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Jindal Steel & Power's prospects remain supported by volume growth, deleveraging

Ongoing expansions, reducing leverage, operational efficiencies arising out of the rising scale of operations and improved raw material sourcing lead analysts to maintain a positive view of Jindal Steel and Power Ltd. (Bloomberg)Premium
Ongoing expansions, reducing leverage, operational efficiencies arising out of the rising scale of operations and improved raw material sourcing lead analysts to maintain a positive view of Jindal Steel and Power Ltd. (Bloomberg)

  • The softness in steel demand and realisations is driven by extended monsoon season, delayed harvesting and ban on construction in the NCR region due to severe pollution levels

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Jindal Steel and Power Ltd (JSPL) has seen its stock price correct more than 18% from October highs. This is owing to some softness in steel demand seen during recent times. Steel prices too have thereby seen some correction. However, analysts maintain their positive stance on JSPL.

 

The softness in steel demand and realisations is driven by extended monsoon season, delayed harvesting and ban on construction in the NCR region due to severe pollution levels. The international market too has seen weak sentiment and analysts say that consumers are adopting a wait-and-watch policy. Besides, analysts at Motilal Oswal Financial Services Ltd point out that there is sufficient inventory lying with traders, who, in a falling market, would try and liquidate rather than accumulate.

Despite near term weakness, analysts believe demand will improve, helped by strong pent-up demand. Further, the company should also benefit from its specialised product range and expansions undertaken. Analysts at Antique Stock Broking Ltd said that “Seventy per cent of the company's product portfolio consists of non-commodity steel like rails, specialized plates and structural products for which demand is expected to improve post-monsoon in line with historical trends"

Note that production numbers posted by JSPL for the month of November are decent. The company’s steel production increased by 10 % Y-o-Y to 6.74 lakh tonnes, although steel sales declined 5% Y-o-Y to 5.39 lakh tonnes. The company attributed weakness in sales to non-availability of Indian Railway rakes on demand

Meanwhile, rising cost of raw materials has been one of the concerns for the Street. The company recently bagged the Kasia mines. Since it is an operational mine, it would now feed into the company’s Barbil pellet plant. Meanwhile, iron-ore prices have already seen a correction from peaks. Note that JSPL would be the least impacted by higher coking coal costs in 3QFY22 ($50/tonne as compared to $95-100 for domestic peers) due to a natural hedge from its overseas coal mines and lower-cost inventory available with the company till January'22, according to Antique’s analysts.

It is worth noting that the debt reduction undertaken by the company lately has also improved earnings outlook significantly. Leverage levels are expected to continue to improve further driven by operational free cash flows and calibrated capex outlay. The net debt to Ebitda ratio that was at 1.5 times at the start of the financial year should improve to 0.6 times by end of FY22 as per Motilal Oswal’s estimates. The company plans to be net debt-free by the end of March 23.

Overall, ongoing expansions, reducing leverage, operational efficiencies arising out of the rising scale of operations and improved raw material sourcing lead analysts to maintain a positive view of the company.

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