IGI Logo

Expansion strategy to propel growth in the long run

* Jindal Steel & Power’s (JSP) ongoing capacity expansion at Angul (Odisha) will boost the crude steel capacity by 65% to 15.9mtpa and finished steel capacity by 83% to 13.75mtpa. The expansion is expected to complete by Q1FY27 and position JSP as the fourth-largest steel producer in India.

* JSP is also undertaking cost-effective measures to expand the operating margin through: 1) the strengthening of raw material integration, 2) increase in the captive power plant share, 3) higher flat steel mix to ~55%, and 4) focus on VAP (current share ~67%). JSP has started production at the Gare Palma IV/6 coal mine (EC ~4mt; R&R ~160mt) and supplies coal to the Raigarh unit. Further, as the Utkal C, B1, and B2 come on stream, the RM integration and cost-effectiveness will increase, leading to margin accretion.

* The steel demand in India is expected to remain robust, driven by improvements in construction activity; a strong push on infrastructure projects; and a higher demand for automobiles, RE, and consumer goods. Given the robust demand coupled with incremental new capacities, we expect JSP to clock 9mt (+18% YoY) and 11mt (+25% YoY) volumes for FY25/26, respectively.

* Recently, the metal prices corrected significantly, with both long and flat prices experiencing a 5% and 10% decline QoQ in 2QFY25, respectively. Global steel prices also trended downward on account of the muted global demand and Chinese oversupply. Margins in the near term could be under pressure due to weak realizations. However, the prices have bottomed out and recent measures by China to boost its economy would positively impact the domestic steel prices going forward.

* The company deleveraged its B/S from the net debt of INR391b in FY19 to ~INR104b as of 1QFY25, translating into 1x the net debt/EBITDA. The company targets to maintain it below 1.5x, considering the ongoing capex. The robust steel demand and increased capacity place JSP in a strong position. At CMP, the stock trades at 6.2x EV/EBITDA and 1.8x P/B on FY26 estimate. We reiterate our BUY rating on JSP with a TP of INR1,200, based on 7x FY26E EV/EBITDA.

Scaling up the capacity

* JSP has outlined a capex guidance of INR310b, which will raise its total liquid steel capacity to 15.9mtpa and finished steel capacity to 13.75mtpa. The capex will be allocated toward the Angul expansion (75%), ACPP-II (10%), coal mines (5%), and new projects such as Q&T, Rakes, and Micro Palletization (10%).

* As of FY24, JSP has spent ~INR150b out of the announced INR310b capex. It expects to incur the remaining ~INR150b capex in the next three years, excluding the maintenance capex. Post the expansion, the share of flat steel products is expected to increase to ~55% as compared to ~30-35% currently.

* JSP has commissioned 6mt Pellet Plant-I and 6mt Hot Strip Mill (HSM) at the Angul facility. All other expansions are progressing with slight delays and are expected to come on stream in phases by 1QFY27 vs. 3QFY26 earlier (majority to get commissioned during FY25-FY26)

Strong RM linkages and cost competitiveness

* JSP owns two iron ore mines at Kasia (7.5mt) and Tensa (3.11mt) in Odisha, which fulfill ~60% of its requirements. These mines are situated in proximity to the Barbil pellet facility, reducing dependency on third-party merchant miners.

* Further, JSP plans to increase the pellet capacity to 21mt (current 15mt), along with the installation of a ~200kms slurry pipeline of 18mt from Barbil to Angul as part of its ongoing capex, leading to margin accretion and cost synergies.

* JSP acquired thermal coal blocks at Utkal C (PRC 3.37mt), Utkal B1 & B2 (PRC 8mt), and Gare Palma IV/6 (4mt) with a cumulative R&R of over 700mt.

* In Oct’23, JSP started production at the Gare Palma IV/6 mine and currently operates at ~1mt; the management targets to operate at 3.5mt run rate in the near term.

* From the Utkal C coal block, JSP produces ~0.9mt and plans to gradually ramp up the production. The Utkal B1 and B2 mines are in an advanced stage of clearance and are expected to begin operations in FY25.

* JSP has also acquired coking coal, thermal/coking coal, and anthracite coal assets in Australia, Mozambique, and South Africa with EC of 1.2mt, 5mt, and 1.2mt, respectively.

* In FY23, JSP acquired 2 x 525mw power plant assets at INR4.1b (Monnet Power Company Ltd) at Angul. The 1050mw plant was under construction at the time of acquisition and is a part of the ongoing capex, likely to be commissioned by 3QFY25. Once fully commissioned, the power plant will supply power/energy to the Angul facility. The plant’s proximity to Utkal C, B1, and B2 mines and JSP’s Angul facility provide an added advantage to JSP.

Valuations

* JSP has followed a prudent deleveraging policy, which has helped the company strengthen its balance sheet. The company deleveraged B/S from INR391b of net debt in FY19 to ~INR104b as of 1QFY25, translating into 1x net debt/EBITDA. The company targets to maintain it below 1.5x, considering the ongoing capex.

* At CMP, the stock trades at 6.2x EV/EBITDA and 1.8x P/B on FY26 estimate. We reiterate our BUY rating on JSP with a TP of INR1,200, based on 7x FY26E EV/EBITDA.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412