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Last Updated : Jan 29, 2018 06:43 PM IST | Source: Moneycontrol.com

Is JSPL on the cusp of a turnaround?

JSPL stock is back to a level of Rs 123 a share with most of its businesses now showing revival. While the Street is still debating whether to call it a turnaround or not, green shoots are visible.

 
 
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In 2010, with a share price of Rs 800, shareholders of Jindal Steel and Power were sitting on a gain of 100 times generated in a short period of seven years. Today, after another seven years, the stock is Rs 122 a piece.

Its consolidated debt levels spiked following a series of missteps. Expansion of steel business at the time of global slowdown, mis-allocation of capital when it diversified into power and acquired overseas mining assets cut it to the quick. Subsequent problems in power business, de-allocation of coal blocks and court cases involving promoter Naveen Jindal (former Congress MP) in the coal scam only compounded its problems, raising questions about the company’s ability to service its debt. Last year, in December, its stock hit a low of around Rs 48 a share.

JSPL stock is now at Rs 123 a share with most of its businesses showing a revival. While the Street is still debating whether or not to call it a turnaround, green shoots are visible.

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Today, the company’s biggest worry is how to sweat its assets. JSPL is sitting on a debt of close to Rs 46,000 crore on an equity base of Rs 30,000 crore, which is hardly alarming for an asset-heavy business. But since the assets, which resulted in the debt, were not generating anything meaningful, the company suffered.

To put the numbers in perspective, in Q4 of FY17, the company had an interest cost of Rs 864 crore as against an earning before interest of Rs 555 crore. Thankfully, this is far better than the year-ago figures of Rs 853 crore interest cost on a loss before interest of Rs 227 crore.

In fact as the cash flow deficit widened last year, the company actually defaulted on part of its interest payments.

Easing Debt Worry

The bankers have agreed to a moratorium of between three and five years on JSPL repayments. This essentially means that some of the medium-term maturities will be postponed, which will help in easing liquidity concerns.

The company is also working on conserving cash. "We believe JSPL is charting a turnaround through efficient cash management and focused expansion, which would drive strong earnings growth. It has managed to keep net debt at similar levels as last year at Rs 45,400 crore, despite ongoing expansion and higher raw material prices, by squeezing cash from the supply chain," said Sanjay Jain, who is tracking the company at Motilal Oswal.

To be fair, JSPL went through a rough patch when its 4 million-tonne Angul plant in Odisha suffered a delay in execution owing to the cancellation of coal mines allocated for this facility. The company had to change the plant module to blast furnace as against its earlier plan of fueling the plant through coal gasification.

Angul expansion involved a debt of close to Rs 24,000 crore. In FY16, a large part of this project was included in the capital of close to Rs 12,000 crore, which was 26 percent of its fixed capital employed in the business.

Angul to Start Contributing to Earnings

If a large part of capital is stuck and yielding nothing, it is bound to have a negative impact on financials. In FY17, on a consolidated basis, JSPL incurred an interest cost of Rs 3,400 crore on an income before interest of Rs 4,300 crore.

This, however, is now correcting. The Angul expansion is now operational and expected to reach its rated capacity of 3.5-4 million tonnes by end of next year. "The expansion at Angul would drive India’s steel volume growth at 32 percent annually for FY17-19. Over this period EBITDA is likely to grow at 30 percent annually to Rs 7900, which would drive a sharp turnaround in cash profits," said Sanjay Jain.

Based on current EBITDA per tonne, this facility at the rated capacity utilisation of 4 million tonnes could add another Rs 4,000 crore to its current consolidated EBITDA of Rs 4,658 crore.

This will ease financial burden considerably. For instance, the company incurs close to Rs 200 crore monthly or about Rs 2,400 crore of interest cost annually on the debt tied to the Angul project. As the project starts to generate more and more cash, it will ease interest cost pressure leading to higher profitability.

Power: No More pain

One other big area that is now expected to work in favour of the company is the power business, which comprises 3400 MW of operational power plants. Power business made an annual loss of Rs 464 crore in FY17 on a sales turnover of Rs 3,119 crore. Power plants are operating at a very low PLF (plant load factor) of 32 percent as a result of there being no power purchase agreements (PPA). However, winds of change are blowing here as well. The company has sold 1,000 MW plant to JSW Energy, which will fetch close to Rs 4,500 crore.

For the remaining plants, losses are being controlled with more and more fuel being procured domestically from Coal India as against imported coal, thus bringing down the overall cost.

The power business has now come to a stage where it will not deteriorate further. Besides, the sale of power assets will ease the pressure on the liquidity and interest cost for the consolidated entity.

Overseas Business

International business, which comprises three coal mines and one steel producing facility in Oman, had also contributed to JSPL’s financial pressure.

However, positive changes are visible there as well. International coal subsidiaries have benefitted from the rise in international coking coal price (even after recent correction) from USD 80 a tonne in May 2016 to the present USD 170 a tonne.

Similarly, the 1.7 million tonne Oman facility has started to make profits with higher steel prices and ramp-up of production. In Q4FY17, this facility made an EBITDA of USD 100 a tonne as against USD 65 a tonne in Q3FY17. Hence, international business which was a drag on the overall performance has started to contribute both to profitability and cash generation.

Valuations

JSPL is classic debt turnaround story where bankers are now willing to help in its revival. Its core steel business is starting to see a lot of cash; power business concerns are easing and international businesses have started to turn positive. The combination of all these factors would mean a huge positive impact on earnings.

“We believe, EBITDA CAGR of 32 percent over FY17-19 will be led by volume ramp-up at domestic and international operations despite power PLF remaining at 35 percent on an average. Moreover, there will be a volume-led growth on all fronts, which will generate free cash flow equivalent to 20 percent of the current market cap (Rs 11,145 crore) over the next 2 years,” said Amit Dixit, who is tracking the company at Edelweiss Securities.

Our estimates suggest that the company will be making close to Rs 8,000 crore EBITDA in FY19. On the current market capitalisation this works out to a valuation of 6 times FY19 EV/EBITDA, which is reasonable.

However, we need to focus on the big picture – the company is sitting on an equity of Rs 30,000 crore. In FY19, it will be making a return on equity of 3 percent which makes no business sense. Even if equity starts to generate 12-15 percent return, the company will make close to Rs 3,600-4,500 crore of net profit as against its current market capitalisation of Rs 11,000 crore. Between 2007 and 2013, JSPL on an average generated return on equity of close to 47 percent. Its peers, JSW Steel and Tata Steel, will be making close to 13-15 percent return on equity in FY19. Can JSPL do it again? It will all depend on how effectively it sweats its existing assets and how prudently and how soon it rectifies its capital allocation.



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First Published on May 31, 2017 05:12 pm
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