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Home >Markets >Mark To Market >Steel production is on the rise for JSPL, but stock price is stiff

Jindal Steel and Power Ltd (JSPL) continues to show that the recovery in the steel cycle is taking hold. Besides, iron ore inventories at its Sarda Mines is also helping production. The stock gained 1% on Monday due to higher crude steel production.

The firm’s November production jumped 15% year-on-year (y-o-y), which is a shade higher than October’s 13% growth. This shows JSPL is sustaining its double-digit run rate witnessed in October.

This is also higher than peers such as JSW Steel Ltd, which saw a 3% y-o-y rise in crude steel production, albeit on a larger base. JSW Steel, however, has said that shortage of iron ore constrained its capacity utilization.

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Another positive is that JSPL’s iron ore inventories are in place, which is aiding the company at a time when iron ore is in short supply.

Besides, iron ore prices have risen considerably and are near their all-time high, which should assist margins in the coming quarters.

Further, JSPL also has coal inventory to last till February 2021. However, the price of coal after February will need to be watched.

Besides, domestic demand is perking up. JSPL is seeing value-added products’ exports helping its volumes, with demand for long products seeing a pick-up post the monsoons, when construction activity picks up. Hence, the second half should continue to see growth, provided steel prices remain at higher levels.

“We expect margins to remain strong in 2HFY21, driven by an expected increase in long steel prices, cost tailwinds from lower coking coal costs, and the continued benefit of free-of-cost iron ore," said analysts at Motilal Oswal Financial Services Pvt. Ltd.

Concerns on its high net debt levels is being addressed. The company’s net debt fell by about 19% since March, thanks to the completion of the first tranche sale of Oman assets. Some more debt reduction is on the anvil, provided JSPL’s operating cash flows maintain the trajectory.

“The company is fully focused on its target of reducing consolidated debt to below 15,000 crore over the next two years before embarking on any capex plans. FY23 net debt to Ebitda of 2 times is the lowest in the steel sector," analysts at JM Financial Institutional Equities said. Ebitda is earnings before interest, tax, depreciation and amortization.

That said, there are several factors that can drive the progress of the company, which should aid volume growth.

“We expect JSPL to achieve a 10% annual growth rate over FY20-23, helping drive 8% standalone annual growth in Ebitda," analysts at JM Financial said.

Nevertheless, the stock gains this year of about 57% has stretched its valuations considerably. The stock is trading at almost 17 times one-year forward estimates and prices in the improvement in earnings.

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