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Published on 10/01/2019 11:58:11 AM | Source: ICICI Securities Ltd

Buy Jindal Steel & Power Ltd For Target Rs. 215 - ICICI Sec

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Continues to focus on deleveraging

Jindal Steel and Power (JSPL) management highlighted the stress points emerging from i) contraction in spreads in domestic business, ii) ramp up pangs leading to domestic volume miss in Q3FY19E, iii) sharp contraction in spreads in the Oman business, and iv) continued shortage of coal impeding full operations of Tamnar 1. All these make Q3FY19E EBITDA lot less prospective with a 12.9% QoQ drop expected now. Also, what seems consuming some part of management bandwidth is handling foreign currency loans (~US$2bn) as Oman EBITDA endures the impact of compressing spreads. While interest servicing on foreign loans is still being made possible from Oman EBITDA, efforts are required to perhaps ensure better sustainability. Management continues to guide for Rs90bn of debt reduction (over FY19/20E) albeit conceding the risks to commodity price volatility to the baseline forecast. Capex remains pegged at Rs10bn p.a. We have rebased FY19/20E domestic steel volumes to 5/6mnte from 5.5/6.5mnte earlier and adjusted for the sharp decline in Oman EBITDA. While acknowledging cascading near-term risks to earnings and valuations, continued focus on debt deleveraging, inexpensive valuations (~0.5x FY20E book) allow us to be relatively more constructive on the name in the sector. We maintain BUY with a revised target of Rs 215/share.

 

* Miss in Angul volumes leads to correction in earnings expectations. Production guidance for FY20E remains at 6.5mnte (factors 3.3mnte from Raigarh and 3.2mnte from Angul). Q3FY19 production miss was due to a combination of ramp-up issues and a weak market. We have reduced our FY20E volume target to 6mnte from 6.5mnte.

 

* Oman witnessing significant spread compression. This is mainly due to sticky pellet prices as long products witness significant correction, leading to meaningful normalisation of EBITDA/te. We have normalised Oman earnings and factor in ~US$100/te spreads. This has corresponding impact on earnings and valuations. While interest servicing is still smooth, management is actively engaged to ensure that further spread compression in Oman does not lead to any material stress in overseas debt servicing.

 

* JPL continues to face coal shortage. E-auction markets are extremely tight hence not allowing for continuous operations of two 500 MW units of Tamnar 1. ~ 850MW PPA out of Tamnar 2 continues to generate majority of the JPL EBITDA.

 

* Deleveraging target of Rs90bn over two years (Rs40bn in FY19 of which Rs22bn has been achieved in H1FY19) from operational cash flows. This will have to be linked to spreads. At current spreads it is unlikely that the target for FY19E will be met.

 

* We moderate our Q3FY19 estimates to factor in softer Oman operations. While near-term spread compression in Q4FY19E will be partly offset by reduction in iron ore costs, over the longer run, higher blended NSR and cost improvements through Angul ramp-up can prop EBITDA up by ~Rs1,500/te.

 

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