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Deleveraging to continue on strong earnings

Announced Steel capex improves the growth outlook

* JSP achieved its highest ever Steel EBITDA/PAT of INR48.8b/INR27.7b in 4QFY21, supported by a strong pricing environment. Consolidated net debt fell further by INR34.7b QoQ to INR224b, implying a net debt/EBITDA of 1.53x.

* It has announced an INR180b capex at Angul to expand its Steel capacity by 85% to 15.9mtpa by FY25, at a very competitive cost of ~USD390/t.

* With the proposed sale of Jindal Power (JPL), JSP would become a pure play Indian Steel company, which should also aid in better value discovery as the Steel business is still under-valued at 4.1x FY23E EV/EBITDA.

* We raise our FY22E/FY23E EBITDA by 15%/11% to factor in strong Steel prices. Despite the announced capex, we expect net debt to fall further to INR126b (excluding the ~INR50b net debt reduction from the Power divestment) by Mar’23E. Reiterate Buy.

Highest ever EBITDA/PAT on the back of strong Steel margin

* JSP reported strong 4QFY21 earnings, with consolidated revenue/adjusted EBITDA/PAT rising 13%/15%/23% QoQ to INR119b/INR52.9b/INR29.4b (est. +3%/+1%/+18%).

* Steel (standalone) revenue/EBITDA/PAT rose 19%/25%/16% QoQ to INR104.3b/INR48.8b/INR27.7b (est. +6%/+3%/+4%).

* Steel sales (excluding pig iron) rose 2% QoQ to 1.81mt (+36% YoY). Pellet sales declined 28% QoQ to 0.29mt due to higher internal consumption.

* Blended Steel realization improved by ~INR8,452 (17%) QoQ to INR57,481 (est. INR54,794/t) due to better than expected product mix. However, the increase in realization was partly offset by higher iron ore cost and other expenses. As a result, EBITDA/t improved by 23% QoQ to INR26,915 (est. INR26,318) – including ~INR6,000/t benefit from the utilization of Sarda iron ore inventory, which gets exhausted in 1QFY22.

* Power (subsidiary JPL) EBITDA increased 4% YoY to INR3.5b, even as revenue rose 50%, due to a likely write-off of surcharge receivable as reported in 3QFY21. Sales volume PLF declined to 53% (v/s 56% in 3QFY21). Realization improved 2% QoQ to INR3.8/kwh. EBITDA/kwh came in at INR1/kwh.

* Consolidated net debt (reported) declined further by INR34.7b QoQ to INR224b, implying a net debt/EBITDA of 1.53x.

* Standalone revenue/EBITDA/PAT grew 27%/123%/10x YoY in FY21 to INR332b/INR129b/INR66b on the back of greater (~21%) Steel sales (6.9mt), higher Steel prices, and benefit from free of cost Sarda iron ore inventory.

* Consolidated OCF/FCF stood at INR120b/INR111b in FY21, up 4%/13% YoY.

Announced capacity expansion, deleveraging continues

* JSP has announced an expansion of its 6mtpa Angul plant to 13mtpa by FY25 – 1mtpa through debottlenecking in FY22 and a 6.3mtpa brownfield expansion in phases by FY25.

* This would entail a capex of INR180b spread over the next five years. Expansion capex for FY22/FY23/FY24 is likely to be INR24b/INR47b/INR43b.

* Net debt reduced further in Apr’21: JSP has further reduced its net debt by INR28.1b to INR193.2b as of 11th May’21. Net debt had fallen by INR138b in FY21 to INR221b.

* Iron ore availability not a constraint for JSP: The company is likely to exhaust its free Sarda iron ore inventory in 1QFY22. The management is confident of replacing the same with iron ore from NMDC, OMC (has LTA), and other Odisha miners, though it would of course increase raw material cost from 2QFY22.

Margin to stay strong, expansion improves the growth outlook

* Supported by higher prices, we expect Steel margin to be strong in the near term after exhaustion of Sarda iron ore inventory.

* The announced 85% expansion in Steel capacity to 15.9mtpa in phases by FY25, at a competitive cost of ~USD390/t, should be RoCE accretive and improves the growth outlook of the business.

* Our TP of INR550/share is based on 5x FY23E EV/EBITDA for the Steel business and announced deal valuation for the Power business. At the CMP, the stock trades at an attractive 4.2x FY23E EV/EBITDA for the Steel business.

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