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The reduction in net debt to drive valuation

* JSP reported a weak 4QFY22. A 4% Revenue miss translated into a ~20% EBITDA miss. The management had guided at a strong 4Q performance in its 3QFY22 earnings call, but stumped on delivery, citing various ‘one-offs’.

* Consolidated revenue grew 21% YoY and 15% QoQ to INR143b in 4QFY22. The 4% miss was driven by a 6% lower than estimated ASP and a 2% beat on volumes.

* EBTIDA fell 42% YoY and 7% QoQ to INR31b, 19% below our estimate, driven by an 18% miss on standalone EBITDA. Other operating expenses, which include power and fuel costs, were the key drivers of the EBITDA miss. Lower than expected dispatches from captive coal mines in Australia and Mozambique led to higher fuel costs.

* Adjusted PAT fell 24% YoY, but grew 6% QoQ to INR19b. The 14% miss on our estimate was driven by an EBITDA miss, but was partly covered through lower than expected tax provisions.  Revenue/EBITDA/PAT grew 32%/5%/39% YoY to INR511b/INR155b/ INR87b in FY22, driven by a mix of higher ASP and volumes

Imposition of export duty to lower EBITDA

* The current measures taken by the Finance Minister to curb iron and steel prices will result in savings of INR4,000/t from an expected decline in domestic iron ore prices and savings from a reduction in BCD on coal. It also expects a benefit of ~INR2,400/t from depreciation of the INR v/s the USD. Overall, the management expects a benefit of INR6,400/t in 1QFY23 to offset the correction in steel prices.

* We are building in an EBITDA/t of INR14,000 for FY23, despite a reduction in iron ore prices, cut in customs duty on coal, and increasing captive coal supplies, which may not materialize to the extent as suggested by the management  We have also reduced our captive coal assumptions to 1.4mt as against the management’s guidance of 2mt.

Valuation and view

* We have cut our FY23 EBITDA/PAT estimate by 18%/25%, factor in a standalone EBITDA of INR13,527/t, reduced our valuation multiple to 4.5x (from 5x), and peg net debt at INR63b (v/s the management’s guidance of nil net debt by FY23-end). Despite all this, we still find value in the stock.

* The company reported a net debt of INR88b. It has received INR30b as part of the completion of the sale of JPL to its promoters.

* The stock is trading at 4x our revised FY23 EV/EBITDA estimate. We expect China to kick start its slowing economy with another round of stimulus and view the export duties imposed by the Indian government to be temporary. We see these two factors as near-term triggers for the stock. We maintain our Buy rating with a revised TP of INR440/share.

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