Jindal Steel & Power (Q1 FY15)

• JSPL’s standalone performance was quite higher than our estimate led by higher than expected sales volume and lower raw material costs

• The outperformance was also boosted by some inventory liquidation and improvement in standalone power performance

• The company has ramped up its steel capacity after its modernization exercise and managed to register a production growth of 16.5% qoq

• Operating profit of Rs11.9bn was quite higher than our estimate Rs7.6bn

• JPL’s operating performance too improved due to easing off transmission constraint and incremental production from new 600MW plant

• International subsidiary performance remained subdued on account of restructuring exercise at its Australian coking coal mine

• Recommend accumulate with a revised price target of Rs318

Topline growth boosted by strong steel sales volume

JSPL’s revenue of Rs35.8bn was quite higher than our estimate on the back of higher steel production, inventory liquidation and higher steel realisation. The company managed to register a production growth of 16.5% qoq and 13.2% yoy to 0.8mn tons, quite higher than our estimate of 0.63mn tons. Steel sales volume for the quarter stood at 0.74mn tons, higher by 10.9% yoy. The sales growth was also boosted by inventory liquidation. JSPL reduced its inventory to its lowest ever level of 0.2mn tons. The impact of higher steel production on topline was reduced by the lower pellet sales. Pellet production was lower by 8.6% yoy and 11.7% qoq due to shortage of iron ore availability in the region. External sales too were quite lower at 78.5% yoy. Power production improved qoq due to commissioning of new Angul capacities. However, growth from hereon would be constrained by permission to sell power to external sources. Steel realisations continued to improve on a qoq basis.

Operating profit declines 6.2% yoy

After a weak Q4 FY14 operating performance, JSPL managed to bounce back by reporting an operating profit of Rs11.9bn, higher by 22.7% qoq and 40.6% yoy. The outperformance in operating profit was due to (a) higher steel volumes (b) higher steel realisations (c) lower raw material costs & (d) marginal turnaround in standalone power division. We were quite surprised by the decline in raw material costs on a qoq basis, as steel production was higher by 16.5% qoq. We believe that the decline in raw material costs was due to lower coking coal prices and higher operating efficiencies of the new capacity. Lower external pellet sales also led to some marginal decline in raw material costs. RM costs as a % of sales declined from 37.2% in Q1 FY14 and 34.4% in Q4 FY14 to 28.5% in Q1 FY15. Other expenditure as a % of sales too declined from 28.4% in Q4 FY14 to 26.7%. After a weak Q4 FY14, both the segments managed to register an increase in EBIT margins on a yoy basis. EBIT margins for the steel business were higher by 230bps yoy due to higher steel prices and lower RM costs. EBIT from the power division managed to increase by 574 bps yoy on the back of higher PLFs in the new capacities and increase in availability of coal. Power production in the standalone entity was higher by 15.4% qoq. The company completed the commissioning of all the six units of 135MW each at Angul leading to a jump in interest costs and depreciation during the quarter. However, it continues to face issue with evacuation of power from the region.

JSPL’s 96.4% subsidiary, Jindal Power Ltd’s (JPL), managed to bounce back during the quarter after registering weak performance in Q4 FY14. The improvement was led by marginal easing of transmission lines in the region. Operating performance was also boosted by the commercial commissioning of one unit of Tamnar II. PLF at Tamnar I improved from 77% in Q4 FY14 to 97.8% in Q1 FY15.  As a result, power production during the quarter increased 12% yoy to 2,446mn units. The impact of improved operating performance was negated by a sharp increase in depreciation and interest costs. The commissioning of the new unit led to decline of 40% in bottomline. Average power realizations remained steady at Rs3.12/unit. The company has indicated that it would commission the new units only when transmission constraints ease out and availability of coal is steady.  

International projects continue to bleed

The international performance remained weak due to the correction in coking coal prices during the quarter. Operating profit was also impacted due restructuring of Wollongong Ltd (formerly Gujarat NRE) during the quarter. The impact of lower contribution from Mozambique, South Africa and Wollongong Coal was somewhat offset by a strong performance at Oman. The company managed to increase its revenue from the Oman unit due to the commissioning of the 2mtpa steel plant. The company has started the commercial production at Oman in Q1 FY15. 

Upgrade to Accumulate with a price target of Rs318

JSPL’s stock has underperformed over the last one year on account of issues related to allocation of coal blocks. Concerns regarding availability of transmission lines in the region have added pressure on the stock. We believe transmission constraints would remain in the near term, but would ease out with the commissioning of new lines in FY16. We also believe that power prices would improve marginally on expectations of a revival in the state SEBs. Faster than expected rampup after the modernisation exercise has led to an increase in our volume growth estimate for FY15 and FY16. The company expects to restart the Sarda iron ore mines by H2 FY15. The company has indicated it has accumulated inventory which would aid it to run smoothly over the next one quarter. The profitability of JSPL’s Angul project would be largely dependent on availability of captive coal and the signing of mining lease for the coal block by the State Government would be a major positive for the company. We recommend an accumulate rating on the stock with a revised price target of Rs318.