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Focusing on capacity expansion and cost reduction to drive earnings

Capex to enhance crude steel capacity by ~65% to 15.9mt by FY25

* JSP plans to incur a significant capex to enhance its crude steel capacity to 15.9mt from current 9.6mt and strengthen raw material integration and product enrichment. The planned capex could result in volume growth and a reduction in structural costs.

* With the planned capex, JSP will increase its flat steel capacity to 7.7mt from 2.2mt to cater to automotive and high-tensile steel, thereby enhancing its product mix.

* In 1QFY24, the company signed a mining lease for Gare Palma IV/6 and Utkal C, with total R&R of   ~363mt and EC of ~7.4mt p.a. JSP has already entered the Gare Palma IV/6 mines and is in the final stage of entering Utkal-C mines. After the two mines become operational, they will fulfill ~50% of JSP’s thermal coal requirement, thereby reducing its dependence on the import of coal and merchant mines.

* JSP over last few years has shifted its focus to high-margin VAP (~65% of sales). This has helped the company strengthen its product offering across the value chain and improve realizations.

* The company has followed a prudent deleveraging policy to strengthen its balance sheet. With net debt of ~INR68b in 1QFY24 and a net debt-to-EBITDA ratio at a comfortable level of 0.75x, JSP has one of the strongest balance sheets among the domestic manufacturers. The stock trades at 4.8x FY25E EV/EBITDA. We reiterate BUY on the stock with a TP of INR790 (5.5x FY25E EV/EBITDA).

* Key downside risk: Delay in the commissioning of the Angul plant and coal mines may delay growth and margin improvement. 

Driving value through capacity expansion

* JSP is undertaking an INR240b capex program to expand its crude steel capacity by ~65% to 15.9mt, pellet capacity by 133% to 21mt and finished steel capacity by ~80% to 12.2mt by FY25E.

* The capex is aimed at 1) margin expansion (INR81b), which would enhance pellet capacity at Angul by 12mt, along with the installation of a ~200kms 18mt slurry pipeline from Barbil and 5.5mt HSM; and 2) capacity expansion (INR159b), which would enhance the existing crude steel capacity at Angul to 12.3mt from 6mt. ? After the expansion, the share of flats will significantly increase to 7.7mt from 2.2mt, catering to automotive and high tensile steel, thereby enriching the product mix.

* Historically, flats command a premium over long steel products, and JSP’s structural shift from being a long steel manufacturer to a VAP flat steel manufacturer bodes well for the company’s long-term strategy. ? The 6mt pellet plant-I has been commissioned recently, and the 5.5mt HSM is expected to be commissioned by 3QFY24.

* The total capex for FY24E is expected to be around INR56b and JSP expects to spend ~INR140-150b over the next two to three years. Once the Phase I expansion at Angul is completed by FY25E, JSP aims to augment its capacity further to 25.2mt, thereby making it one of the largest single-location steel facilities in the world

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