Equity dilution concerns may weigh on JSPL; earnings prospects remain firm

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Jindal Steel and Power (JSPL), which saw its stock price more than double in the past year, led by a turnaround in performance and completion of a major capacity expansion, is now in the news due to debt reduction initiatives. 

Its board of directors met on Friday and gave a nod to raise equity through a Qualified Institutional Placement (QIP). While the move is positive and will help reduce debt, the details haven’t been spelt out. 

 
Since the extent of equity dilution and whether it will be at a premium or discount to the current market price is not known, analysts believe this lack of clarity might weigh on the stock in the near term. On Friday, as compared to the 1.5 per cent fall in the benchmark Sensex, its share price dropped two per cent.

 
Analysts expect fundraising of Rs 10-12 billion through the QIP. While this might alone not provide a big relief to JSPL, as its consolidated debt is Rs 424 billion, it is still seen in positive light. As consolidated operating profit surges from an estimated Rs 60-63 billion in FY18 to nearly Rs 100 billion the next financial year, the company could use it for reducing debt further. Thus, analysts estimate the standalone gross debt to operating profit ratio will decline from 6.6 in FY18 to 4.4 in FY19.

 
The prospects remain good, with improving operating performance and new capacities on hand. The company reported its best-ever operating performance in the past 12 quarters for the three months ended December 2017 (Q3), fuelled by a spurt in domestic volumes (up 12 per cent over a year and 13 per cent sequentially). The standalone loss at Rs 767 million was lowest in the recent past. Even Jindal Shadeed (its Oman business) reported best-ever performance, with profit per tonne of $140. 

 
Domestic volumes are being driven by completion of the Angul (Odisha) plant expansion in December, which increased total capacity to 8.6 million tonnes per annum (mtpa). Analysts estimate JSPL’s domestic steel volumes to grow from 3.4 mt in FY16 and FY17 to 4.7 mt in FY18 and to 6.5 mt in FY19. 

 
ICICI Securities, last month after plant visits, said the throttled blast furnace operation in Angul provides near-term levers to volumes and margins. Higher hot metal production and lower coke consumption, with a new blast furnace, will boost profit. Per-tonne profit is expected to improve by Rs 2,000, estimate analysts.

Edelweiss Securities expects JSPL to turn profitable in the current quarter at the net level, a first since the second quarter of FY15, primarily propelled by volume ramp-up at Angul. 

 
Domestic demand is also expected to remain strong, say analysts. Soumen Chatterjee, head of research at Guiness Securities, adds JSPL should continue benefiting from this, as demand supports domestic realisations.

 
The combined benefit of QIP, improving operating performance of the domestic and foreign businesses, and plans to list the Oman subsidiary on foreign exchanges should keep investor interest high in the counter. On the flip side, any adverse news flow, especially on the global front, needs to be watched. 


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