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Growth capex to drive earnings trajectory

JSPL reported a standalone EBITDA of INR31.7bn, below JMfe of INR35.2bn. Despite higher realisations, rise in raw material cost, lower steel and pellet sales led to a sequential drop in EBITDA/ton to INR17.4k. Consol. EBITDA came in at INR33.1bn. International mining operations in Mozambique and South Africa reported improvement in profitability. JSPL was previously declared the preferred bidder for Kasia Iron Ore Mine in Odisha. Kasia Mine has a large geological resource of 278mn tons of iron ore and it consists of an average Fe grade of approx. 62.5%. Kasia is an operational mine with Environmental Clearance (EC) of 7.5 MTPA. Production from Kasia mine have started earnestly with plans to ramp-up production to 5 mn ton in FY23. Consolidated net debt has declined further to INR110bn in 3QFY22 (from INR112bn in Sep’21). Conclusion of Jindal Power Limited (JPL) divestment (accounted as asset held for sale) will result in Net Debt declining further by INR30bn, taking JSPL a step closer to its vision of becoming a Net Debt free company by FY23. The company has embarked on a capacity expansion plan to augment its capacities from 9.6mtpa (post CTO) to 15.9mtpa by FY25E. Divestment of non-core businesses, de-leveraging of balance sheet (net debt/EBITDA to be at sub 1x FY24E) and growth capex will drive earnings trajectory going forward. Maintain BUY

Higher costs lead to lower EBITDA/ton despite higher realisations: During 3QFY22, JSPL Standalone reported steel sales (incl. pig iron) of 1.82mn tons (down 15% QoQ). Sales volume during the quarter stood lower than production, resulting in inventories increasing sequentially. Export share for JSPL declined to 23% vs 40%+ in 2Q. Higher internal consumption resulted in negligible external sales of pellets falling to 0.01mn tons (down 96 % QoQ). Higher realisations led to JSPL reporting revenues of INR120bn. However, sharp rise in raw material cost, lower steel and pellet sales resulted in EBITDA being reported at INR31.6bn, implying an EBITDA/ton of INR17.4k. Lower operating profit and higher tax expense have resulted in JSPL posting profit after tax (PAT) of INR17bn (down 37% QoQ

Production from Kasia mine have initiated: JSPL was declared as the preferred bidder for Kasia Iron Ore Mine in Odisha. Kasia Mine has a large geological resource of 278mn tons of iron ore and it consists of an average Fe grade of approx. 62.5%. Kasia is an operational mine having an Environmental Clearance (EC) of 7.5 MTPA. Production from Kasia mine has started earnestly with plans to ramp-up production to 5 mn ton in FY23. The mine is only 17 km away from JSPL’s Barbil pellet plant. Iron ore from Kasia will significantly boost JSPL’s raw material security; especially as the company makes steady progress on its plans to raise its pellet capacity to 21mtpa (from 9mtpa now) by FY24 and steel capacity to ~16mtpa (from 9.6mtpa) by FY25. The company is also working towards setting up a slurry pipeline between Barbil and Angul (c200kms).

Deleveraged Balance Sheet set for re-rating: Strong operational cash flows, improving working capital, declining finance cost, and lower capex have all contributed towards continuous deleveraging in 3QFY22. Consolidated net debt has declined further to INR110bn in 3QFY22 (from INR112bn in Sep’21). For the reported quarter, finance costs have declined by 35.2% YoY. Conclusion of Jindal Power Limited (JPL) divestment (accounted as asset held for sale) will result in Net Debt declining further by INR30bn, taking JSPL a step closer to its vision of becoming a Net Debt free company by FY23. The divestment has received strong backing from the shareholders’ approving the transaction in the EGM held on 3rd September 2021. The company is currently in the process of getting relevant approvals from JSPL as well as JPL lenders and expect the divestment to conclude in FY22 itself.

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