This Steel & Power Stock Is Likely To Gain 21%, Reported Strong 1QFY23 Results: Motilal Oswal

Jindal Steel & Power Stock Outlook

The Current Market Price of the Jindal Steel & Power is Rs 351.30 per share, it was opened at Rs 349.05 per share. The previous close was 345.50 per share. The 52-week low is Rs 304.20 per share, recorded on June 22, 2022, and the 52-week high is Rs 577.80 per share, recorded on April 1, 2022. The ROE is 18.99%. PE ratio is 4.16. The PR ratio is 0.97.

It has given positive returns last week around 0.31% and in last 1 month 6.94%. In the past 1 year, it has given negative returns of 13.28%. In the past 3 years, it has given 146.53%, and in the past 5 years, it has given 150.93% of positive returns, respectively.

1QFY23 Results

Jindal Steel & Power reported a strong 1QFY23 result driven by higher-than-estimated sales, exports and a strong beat on ASP. Exports contributed to 26% of the sales during the quarter where Jindal Steel & Power also sold high-value plates that helped boost both ASP as well as margin. Consolidated revenue grew 23% YoY but was 9% lower QoQ to Rs 131b in 1QFY23. The 19% beat was driven by an 11% beat on ASP and a 12% beat on sales volumes. Consolidated EBITDA declined 34% YoY and 3% QoQ to Rs 30b, 45% above our estimate. The sharp YoY drop in EBITDA was led by: a) higher cost of coking coal and b) absence of low-cost iron ore from Sharda mines. Other operating expenses, which include power and fuel costs, rose sharply by 40% YoY due to a spike in thermal coal prices. Adjusted PAT decreased 42% YoY and 25% QoQ to Rs 15b but was sharply higher than our estimate driven by EBITDA beat.

High-value exports boost ASP/EBITDA, input costs to correct in future

Correction in HRC price, which had started since May'22 due to weakness in China, was accentuated with the imposition of export tax on steel. HRC price corrected to Rs 59,500/t from the peak of Rs 76,000/t in May'22. Four events helped Jindal Steel & Power shore up its EBITDA: a) sales, already backed by LC/BG on the date of announcement of export tax, were exempt from export tax, b) sale of high-value plates commanded higher ASP where profitability was greater despite paying export tax, c) exports of semis to Europe (the space vacated by Russia) is exempted from export tax, and d) ASP coming off from higher base also contributed to higher average ASP for the quarter. We estimate an EBITDA of Rs 12,710/t for Jindal Steel & Power in FY23 as we expect: a) its ASP to continue to correct due to continued slowdown in China and get support from corrections in coal and ore prices, and b) benefits from captive Australian coking coal mines should wane as coking coal prices correct.

Highlights from the management commentary

The management guided at a production/sales of 8.2-8.4mt in FY23E. There is no change in the guidance. Coking coal cost is likely to reduce going forward as coal cost has reduced sharply by 49% from the 4QFY22 average. Iron ore cost is also lower by almost 27% from 1QFY23 average and should help lower costs further. Jindal Steel & Power will continue to export about 25% or more of the total production and will focus on alloy steel that do not attract export duty. It will also focus on highvalue plates that are profitable despite imposition of export duty. The management has already committed its entire capex for 15mt, and does not foresee any issues on finishing the same on time. Its near-term (3.3mt) expansion is under its wholly-owned subsidiary to take advantage of the reduced corporate tax of 15%. The management expects Utkal captive coal mines to be operational by endFY23 and at least two coal mines in the next two years with a peak output rate of 12-14mt. It expects the Kasia iron ore mine to deliver ~5mt in FY23, which is linked to the IBM price.

Valuation and view

Commenting on the Jindal Steel & Power, Motilal Oswal said, "Our revenue estimates for FY23/24 remains largely unchanged, but we factor in 8% higher EBITDA for FY23 driven by beat in 1QFY23 and a sharp drop in coal costs. However, we also factor in lower EBITDA for FY24E as we reduce our ASP and coking coal estimates for FY24 and increase operating costs led by rising thermal coal costs. The company reported a net debt of Rs 77b. Receipt of Rs 30b towards proceeds from sale of JPL assets has been partly absorbed in higher working capital and tax payout for the deal. The stock is trading at 4.2x our revised FY23E EV/EBITDA."

It added, "We believe the export duty is likely to be a temporary phenomenon. Though we do not anticipate the modalities for removal of the same, we believe, if the steel sector has to contribute to foreign exchange of India, then export duty has to be removed sooner than later as coking coal is still being imported (about 90%) and steel industry could be net FX negative rather than supporting the FX income of the economy. We reiterate our BUY rating on the stock with a revised Target Price of Rs 425 (v/s INR415 earlier) based on 5x FY23 EV/EBITDA."