Analysts see strong upside in JSPL as risk-reward turns favourable

Jindal Steel & Power
As a weak demand and pricing environment weighed on steel stocks, Jindal Steel and Power (JSPL), too, fell to a 52-week low last week. However, it has rebounded since, recording gains of 16 per cent on expectations of an improvement in the company’s fundamentals, say analysts, many of whom have JSPL as their top pick in the steel pack.

Improving operating cash flows, better operating leverage and volume growth led by expansion at its Angul plant should help JSPL better withstand the challenges industry is facing. Moreover, with the stock down by half in the past one year, valuations have turned attractive. JSPL’s capacity ramp-up at Angul, which drove its standalone steel volumes (up 36 per cent) in FY19, is expected to drive volumes further during FY20 and FY21. 

The blast furnaces at Angul have been ramped up to full capacity and are set to drive benefits. Steel costs at Angul are also expected to decline by up to Rs 2,500 per tonne in FY20 as higher production leads to operating leverage benefits with improved fixed cost recovery.

Further, JSPL’s profitability gets a leg up with better product mix including rails, specialised plates and structural products, which earn higher margins. The product mix being skewed towards long products (used in construction activities) is also positive say analysts, given the government’s plan to hike spending on infrastructure, which is likely to drive steel demand during second half FY20.

Analysts at Prabhudas Lilladher, post analysis of JSPL’s annual report, say that the deleveraging theme remains intact as with strong operating cash flow generation, lower capex, etc, the net debt has fallen by 8 per cent in FY19. The net debt is down 15 per cent from its peaks in FY16 and analysts estimate another 16 per cent reduction in the metric by FY21. Antique Stock Broking estimates JSPL’s net debt-equity ratio to decline to 1x levels by FY21 compared to 1.2x now. 

Not surprisingly, analysts remain positive on the stock despite volatility in steel prices, tight liquidity situation impacting demand, etc. Those at a foreign brokerage say valuation at 0.3 times its price-to-book value remains attractive, and the stock is trading substantially below replacement costs. 

Prabhudas Lilladher though highlights a potential risk. While the brokerage remains upbeat on the stock, it says that the next couple of quarters would be critical for JSPL as quality of its operations would be tested to the maximum for its ability to repay/refinance the quantum size of debt scheduled for repayment, in the rest of FY20.

Overall, 14 of 18 analysts polled by Bloomberg have a buy rating on the stock, with their average one-year target price indicating potential upside of 59 per cent.

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