JSPL’s competitive advantage can strengthen with project expansions
Source: Live Mint
Shares of Jindal Steel & Power Ltd (JSPL) have surged about 15% from their recent low of ₹855 apiece seen on 13 November, outpacing the sub-4% gain in the benchmark Nifty 50 index. The outperformance is attributed to the company’s relative advantage, thanks to its greater presence in the long steel production.
Domestic long steel prices have stayed firm, buoyed by higher demand from the infrastructure sector and production issues faced by a domestic producer. In contrast, flat steel prices have softened due to continued imports from China, which primarily consist of flat products. For JSPL, long steel accounts for over 50% of total production, compared to 20-25% for other producers, providing a competitive edge.
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The company’s upcoming expansion and backward integration projects are expected to underpin a sustainable earnings growth outlook.
“(JSPL’s) expansion projects are on track to deliver 20% earnings per share CAGR over FY2024-27E, with 18% CAGR volume growth and operating leverage,” said analysts at Kotak Institutional Equities in a 9 December report.
This expansion would push up JSPL’s finished steel capacity from 7.2 million tonnes per annum (mtpa) to 13.7 mtpa by the end of FY26, with half of the expansion slated for completion by March 2025. The projects include production of coal from two captive mines, a captive power plant, a 200-km slurry pipeline for raw material transport, which would reduce the logistics cost and time, and the ramp-up of a downstream production line, improving the share of value-added products.
One of the coal mines recently started production, helping the company discontinue purchase of costly coal from e-auction in the September quarter (Q2FY25). As a result of this lower cost of production, JSPL managed to limit its consolidated Ebitda decline to around 4% in Q2 despite an 8% drop in sales volumes.
JSPL’s ongoing projects require lower total investment, thanks to the availability of associated infrastructure at the site and further improve margins.
“Low-cost brownfield expansion would have much lower incremental fixed costs and provide significant operating leverage,” said the Kotak report.
While company’s net debt/Ebitda has been increasing over last few quarters due to capex acceleration, it remains at a comfortable level of 1.21x at September-end. The company has guided for the ratio to remain under 1.5x across the cycle, a sharp improvement from the peak of 4.6x in FY20.
Despite robust domestic demand, Indian steelmakers face challenges from surging imports and declining exports amid supply dynamics in China. China’s steel industry is grappling with a demand slump, prompting a 22% rise in exports during the first ten months of 2024, projected to surpass the 2015 peak. The stimulus announced in September failed to sustain momentum, with prices retreating again after a brief October rally.
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“We expect incremental flat steel production of about 21 million tonnes over FY25–27E. India, thus, needs export markets to push additional volumes, which is plausible only if China dials down exports,” said a Nuvama Institutional Equities report dated 11 December.
At an enterprise value of 7.3x FY26 estimated Ebitda, as per Bloomberg data, the stock appears fairly priced. However, the full benefits of the ongoing projects will likely materialize only by FY27. In the near term, the Indian government’s potential imposition of a ‘safeguard duty’ on imports remains a critical factor to watch.
