Jindal Steel - Focusing On Capacity Expansion, Cost Reduction To Drive Earnings: Motilal Oswal

Motilal Oswal Report

Jindal Steel and Power Ltd. plans to incur a significant capex to enhance its crude steel capacity to 15.9 million tonne from current 9.6 mt and strengthen raw material integration and product enrichment.

The planned capex could result in volume growth and a reduction in structural costs. With the planned capex, JSPL will increase its flat steel capacity to 7.7 mt from 2.2 mt to cater to automotive and high-tensile steel, thereby enhancing its product mix.

In Q1 FY24, the company signed a mining lease for Gare Palma IV/6 and Utkal C, with total reserves and resources of ~363 mt and environmental clearance of ~7.4 mt per annum.

JSPL has already entered the Gare Palma IV/6 mines and is in the final stage of entering Utkal-C mines. After the two mines become operational, they will fulfill ~50% of JSPL’s thermal coal requirement, thereby reducing its dependence on the import of coal and merchant mines.

JSPL over last few years has shifted its focus to high-margin value-added product (~65% of sales). This has helped the company strengthen its product offering across the value chain and improve realisations.

The company has followed a prudent deleveraging policy to strengthen its balance sheet. With net debt of ~Rs 68 billion in Q1 FY24 and a net debt-to-Ebitda ratio at a comfortable level of 0.75 times, JSPL has one of the strongest balance sheets among the domestic manufacturers. The stock trades at 4.8 times FY25E enterprise value/Ebitda.

We reiterate 'Buy' on the stock with a target price of Rs 790 (5.5 times FY25E EV/Ebitda).

Key downside risk: Delay in the commissioning of the Angul plant and coal mines may delay growth and margin improvement.

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