Jindal Steel & Power - Aiming Rs150bn of net debt by FY23 - ICICI Securities

Jindal Steel and Power (JSPL) management continues to strive relentlessly on debt reduction. FY21E should see debt reduction of Rs50-55bn, in-line with the repayment due and FY23 net debt target of Rs150bn. The certainty of these reduction targets is augmented by the fact that zero cost iron ore inventory from Sarada mines will help earnings in FY21 and FY22E. Q1FY21 witnessed ~1.8mnte of iron ore inventory usage and an (estimated) EBITDA tailwind of ~Rs3bn. There has been some restatement from other expenses to cost of materials, which explains the drop in other expenses. Oman deal is pursued to complete by July-end. Capex target for FY21E remains unchanged at Rs6-8bn, with no major project planned to be pursued. We maintain BUY with a target price of Rs213/share (0.62x FY22E P/BV).

- Projected deleveraging at Rs50-55bn for FY21E, net debt expected to reach Rs150bn by FY23. The targeted reduction of Rs200bn of net debt over the next three years takes pivot from the fact that i) no major capex is planned, ii) increase in utilisation of existing capacities can lead to 8.5mnte of India steel production volume in FY22E and iii) quarterly benefit of ~Rs3bn on account of low cost iron ore inventory usage. Management expects ~Rs500bn of topline and Rs120bn of EBITDA in FY23, which is also suggested via the projected net debt number. FY23 net debt number also factors in ~Rs60bn of deleveraging on account of the Oman deal and ~Rs14bn of deleveraging due to payment of receivables from TANGEDCO in JPL business. FY21E deleveraging target though doesn't factor in any such benefits and FY21E net debt number can potentially surprise.

- Volume guidance for the rest of FY21E. Management expects 1.8/1.8/2mnte of volume in Q2/Q3/Q4FY21, respectively. Q2FY21 will witness ~1.2mnte of domestic sales and 0.6mnte of exports. There has been traction in plates - middle exports towards oil and gas sector and for domestic water supply projects, head hardened rails in coming metro projects where management sees opportunity.

- JPL has seen materialisation of Rs14bn of receivables from TANGEDCO. Q4FY20 has witnessed ~Rs1.4bn of receipt and management expects to get the same within the next two years. This will further help to reduce Rs72bn of debt in JPL. JPL has availed the RBI moratorium in EMI payment for term loan and has repaid NCD. Q1FY21 EBITDA surprise was due to coal cost reduction, continued supply to PPAs and opportunistic sales to exchanges. Management expects local players to engage in.

- Oman deal will lead to additional deleveraging of Rs60bn. This is on account of US$150mn of intercompany debt from JSIS (owner of Oman operations) to JSPML (JSPL Mauritius). Thus, while the deal EV is US$1bn, net debt reduction is US$850mn. Management is also endeavouring to make overseas operations more sustainable - especially in Australia.

Valuation and risks

We maintain BUY on Jindal Steel and Power with a target price of Rs213/share (implied P/B of 0.62x on FY22E P/B and implied normal cycle RoE of 7.5%). We do not see any solvency issue for JSPL given the current scenario of a quarter-long disruption.

Risks: Sooner or later the viability of thermal power assets will be in question. We feel our FY22E EBITDA from JPL assets (Rs23bn) can be at risk. One of the reasons for ascribing 0.62x FY22E book is the possible unviability of not only foreign assets but also the earnings potential of JPL assets.

Even if JPL reports half of what we are estimating i.e Rs11-12bn of EBITDA, our estimated FY22E book changes to Rs328/share from Rs341/share currently. Our target price changes to Rs203/share from Rs213/share currently.

Shares of JINDAL STEEL & POWER LTD. was last trading in BSE at Rs.171.7 as compared to the previous close of Rs. 173.3. The total number of shares traded during the day was 733914 in over 4881 trades.

The stock hit an intraday high of Rs. 175.9 and intraday low of 170.45. The net turnover during the day was Rs. 127035954.

Source : Equity Bulls

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