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Capacity expansion to propel growth

* The ongoing capacity expansion at Angul (Odisha) will significantly enhance Jindal Steel and Power’s (JSP) crude steel capacity by over 65% to 15.9mt. The planned expansion, which is expected to be completed by 3QFY26, will catapult JSP to the fourth largest steel manufacturer in India.

* Along with the capacity expansion, JSP plans to strengthen its raw material integration, increase the share of CPP, increase the share of flat steel, and undertake product enrichment. The planned capex will result in volume growth and a reduction in structural costs.

* JSP recently commissioned and dispatched its first rake from 6mt HSM at Angul in a record period of 30 months. This achievement enables the company to cater to key sectors such as automobile, construction, oil, GP, color coating, etc.

* In Oct’23, JSP started production at Gare Palma IV/6 mines, which supply coal to its Raigarh facility. At the current mine, JSP has already mined ~1mt of coal in 3QFY24 and as production ramps up, the mine can see increased raw material integration, which helps JSP to accelerate its capacity expansion.

* In addition, JSP has also commenced production at its Utkal C coal block within a record time of 12 months and the entire incremental benefits from this mine are expected to accrue in FY25E, which should further strengthen RM integration.

* JSP has followed a prudent deleveraging policy to strengthen its balance sheet. With net debt of ~INR91b in 9MFY24 and a net debt-to-EBITDA ratio at a comfortable level of 0.9x, JSP has one of the strongest balance sheets among the domestic ferrous manufacturers. The stock trades at 5.2x FY26E EV/EBITDA and 1.3x FY26E P/B. We reiterate BUY on the stock with a TP of INR900 (6x FY26E EV/EBITDA).

* Key downside risk: A delay in the commissioning of the remaining coal mines may delay cost synergies and margin improvement.

Scale-up through capacity expansion

* JSP has guided for a capex outlay of INR75-100b p.a. over the next three years. The increase in capex guidance during 1HFY24 by INR70b to INR310b was attributed mainly to scope changes and the construction of a 1.2mt CRM complex and a 0.5mt plate mill facility at Angul.

* The INR310b capex will be utilized for the expansion at Angul (75%), ACPP-II (10%), coal mines (5%) and new projects (10%). After the capex, the share of flat steel products is expected to increase to ~55-58% from ~30-35% currently.

* 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 growth outlook.

* JSP recently commissioned the 6mt HSM facility, and all the other expansions are progressing as per timelines, which are expected to come on stream in phases by 3QFY26 (with majority coming on stream by end of FY25).

* As a part of the ongoing capex, JSP is enhancing its pellet capacity to 21mt (current 15mt), along with the installation of a ~200km 18mt slurry pipeline from Barbil to Angul, which will help in margin expansion and cost synergies.

* The total capex for FY24E is expected to be around INR75-100b and JSP has already spent INR60b till Dec’23.

* Once the doubling of the capacity at Angul is completed, JSP aims to increase its Raigarh capacity to 9.6mt from 3.6mt, thereby augmenting the installed crude steel capacity to ~22mt.

Strong RM linkages and cost competitiveness

* The company has two iron ore mines at Kasia (7.5mt) and Tensa (3.11mt), which fulfill around 64% of its iron ore requirements. These mines are in proximity to the Barbil pellet facility, which helps JSP reduce its reliance on third-party merchant miners.

* Total requirement of JSP in FY23 stood at ~14mt, of which Tensa mine supplied ~3mt and Kasia mine supplied ~6mt, with the rest procured from OMC and NMDC.

* JSP had acquired thermal coal blocks at Utkal C (PRC 3.37mt), Utkal B1 & B2 (PRC 8mt) and Gare Palma IV/6 (PRC 4mt) with a cumulative R&R of over 700mt. In Oct’23, JSP started production at Gare Palma IV/6 mine, and its proximity to the Raigarh facility (~49kms) provides RM linkages to JSP.

* Gare Palms IV/6 achieved a production of ~1mt during 3QFY24 and is expected to reach a run rate of over 3.5mt by Mar’24. JSP recently commenced production from Utkal C coal block and the entire incremental benefits from the Utkal C coal block is expected to accrue in FY25E. JSP also has 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.

ACPP-II

* In FY23, JSP acquired 2x525mw power plant assets belonging to Monnet Power at Angul under the IBC proceedings for INR4.1b. The 1050mw plant, which was under construction at the time of acquisition, is expected to utilize ~25% less coal and is expected to come on stream by 2QFY25 (part of the ongoing capex).

* Once fully commissioned, this power plant will provide power/energy to the Angul facility. The plant’s proximity to Utkal C, B1, and B2 mines and JSP’s Angul facility gives an additional advantage to JSP.

* As a part of the ongoing capex, JSP has earmarked INR30b for the construction of this plant.

Valuations and view

* The ongoing capacity expansion is expected to increase the share of flat steel products to over 55%, with the focus on VAP flat steel products. JSP’s strong focus on high-margin VAP (current share ~65%) has helped the company strengthen its product offerings across the value chain, thereby enchasing its realizations. As the additional capacity comes on stream, JSP would be able to develop more VAPs, and thus driving up margins.

* JSP’s focus on RM integration not only provides benefits from cost synergies but also helps the company to sail through extreme steel and raw material cycles.

* Steel demand in India is expected to remain robust, driven by improvements in construction activity, a strong push on infrastructure projects, and higher demand for automobiles, RE and consumer goods.

* Steel demand is relatively stronger in 4Q, which should help JSP garner better margins. The stock trades at 5.2x FY26E EV/EBITDA and we reiterate BUY on the stock with a TP of INR900 (6x FY26E EV/EBITDA).

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