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Jindal Steel & Power

Capacity and cost-efficiencies to aid earnings

Jindal Steel and Power (JSPL) has been the top performer among mainstream ferrous players with a robust return of 45% in past 3 months. However, we envisage further upside in the stock driven by: 1) cost-efficiencies as captive thermal coal mines ramp up; 2) logistical advantages from new conveyor belt and slurry pipeline; 3) upcoming capacity expansion of 6mtpa at Angul expected to result in a volume CAGR of 11% through to FY25E; and 4) acquisition of Monnet Power Company’s assets, which is likely to reduce costs further. Despite our estimate of progressively declining realisations, we expect cost-efficiencies to lift standalone EBITDA/te to Rs14,500 by FY25E.

In view of our revised cost estimates, we raise our FY24E EBITDA by 24%. Besides, a combination of DRI and BF-based iron making at Angul gives the company operating flexibility and an opportunity to optimise costs. We value JSPL at an unchanged multiple of 6x FY24E EBITDA (1 deviation above 5-year trading average). Our revised target price works out to Rs750 (earlier: Rs605). We maintain BUY on the stock and recommend it as our top pick in the ferrous space.

Cost-efficiencies likely to sustain high earnings. We expect JSPL to benefit from cost-efficiencies emanating from the recently acquired thermal coal assets and logistics infrastructure for both iron ore and coal. Key points: 1) captive coal supply from Gare Palma IV/6 and Utkal blocks likely to rise up to 5mtpa in FY24E and ultimately reach 15mtpa on full capacity utilization (we peg landed cost reduction of at least Rs1,100/te); 2) full benefit of slurry pipeline from Kasia mine to Angul plant (likely in FY25) may lower the overall cost by Rs1,000/te; and 3) captive thermal coal and iron ore (especially at Angul) to facilitate optimal yield of DRI plant and blast furnace respectively. We thus expect JSPL to deliver EBITDA/te of >Rs14,000 by FY24E, despite prices remaining range-bound compared at current levels.

Acquisition of Monnet Power assets likely to be value-accretive. In our view, Monnet Power Assets, once operational, will provide an opportunity for the company to improve the heat rate, resulting in lower usage of coal in the power plant. Besides, proximity to Utkal mine is likely to reduce operating costs. Together with the benefit of captive coal supply, we expect 40% lower power cost at Angul by FY25E.

Outlook: Cost-efficiencies ensure sustainable upside. Despite our estimates of realisation remaining range-bound through to FY25E, we raise our FY24E EBITDA by 24% taking cognizance of higher volumes and cost efficiencies. We value JSPL at 6x FY24E EBITDA resulting in a revised target price of Rs750/share (earlier: Rs605). Maintain BUY. Higher than expected fall in steel prices and delay in commissioning of upcoming capacity at Angul are the key risks in our view.

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