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Management meeting update

Cautious near-term demand, but pent-up demand inevitable

* Near-term demand is tepid and demand decline is seen (especially last month) due to (a) the ban on construction in the NCR region due to severe pollution levels, (b) an extended monsoon, (c) weak sentiment in the international market – consumers are adopting the wait-and-watch policy, and (d) sufficient inventory lying with traders, who, in a falling market, would try and liquidate rather than accumulate.

* However, pent-up demand is inevitable, as seen since the ebbing of the first COVID wave

Pricing remains under pressure in the near term; 4Q outlook positive

* The management highlighted that the pricing for longs products has corrected by INR4000/t. Rebar has corrected to INR58,000/t (from INR62,000/t in Nov). We believe the trade is operating at INR56,000/t.

* Flats are currently being exported at ~USD815/t CFR, while China is offering USD780/t. On the other hand, domestic prices stand at USD902/t. The management expects a price reduction for flats in the domestic market, in line with the reduction in longs.

* We expect a price recovery in 4Q as pent-up demand and unfinished projects are revived.

* However, the resurgence of COVID remains a key concern, with fears related to the Omicron variant leading to the postponement of consumption.

Expansion program on track

* The company has placed orders for equipment, indicating, with reasonable certainty, that projects would get commissioned on time, subject to COVIDrelated disruptions.

* A 6mt pellet plant would be the first one to be commissioned by Sep’22. This would augment operational cash flows as the rest of the plant moves to the construction phase.

* Steel volumes would grow beyond the current 1mt (increase in CTO) from FY24E/FY25E depending on the construction timelines.

* A large portion of the equipment being sourced this time around has been finalized on INR terms v/s prior expansions, where a large portion of the capex was spent on the USD denomination. The management believes this would reduce its dollar exposure for capex funding.

Plans to harness benefits of captive raw material

* The company recently won the Kasia mines at a premium of 118%. This is an operating mine with EC of 6mt, which would now feed into the Barbil pellet plant (9mt currently).

* Subsequently, it would set up a 2x 6mt pellet plant at Angul, which would be fed with iron ore brought to Angul through a slurry pipeline from the Kasia mines; this could be expanded to match the Angul pellet plant requirement.

* It also has a 5mt sinter at Angul and a ~2.8mt sinter at Raipur. These would continue to be used, thereby leaving a surplus of 6–7mt pellets for sale in the merchant market.

* The Wollongong coking coal mines in Australia would supply ~1mt going forward once the mine is fully operational.

* Mozambique would deliver another 1mt, while Anthracite coal from SA would be a natural hedge.

* This would bring the captive coking coal source to 2.5mt. Its peak requirement for coking coal for 7mt hot metal would be 5.5–6mt, of which 2.5–3mt would be captive from Australia, Mozambique, and South Africa. The balance premium hard coking coal would continue to be imported.

Net debt to continue to taper, with FY23 net debt zero target in place

* The company is maintaining its target to turn net debt zero by end-FY23.

* However, JSPL may achieve this earlier as it is planning another stream of cash flows from the 6mt pellet plant being set up in Angul by Sep’22.

* Assuming a conservative margin of ~INR1000/t on pellet sales, the company could ideally secure additional cash flows of INR20b to achieve debt reduction – provided the pellet plant is commercially commissioned by Sep’22.

* The company reported consolidated net debt of INR112b at end-2QFY22.

Remain constructive on JSPL given its deleveraging and volume growth

* The company is undergoing a structural change in its EBITDA margin. We believe its sustainable EBITDA margin would likely improve by INR2,000–2,500/t over the previous cycle average; this is reflected from the following:

* The higher share of pellets for which iron ore would be supplied through the slurry pipeline – savings of INR600/t of iron ore

* Merchant sales of pellets of 6–7mt annually – margins of INR1,000–1,200/t of pellets

* An improvement in the FG mix with the addition of HRC and a significant reduction in semis via the introduction of Thin Slab Caster, whereby its current run-rate of semis will come down from 35% to 5%

* Over the near term, the Steel market remains weak due to the factors discussed above. However, considering a) the long-term growth plan already under implementation (funded largely through internal accruals), b) the target to turn net debt zero by Mar’23 at the latest, and c) the mix towards flats improving the blended NSR substantially, we are positive on the stock and maintain a BUY rating.

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