Mix, volume boost to shape JSPL
Jindal Steel and Power Ltd (JSPL) appears to be in a sweet spot with expected improvement in product mix and volume growth. The company’s planned capital expenditure (capex) is likely to boost volumes and push costs lower, driving future earnings growth.
JSPL is in the midst of a ₹31,000 crore capex plan, set to wrap up by FY27, with funding mainly from internal accruals. The company will utilize 75% of the capex for capacity expansion at Angul (Odisha), 10% is slotted for ACPP-II, 5% for coal mines and 10% for new projects.
The capacity expansion at Angul plant will enhance JSPL’s crude steel capacity by over 65% to 15.9 million tonnes (mt). The planned expansion, which is expected to be completed by Q3FY26, will catapult the company to the fourth largest steel manufacturer in India, said a Motilal Oswal Financial Services report dated 20 February.
As such, a better product mix will mean higher realization, leading to better margins. After the capex, share of high-margin flat steel products in the sales mix is expected to increase to approximately 55-58% from about 30-35% currently.
In the near term, it helps that the March quarter is typically the strongest quarter for steelmakers. Higher domestic sales in Q4FY24, along with additional volumes from the tie up with
Rashtriya Ispat Nigam Ltd, and a foray into flat steel products at the recently commissioned hot-strip mill would aid profitability.
In its latest earnings call, JSPL said steel spreads could be affected by an additional $10–20 per tonne increase in coking coal costs and a 2-3% decline in realization in Q4.
Going ahead, lower coal costs with further ramp-up at captive coal mines Gare Palma IV/6 and Utkal block C, and slurry pipeline which is expected to be commissioned in Q1FY25 and the anticipated reduced cost of steel will bolster earnings before interest, taxes, depreciation, and amortization (Ebitda) margin in FY25. However, the anticipated rise in coking coal cost could dent margin slightly.
Kunal Kothari, analyst at Centrum Broking, believes that the on-time completion of the expansion plans will result in a 17% compound annual growth rate (CAGR) in volumes during FY23-26, reaching 12.4 mt in FY26. Over the same period, the Ebitda is expected to rise by 26% and profit after tax by 37% CAGR, added Kothari.
In Q3FY24, the steelmaker's production fell 6% year-on-year to 1.94 mt and sales declined 5% to 1.81 mt.
Meanwhile, steel demand in India is expected to remain robust aided by increased construction activity and focus on a number of infrastructure projects. The rising demand for automobiles, renewable energy, and consumer goods would also support demand.
Moreover, JSPL has followed a prudent deleveraging policy to fortify its balance sheet. As of December-end, JSPL’s net debt stood at around ₹9,100 crore and the net debt-toEbitda ratio was at a comfortable level of 0.9 times. “JSPL has one of the strongest balance sheets among the domestic ferrous manufacturers,” said Motilal Oswal’s analysts.
However, despite these positive developments, the stock has yielded merely 15% returns over the past six months. The shares now trade at an enterprise value of nearly seven times estimated FY25 Ebitda, which implies there is still some steam left, said Tushar Chaudhari, analyst at Prabhudas Lilladher.
Going forward, investors should closely watch the progress of JSPL's capacity addition plans as any delay here could affect its growth trajectory.