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Capacity expansion on track to become a mega steel producer

* JSP is all set to capture rising domestic steel demand amid the rapid expansion in infrastructure, railways, housing and construction. We believe JSP is adding capacity at a right time to capture the robust growth opportunity.

* JSP is a leading integrated steel manufacturer (~9.6mt of crude steel production capacity) in India with strong raw material (RM) linkages, which ensures adequate and timely supply. JSP has two iron ore mines with a cumulative capacity of over 10.6mt and has recently acquired four thermal coal mines with total R&R of ~500mt.

* Around 60% of its iron ore requirement is met via captive mines. Once its thermal coal mines are operational, they will cater to 12-15mt of its thermal coal requirement, which will drive structural cost reduction and make JSP one of the lowest-cost steel producers globally.

* A multi-pronged strategy: JSP is taking measures to increase margin and improve cost efficiency. JSP is improving its integration by 1) setting up a coal and iron ore mines, which will ensure consistent RM supply and thus reduce costs; 2) setting up a 12mt pellet facility at Angul, which will further improve the availability of pellets and reduce the freight cost from Barbil; 3) setting up a 18mt 200km slurry pipeline; 4) the acquisition of power assets from Monnet Power, which is in close vicinity to the Angul facility to drive cost synergies, 5) the commissioning of HSM to further enhance the margin profile; and 6) setting up BoF/EAF at Angul, which will further enhance the cumulative crude steel capacity to 15.9mt by FY25 from 9.6mt.

* JSP has been predominantly a long steel manufacturer (~67-70% product portfolio) and offers a wide range of infrastructure steel products. However, after the expansion, the contribution from flats is expected to increase to ~70% from 30%.

* The stock trades at 4.5x FY25E EV/EBITDA. We reiterate BUY on the stock with a TP of INR720 (5.5x FY25E EV/EBITDA).

* Net debt stood at INR67b as of FY23 (down ~INR27b in FY23) and the net debt-toEBITDA ratio (ND/EBITDA) stood at a healthy level of 0.7x. JSP has one of the lowest ND/EBITDA in the steel sector and expects to keep it below 1.5x.

* Key downside risk: A delay in the commissioning of the Angul plant and coal mines may delay growth and margin improvement. Any major write-off in international subsidiaries may impact margins.

JSP on track to increase India capacity to 15.9mt

* JSP is undertaking INR240b capex programme which will to expand its crude steel capacity by 66% to 15.9mt and pellet capacity by 133% to 21mt by FY25.

* The capex is aimed at: 1) margin expansion (INR81b), which would enhance pellet capacity at Angul, along with the installation of a slurry pipeline, and 2) capacity expansion (INR159b), which will enhance the existing crude steel capacity at Angul to 12.4mt from 6mt.

* Capex per tonne works out to ~USD390/t, which is one of the lowest in the industry. The capacity and margin expansions provide growth visibility to JSP.

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