Morgan Stanley says the 12-month forward EV/EBITDA of 4.8x is attractive against an average of 8.5x since April 2015.
Jindal Steel & Power (JSPL) share price gained 2.6 percent intraday on December 19 after Morgan Stanley retained its bullish stance, expecting a faster earnings growth.
"We find risk reward attractive despite a sharp rally in the last three months. We are constructive on global steel spreads going into 2020. Valuation is still reasonable. Multiple events could take the stock to our bull-case value," said the brokerage.
The stock has shot up 42 percent in the last three months. It was quoting at Rs 149.50, up Rs 3.50, or 2.40 percent, on the BSE at 1337 hours.
Maintaining an overweight call and raising price target by 25 percent to Rs 174, implying 19 percent potential upside from current levels, Morgan Stanley said the company will grow faster than the market and the demand recovery would be gradual.
JSPL’s capacity utilisation stood at 85 percent even after excluding DRI facility at Angul and its net debt will come down by Rs 8,800 crore to Rs 30,400 crore by FY21-end, it said.
Morgan Stanley recently visited the Angul facility that suggests DRI plant may begin operations in January, which could start contributing to volumes – which isn't in its base case.
It feels 12-month forward EV/EBITDA of 4.8x is attractive against average of 8.5x since April 2015.
"The potential rejection of Gare Palma IV/I is already partially reflected in the stock price. A confirmed rejection could cause a further negative reaction. Yet despite this volatility, we see scope for re-rating over the next 12 months," said the brokerage.
It believes judgment in the Sarda mine case, international debt restructuring, sale of international operations and DRI plant haven't been priced in.
In a bull case, the brokerage expects the stock to hit Rs 300, citing higher steel and power prices, and abating regulatory issues.
In its target, Morgan Stanley factored in benefits from the recent commissioning of the fourth coke oven battery, which should save Rs 250 crore per year. "Consolidated EBITDA estimates may rise 3 percent for FY21 and 1 percent for FY22."
Key risks are escalation of US-China trade tensions, which could affect global metal prices; slower than expected demand in second half of FY20; negative surprise in overseas operations and liquidity concerns.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.