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EBITDA in line; strong results during tough times

* Jindal Steel & Power (JSP) reported yet another in-line quarter. While the topline was higher than our estimates driven by higher ASP, EBITDA was in line post-adjusting for FX gains. The company reduced its net debt to INR70b (lowest among the top four listed steel companies in India).

* Consolidated revenue was flattish YoY but up 4% QoQ to INR135b in 2QFY23. The 13% beat on revenue was driven by a 6% beat on ASP and a 7% beat on sales volumes. Sales volumes for the quarter stood at 2.01mt, down 6% YoY but up 16% QoQ. Exports were 11%. ASP was at INR67,271/t, up 5% YoY but down 10% QoQ due to imposition of export duty.

* During the quarter, JSP also recorded INR4b FX gain in foreign subsidiaries as a one-off on strengthening USD. However, adjusted for the same, the consolidated EBITDA was in line with estimate.

* Consolidated adjusted EBITDA declined 67% YoY and 49% QoQ to INR15b, in line with our estimates. The sharp YoY and QoQ decline was led by: a) a steep drop in ASP and b) elevated coal costs.

* Consolidated EBITDA/t for the quarter stood at INR7,559, down 65% YoY and 56% QoQ and was in line with our estimate of INR7,974.

* Adjusted PAT decreased 73% YoY and 53% QoQ to INR7b but was sharply higher than our estimate of INR5b due to deferred tax reversal as the company provided for FX gains of past periods in the consolidated income statement.

Net debt continues to trend down amid difficult times

* Despite a sharp correction in steel prices, rising coal costs and increasing working capital requirements, the company reduced its net debt to INR70.5b, down INR6.7b QoQ with all external debt of international subsidiaries paid.

* We note that over the last five years, JSP has brought down its net debt considerably to INR70.5b from INR455b while almost doubling its steel production along with acquisition of mines in India and abroad. JSP continues to charter the same course with cash volume and profit growth deployed in debt repayment and capex.

Highlights from the management commentary

* The management expects FY23 sales volume in excess of 8mt.

* The cost of coking coal is likely to reduce in line with peers except for the fact that the company has a lower inventory and to that extent the benefit could be partly lesser, but the trajectory remains consistent with competition.

* JSP plans to have 50% of its thermal coal requirement met from captive mines from FY24E onwards, which could be a further margin booster (not captured in our numbers so far).

* The management will now focus on maintaining leverage at 1.5x across cycles.

Valuation and view

* We have moderately raised our FY23E EBITDA by 1.5% to INR111b but have notably raised our FY24E EBITDA by 10%, expecting a normalized EBITDA margin scenario next year to INR14,776/t.

* TMT price has already started to move up. We note that while HRC price has dipped since Oct’22, TMT price has increased INR500-INR 750/t since the beginning of Oct’22

* The second half is generally seasonally strong for construction steel. We believe JSP will benefit from lower coal costs in 3QFY23 as well as its improved ASP v/s competition (that are more flat steel oriented where the price hike has not been effective).

* We maintain JSP as our top pick in the steel sector with a revised TP of INR565 based on 6x FY23E EV/EBITDA. We believe JSP’s focused approach on leverage along with capacity expansion will augur well.

* The stock is trading at 5.1x/3.7x our FY23/24 EV/EBTIDA estimates. On P/B basis, it is trading at 1.2x/1.0x our FY23/24 estimates with RoE expectation of 14.7%/16.8%, respectively. Incremental coking coal production from Australian/Mozambique coal mines would be incrementally beneficial for the stock.

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