA of 0.8x for FY23E. Management will continue to endeavor to make JSPL a zero net-debt company and all future expansions will be guided by an outer cap of 1.5x Net Debt to EBITDA. Capex intensity for Angul appears low due to i) not commensurate downstream expansion ii) brownfield addition with inhouse civil structural, fabrication works. Increase in pellet capacity to 21mtpa (from 9mtpa at present) along with a slurry pipeline will help in further cost support and can significantly increase RoE.

* Upgrade to ADD from HOLD. With divestiture of the power assets, JSPL will see a substantial improvement in RoE. Expansion at Angul in a capex effective manner will further augment the same. We see a potential of 17% through cycle RoE even with Rs13,000-14,000/te of steel EBITDA.

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