Brokerage firm, Motilal Oswal is bullish on the stock of Jindal Steel and Power and says there could be an upside of as much as 75 per cent on the stock. Here are a few highlights from the Motilal Oswal report.
Jindal Steel and Power’s (JSPL) Apr’20 operational update:
India steel operations
JSPL produced 550 kt steel and related products during Apr'20 (up 5 per cent year-on-year). This was on the back of record high production from the Angul Blast Furnace, which produced 298kt hot metal, clocking 10kt daily. Other related products include granulated pig iron and other intermediary products.
Though domestic demand remained dry during the month, production was boosted by large export orders, primarily of billets from China due to the shortage of intermediates there.
Apr'20 sales stood at 3,35,000 tonnes, of which 2,48,000 tonnes (74% of total) were exports.
Exports were up 109% month-on-month while implied domestic sales were down 80% month-on-month.
The balance production in Apr'20 is at the ports, waiting to be exported out; sales would be booked in May'20.
We note that while these export volumes would earn lower EBITDA margins (likely Rs 5,000/tonne), it is still positive as this should help recover fixed costs if plants earn positive cash flows, which is critical in this environment.
JSPL's Oman operations reported production of 106kt, down 40% over the normal monthly run-rate. However, the decline in sales volumes was lower at 33% as the company sold ~120kt of steel during the month.
Valuation and view – steel business available virtually free
JSPL's ability to export volumes during Apr'20 provides confidence to our expectation of 2% decline in FY21E volumes. Restructuring of debt in Australian operations during 4QFY20 should help JSPL meet its debt obligations comfortably in Indian and other overseas operations.
"We expect JSPL to reduce its net debt by INR77b over FY20E-22E to INR272b. This would be achieved through free cash flow generation on the back of higher earnings and lower capex.
At CMP, the stock trades at 4.1x FY22E EV/EBITDA. We value JSPL stock using SoTP methodology and value the steel business at 4.0x. The power business is valued using DCF method. We arrive at a target price of INR188/share. Our valuation of the power business translates to an EV of INR40m/MWH capacity, which is at 40% discount to the replacement value. Equity value of the power business (JPL's estimated net debt at Rs 60b FY22E) works out to Rs 76 per share. Hence, the steel business of JSPL is available virtually free at the current stock price. Reiterate Buy," Motilal Oswal has said in its report.
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