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EBITDA downcycle continues

Jindal Steel & Power (JSPL) reported lower-than-expected EBIDTA and PAT in Q3FY22. EBIDTA/te declined by ~Rs3,812/te QoQ to Rs17,404/te; net debt print also disappointed. Management commentary suggests the decline in EBIDTA is mainly on account of higher raw material cost (up by ~Rs4,250/te QoQ); it expects EBITDA/te to be Rs20,000+ in Q4FY22. EBIDTA margin contacted by ~760bps QoQ. With the divestment of Jindal Power (JPL), management looks to turn net debt free by FY23E – a very likely scenario, in our view. Export share for JSPL declined to ~23% in Q3FY22 from >40% in Q2FY22. Further, production from the Kasia mine has started earnestly with plans to ramp-up production to ~5mnte in FY23. While management is looking to build up capacity through internal accruals and limiting net debt to 1.5x of EBITDA at all times, the execution is seldom as linear as the plan sounds. We maintain HOLD with an unchanged TP of Rs433.

Margins disappoint, impending margin pressures ahead. JSPL reported lowerthan-expected EBITDA/te. Though realisations (derived) increased by ~Rs3,427/te QoQ, EBITDA declined ~Rs3,800/te QoQ. This has been driven by an increase in RM costs by ~Rs4,250/te QoQ. The industry, however, continues to grapple with a sharp rise in coking coal prices. Premium Hard Coking coal price has risen more than 3x in 9MFY22. Further, rising seaborne iron ore price has triggered an increase in domestic iron ore prices in recent weeks.

Integration benefits to flow in gradually. JSPL has recently won the Kasia iron ore mine; production from the mine has started earnestly with plans to ramp up production to 5mnte in FY23. Kasia will aid JSP’s growth plans as the company progresses steadily toward ~16mnte capacity target in FY25 (from 9.6mnte now). Along with Tensa mines (2.5mtpa capacity), FY23E should see 7-7.5mtpa of captive production meeting ~50% of JSPL’s requirements. Also, management expects to derive ~2.5mtpa of coking coal from Australia and Mozambique combined which should provide some relief from rising cost headwinds and ensure continued availability of raw materials.

6mtpa Angul expansion will hardly stretch the balance sheet; management maintains guidance to achieve net debt free status by FY23E. Current net debt of ~Rs110bn will go down further by Rs28-30bn as payment for divestment of JPL flows in. Management maintained guidance of being a net debt free entity by FY23E.

Maintain HOLD. A simplistic downcycle EV calculation would peg downcycle valuation at ~Rs350bn. If the EBITDA/te contracts for 4-5 quarters, won’t there be a better value discovery? Of course yes – one may look to enter at better levels. We maintain HOLD with a target of Rs433/share (P/B of 1.1x on FY23E).

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