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In-line revenue with a slight miss on margins; outlook bright

*Jindal Steel & Power (JSP)’s 1QFY25 revenue stood in line at INR136b (YoY/ QoQ: +8%/+1%), driven by decent volume growth. Sales volume came in at 2.09mt (YoY/QoQ: +14%/ +4%) vs. our est. of 2.02mt. Production volume stood at 2.05mt (YoY/QoQ: flat) in 1QFY25.

* EBITDA came in at INR28b (YoY/QoQ: +8%/+16%), 8% below our est. of INR31b led by higher-than-expected cost and weak realization. EBITDA/t was INR13,585 (YoY/QoQ: -5%/+12%) vs. our est. of INR15,195 in 1QFY25.

* APAT for the quarter stood at INR13b (YoY/QoQ: -21% /+43%) vs. our est. of INR14b. The share of exports reduced to 7% in 1QFY25 vs. 11% in 4QFY24.

* Net debt stood at INR104.6b at the end of Jun’24 (vs. INR112b at the end of Mar’24). Net debt-to-EBITDA stood at 1x as of Jun’24 vs. 1.1x at Mar’24.

Expansion status and update

* The BOF-II plant construction is delayed and is likely to be completed by Mar’25 (earlier 2QFY25). BOF-III, which will be in the same vicinity, should be commissioned by 3QFY26E.

* As of Jun’24, JSP spent ~INR175b of the INR310b of the announced capex plan. Management does not foresee any cost increase due to the delay in the expansion process. Going forward, JSP foresees incurring the remaining ~INR135b in the next three years (~INR75-100b each year) subject to better operating cash flows and balance sheet position.

* The company is targeting to increase the EC limit of Gare Palma IV/6 coal mine to 5MTPA by FY25-end from 4MTPA.

* JSP is in the last leg of EC limit approvals for Utkal B1 mines and expects the same in the next 2-3 months. Utkal B2 is under clearance and is likely to open in FY25.

Highlights from the management commentary

* Based on current price trends, management expects coking coal costs to moderate by USD30-35/t in 2QFY25

* Iron ore costs to reduce by ~INR500-INR1000/t in 2QFY25

* Blended realization would see softening of 1% going forward, as the overall steel prices remain soft.

* Management targets to keep net debt/EBITDA below 1.5x.

Valuation and view

* While 1Q EBITDA was marginally lower than our estimate, the outlook remains bright. JSP foresees coking coal/iron costs to be lower in 2QFY25, translating into a better margin despite softening NSR. The ongoing capex would lead to more value-added products, which would yield better profitability.

* We broadly retain our estimates and reiterate our BUY rating on JSP with a TP of INR1200, based on 7x FY26E EV/EBITDA. The stock is currently trading at 5.8x FY26E EV/EBITDA and 1.7x FY26E P/B.

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