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Value will emerge as downcycle tightens its grip

Jindal Steel and Power (JSPL) reported better-than-expected EBITDA in Q1FY23. Timing of sales and inventory helped report an EBITDA beat. EBITDA/te (adjusted for forex gains) increased ~Rs2,900/te QoQ to reach Rs16,464/te in Q1FY23. Marginal net debt reduction of Rs11bn QoQ disappointed. Working capital buildup of Rs25-30bn did offset an impressive operational performance of +Rs30bn cashinflow on the completion of the JPL deal. Overseas operations continue to witness improvement QoQ (on price increase and not necessarily volumes). We expect a significant contraction in Q2FY23 EBITDA, and the clarity for an improvement in Q3FY23 is still lacking. Management expects to become net debt free by FY23E given the expected accruals. The tie up of project financing (Rs150bn) for Angul expansion was projected as a normal business practice. We maintain REDUCE.

* Realisation held up well in Q1FY23

on the back of i) timing of sales (main cause as per our view), ii) lagged impact on plate prices in a correcting HRC price environment and iii) lower correction seen in May and June for long product prices. Also, raw material inventory along with declining iron ore prices helped partly offset thermal and coking coal inflation. This allowed for Rs 3,000/te QoQ increase in EBITDA/te. We expect a sharp contraction in Q2FY23. The lagged impact on plate prices, declining exports (and plate demand) may lead to a sharp contraction in realised prices, which the management was not comfortable to guide.

* Business levers well in place, deleveraging and capital structure are close moniterables.

With Angul capex under way, three thermal coal mines are set to ramp up and with captive coking coal sourcing at 58%, business levers are well in place. Coal mines (captive thermal) alone can lead to Rs20bn of through cycle EBITDA benefit in our view. Angul expansion (at Rs180bn - impressive capital intensity of US$450/te) will act as return enhancer, unless capital cost sees an upward trajectory (as was feared post Q4FY22). Deleveraging remains the key moniterable. Management commented on project financing of Rs150bn for Angul expansion as a normal business practice. However, there were also references of being net debt free by FY23E (given the management expectations of FCF in FY23E).

We maintain REDUCE.

An improved print for Q1FY23 does little to impart incremental visibility on forward profitability (EBITDA/te) which is expected to trend down. Debt print also disappointed (despite JPL divestment) on account of working capital buildup. Management will do well to pare down debt aggressively over the next two quarters and cull out any expectations of increasing leverage as project capex ramp up will help asset valuations stabilise faster, in our view.

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