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Cost savings and expansion plans are crucial for JSPL
Summary
JSPL plans to limit its net debt to 1.5 times of Ebitda. But efforts it will take to keep leverage in check remain to be seen
For Indian steel companies, deleveraging their balance sheets was a key theme over the last two years. Jindal Steel and Power Ltd (JSPL) is not an exception and has reduced its net debt to ₹11,164 crore as on 30 September 2021 from ₹35,919 crore as on 31 March 2020.
The focus has now shifted to expansion plans. Analysts have come back pleased after visiting JSPL’s Angul plant recently. The Angul manufacturing facility, which has received clearance for 1 million tonne per annum (mtpa) expansion, sees its steel manufacturing capacities reaching 6.6 mtpa. JSPL’s overall steel production capacity is 9.6 mtpa, including the Raipur facility. The company is also on track to expand Angul capacities by another 6 mtpa and plans to reach a total of more than 15 mtpa capacity by the end of FY23.
Most ongoing expansions are being done through internal accruals. JSPL intends to limit its net debt to 1.5 times of earnings before interest, taxes, depreciation, and amortization (Ebitda) at all times. That said, how good the execution is and what efforts JSPL will take to keep leverage in control remain to be seen. “Execution is seldom as linear as the plan sounds," said ICICI Securities Ltd’s analysts, though they have upgraded their rating on the JSPL stock.
Successful implementation of these expansion plans is key to driving volume growth, achieving cost savings, and improving profitability. Expansions and cost savings measures are also needed as steel prices softened by the end of 2021, after rising consistently since the second half of 2020. Domestic demand has been subdued for the last few months. The correction in international steel prices is also keeping a check on domestic steel prices. Weak demand in China, the largest producer of the commodity, is a concern, as it can keep global steel prices subdued. This may in turn adversely impact domestic steel prices even if domestic demand improves, analysts pointed out.
For JSPL, structural initiatives such as improving fuel mix, raw material utilization, and a slurry pipeline to reduce logistics costs are vital to boost margin outlook when input costs are rising. The company’s secured iron-ore mines should help. JSPL can also source some coal from its mines in Australia.
Meanwhile, shares of JSPL have declined by about 22% from its 52-week highs in May on the NSE. Risk-reward is favourable, analysts say. Even so, weak demand and lower steel prices are near-term concerns.
