Mumbai: Jindal Steel and Power Ltd (JSPL) has emerged as the lowest bidder to supply 500 megawatts (MW) of electricity to a state-owned entity. The company is yet to sign the final agreement for the contract, scheduled to commence in the second half of FY20. If signed, the deal can make a material difference to the company’s power business and perhaps to its consolidated earnings.
As of December 2019, only 30% of JSPL’s 3,400MW commercial capacity is tied up with commercial agreements. The addition of a 500MW contract can take the operating capacity to 45%, improving utilization levels.
The development comes as JSPL’s core steel business in India is seeing an improvement in volume. Production in the recently-ended March quarter (Q4) rose by a fifth. Commissioning of production at the intermediate and downstream plants is expected to keep up the growth tempo. JSPL is aiming to produce 6.5 million tonnes of steel in India in FY20, an increase of 24% from the previous year.
A fragile global demand-supply situation and steel imports pose a threat to domestic prices. Even so, cost efficiencies from the recently restarted intermediate units such as direct reduced iron and coal gasification plants should help the company withstand the expected volatility in prices.
“We see JSPL better placed than peers in a challenging price environment owing to its imminent production ramp up," analysts at Edelweiss Securities Ltd said in a note last month.
The JSPL stock is reflecting the optimism. It has gained 29% since the December quarter results were announced in February. While the gains helped the company recoup some of the losses, the stock is still down 30% from a year ago. With key intermediate plants restarting production, much now depends on the new electricity contract and the promise of deleveraging. Besides, addition of new power supply contracts are crucial for reducing losses at the power units.
Unsustainably high debt means much of JSPL’s earnings are being eaten up by finance costs, leaving little or no money for shareholders. The company reported losses in four consecutive years to FY18. In first nine months of FY19, interest or finance costs constituted 47% of JSPL’s earnings before interest, tax, depreciation and amortization (Ebitda).
The company’s deleveraging efforts lowered debt in the past year. Net debt to trailing Ebitda moderated from 6.6 times at the end of March 2018 to 4.85 times in the December quarter. It plans to further reduce debt by asset monetization, especially in overseas projects.
According to Edelweiss, the management plans to use the proceeds to lower the net debt-to-Ebitda ratio to less than three times by end-FY20. How well JSPL delivers on this will determine future stock returns.