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Trading at lower than bankruptcy value; BUY

JSPL’s current EV is near to what it used to be when it was on the verge of bankruptcy in December 2016. Investors appear to have ignored the structural changes in the last five years – cost reduction, high volume base, future growth, no risk of bankruptcy amid near-term macro weakness. JSPL has strengthened its balance sheet, with net debt/EBITDA of 0.2x in FY22E v/s 10.4x in FY17, eliminating the risk of bankruptcy in the foreseeable future. The benefits of ongoing capacity expansion via internal accruals are yet to be factored in. Our analysis shows a value of Rs345/share in the bear case and Rs630/share in the base case. Risk-reward is favorable, and we advise investors to ignore near-term headwinds and BUY with a target price of Rs630 (5.5x average of FY23E and FY24E EV/EBITDA).

Current EV is lower than bankruptcy value

We compare JSPL’s current EV with that of December 2016, when it was on the verge of bankruptcy. Current EV (Rs386/share) is lower than that of December 2016 (Rs400/share). Not only this, JSPL is trading at ~44% discount to replacement cost (Rs661/share) and the value at which Tata Steel acquired Bhushan Steel under the Insolvency and Bankruptcy Code, 2016 (~Rs70,400/t). This is despite the fact that JSPL has reduced its cost structure, strengthened its balance sheet over the last five years, and is on the way to future growth. We believe this anomaly will not remain for long.

Net debt free by H1FY23E; ongoing expansion to start benefiting from FY25

JSPL’s net debt was Rs111.6bn as at the end of Q2FY22. We expect it to be net debt free by H1FY23E, assuming sale of Jindal Power goes through in Q4FY22 (will receive ~Rs30bn). The benefits of ongoing 6.3mtpa steel expansion at an estimated capex of ~Rs180bn (via internal accruals) by FY26 will start accruing from FY25 onwards, improving margins profile on a structural basis, taking EBITDA/t to at least Rs9,000/t (FY17 EBITDA/t of Rs7,581; FY17-21 average of Rs11,281).

Our FY23E estimates factor in Rs8,000 lower EBITDA/t than in H2FY22E

We factor in FY23E EBITDA of Rs119.7bn, assuming EBITDA/t of Rs13,771 and volume of 8.7mt. In Q2FY22, JSPL recorded EBITDA/t of Rs21,216 and we expect EBITDA/t of Rs22,000/t+ in Q3FY22. With receipt of consent to operate blast furnace at 4.2mtpa at Angul, taking total steel capacity to 9.6mtpa, we see limited risk to our FY23E volume. We factor in lower steel and coking coal prices and see limited downside risk to our FY23E EBITDA/t.

Ignore near-term weakness; opportunity to BUY

JSPL will be a 15.9mtpa steel company with net cash by FY25-end. With strong balance sheet and volume growth visibility, JSPL should not trade at near to bankruptcy value despite near-term weakness witnessed by the industry. We value JSPL at 5.5x average of FY23E/FY24E EV/EBITDA to arrive at a TP of Rs630. BUY.

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