Value Pick: Deleveraging, good volume growth to aid JSPL; brokerages see 16% upside in JSPL share price

With global commodity price rising, the demand and outlook for domestic steel companies have grown. Several brokerages are bullish on the steel segment and have chosen Jindal Steel & Power Limited (JSPL) as best bet for bumper returns with a long-term view. 

“Emission concerns and negligible capacity additions globally should cap supply and open export opportunity for the Indian steel industry, which is one of the lowest cost producers globally due to cheap domestic iron ore availability,  brokerage firm Axis Securities said on steel category. 

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The stock on Friday surged over 2 per cent to Rs 532.5 per share on the BSE intraday trade as compared to 0.22 per cent fall in the S&P BSE Sensex at around 11:00 am. 

Axis Securities 

Our steel coverage EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) has grown 3x over FY20-22E to Rs 1.4 trillion (USD 18.5 bn), driving 30 per cent reduction in net debt to Rs 1.8 trillion. Net debt/ EBITDA is now the lowest it has been in the past decade – 0.5x for JSPL. 

The brokerage states JSPL has become a pure play on steel with divestment of its power assets. While medium term volume growth should remain strong at 8 per cent CAGR over FY22-24E, 60 per cent capacity expansion by FY25 provides strong long term growth visibility.  

Moreover, investment made in upgrading the product mix (more flats than longs) should improve margin profile. It also expects it to become nearly net-debt free by Mar’24 which should lead to credit ratings upgrade and lower finance cost. Maintains a Buy stance. 

Motilal Oswal 

Jindal Steel has continued with the policy of deleveraging through the entire steel upcycle. It has announced its growth capex only after the sustainable net debt to EBITDA was less than 3x. 

The company has embarked upon modular capex through which cash flow from the initial part of the capex will part fund the second round of capex, thereby reducing debt burden on the balance sheet. 

In the current scenario of elevated coking coal prices, JSPL has been able to start shipments from its Wollongong mines that can result in savings of up to US $200 mn in FY23E. JSPL is the only company, which offers strong volume growth, deleveraging and increase in share of captive raw materials. 

The stock trades at 3.6x/2.4x our FY23E/24E EV/EBITDA and maintains BUY rating with a target price of Rs 605 per share (Upside of 16 per cent) premised on 5x FY23E EV/EBITDA.  

(Disclaimer: The views/suggestions/advises expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)