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Deleveraging + volume growth = BUY

We recently hosted JSPL for an NDR. The key highlights are as follows:

JSPL anticipates a steady domestic demand even at current price levels. The company does not expect any major demand destruction but believes there will be some demand deferrals due to the record high steel prices.

The company has been able to secure significant orders from export markets especially in Europe, partly driven by the void created due to the Russia-Ukraine conflict and China’s policy of reducing exports. The management believes that steel demand can be deferred at the best but cannot be postponed forever.  The utilization rate is currently at high levels, but the company does not expect major capacity additions at industry level in FY23/24. JSPL will likely commission 3mt HSM in Feb’23, which will increase the share of finished steel in the overall sales basket and improve the blended NSR

Raw material security is an added advantage

At 6mt blast furnace capacity, JSPL needs about 4mt coking coal. This is sourced from the captive mines in Mozambique and Australia.

Total coal production at Mozambique is currently at ~5mt of which coking coal is 23-25%, viz., 1mt. Australian mines at Wollongong are likely to deliver 1mt in FY23E.

The unit cost of coking coal from Mozambique is currently at USD110-120/t and Australia mines cost USD130-140/t at current production rate. The management expects a sharp reduction in production costs to USD 80/t at Australian mines once the company achieves sustained production of 95- 100kt per month.

Coking coal benefits can be substantially higher in case coking coal prices remain elevated.

Captive Tensa iron ore mines cater to 25% of JSPL’s iron ore requirements currently. JSPL won the bid for Kasia mines at a premium of 118% to the IBM price for further securing its iron ore supplies. It expects iron ore at Kasia mines to have a high Fe content at 62.5% with reserves of ~278mt

Capital allocation and ND

The company has recently declared an interim dividend of INR1/share. This is resumption after Jun’14. The management expects dividend as a consistent part of capital allocation policy going forward

JSPL plans to maintain a peak ND/EBITDA level of 1.5x through the cycle, even though the company expects to be in ‘Net cash’ position by Sep’22

JSPL recently prepaid USD375m debt in its Mauritius entity. However, we believe a part of the debt was paid through cash in books, and hence, the total de-leveraging in the books will not be equivalent to the loan prepaid.

Projects/capex

Angul pellet plant #1 (6mtpa) remains on track with expected completion during Sep/Oct’22 and HSM Phase #1 (3mtpa) is likely to be commissioned in Feb’23E.

All the clearances for Utkal-C coal block in Odisha are in place and the mine is likely to start production in a year’s time. The block has total reserves of 196mt with EC of 3.37mtpa. The revenue sharing for the coal block stands at 45%, which would be halved to 22.5% if coal is used in synthetic gas production.

JSPL is currently utilizing 50% of its total 220mmbtu capacity. Additional coal from this mine is likely to be utilized for production of synthetic gas resulting in lower revenue sharing with the government

The group capex is expected to peak out in FY23 at INR47b, which would taper to INR43b/41b/25b for FY24/FY25/FY26, respectively.

ESOP

A secondary route (through an independent trust) will be followed for purchase of shares for allotment under the ESOP scheme. The trust has been allowed to buy a maximum of 2% of the outstanding shares in any year with total limit being 5% of outstanding shares under the scheme.

These will be issued to eligible employees (max 0.1% of 1m shares to an individual) at higher of acquisition cost or price decided by the Nomination and Remuneration Committee (NRC).

ESOPs in some cases can carry a term up to 40 years to increase the longevity of employees with the company and provide stability to both the company as well as employees.

ESOPs will be valued as per the relevant IndAS guidelines and fair valuation will be done according to the Black Scholes model. The difference between the acquisition cost and fair value will be amortized over the life of the ESOP.

Separation of JPL and other divestments

Jindal Power’s separation is in progress and awaiting clearances from lenders and the consequent cash receipt of INR30b would be used to reduce the debt.

JSPL is open to sale of Botswana thermal coal assets but lack of debt funding for coal mines globally has resulted in a limited number of prospective buyers as per the management.

Valuation and view

JSPL has continued with the policy of deleveraging through the entire steel upcycle. It has announced its growth capex only after the sustainable net debt to EBITDA was less than 3x.

The company has embarked upon modular capex through which cash flow from the initial part of the capex will part fund the second round of capex, thereby reducing debt burden on the balance sheet.

In the current scenario of elevated coking coal prices, JSPL has been able to start shipments from its Wollongong mines that can result in savings of up to USD200m in FY23E (assuming the coal prices remain at CMP).

We expect coking coal price to average at USD400/t for FY23 and USD300/t for FY24, as compared with the current price of USD625/t (already down from the recent record high price of USD700/t).

JSPL is the only company in our universe which offers strong volume growth, deleveraging and increase in share of captive raw materials.

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