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

Jindal Steel and Power Ltd (JSPL) has seen its stock prices correct more than 18% from October highs. The same has been in the back of some softness in steel demand seen during recent times. The steel prices too have thereby seen some correction. However, analysts maintain their positive stance on JSPL.

The softness in steel demand and thereby realisations has been led by the extended monsoon season, delayed harvesting, 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 the wait-and-watch policy. Besides analysts at Motilal Oswal, financial Services Ltd say that there is sufficient inventory lying with traders, who, in a falling market, would try and liquidate rather than accumulate.

Despite near term weakness, however, analysts are of the view that the demand will improve. The pent-up demand is inevitable. Further, the company should also benefit from its specialised product range and expansions undertaken, Analysts at Antique Stock Broking 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”

The production numbers posted by JSPL for the month of November also have remained decent. The company’s steel production increased by 10 % Y-o-Y to 6.74 lakh tonnes. The steel sales though declined 5% Y-o-Y to 5.39 lakh tonnes. The company however attributed the same to the non-availability of Indian Railway rakes on demand.

Meanwhile, the rising cost of raw materials has been amongst the concerns of the street. The company had recently won the Kasia mines. Since it is an operational mine the same would now feed into the company’s Barbil pellet plant. Meanwhile, the iron-ore prices have already seen correction from peaks. Also, 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” said analysts at Antique Stock Broking Ltd.

The debt reduction undertaken by the company of late too has improved earnings outlook significantly. The 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 MOFSL 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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