Angul plant’s Turnaround, a reality now; Reiterate BUY

Jindal Steel & Power BUY CMP: Rs260, TP: Rs380

We organised investor visit of Jindal Steel and Power (JSP)’s Raigarh and Angul steel facilities and Tamnar IPP. The newly commissioned Basic Oxygen Furnace (BoF) at Angul 
reached production run-rate of 25 heats/day (equivalent to 6250tpd) and expected to stabilise at its designed capacity of 33 heats/day by mid March-18. Keeping pace with ramp-up in BoF, Blast Furnace (BF) is operating at 6ktpd. Higher production in BoF and restart of Neo Electric Oxygen Furnace (NEoF) would drive the increase in BF’s production to 10ktpd by April-18. Management guided for an output of 6mn tonnes in FY19 (equally distributed between Angul and Raigarh) and cost reduction of Rs3000/t, driven by lower variable cost and higher scale benefit. Our entire rationale of increased scale, low cost and higher PLFs in JPL remains intact and will be reflected from Q1FY19 onwards as the new capacity stabilises. We maintain our BUY rating with revised TP of Rs360 (earlier Rs315), at EV/EBITDA of 7x FY20E.

n Strong conviction in meeting the FY19 production guidance: Commissioning of BoF completes the full chain of steel making in Angul plant. Satisfactory ramp-up of BoF and successful stabilisation of BF drives management’s guidance of achieving 250kt/month (3mtpa) in April at Angul facility. Including Raigarh Plant's 3mn tonnes, company targets to produce 6mn tonnes in FY19e. Guidance do not factor contribution from Gas based DRI in Angul though the cost of production would reduce with the replacement of expensive syn gas with cheaper coke oven gas. Company sees scope for further cost reduction in DRI plant with replacement of thermal coal with pet coke in coal gasifiers.   

n Cost of production to reduce by Rs3000/t in Angul: Angul's DRI based steel plant failed to cross 40% utilisation due to poor grade of indigenous coal, technical issues and higher conversion cost. Plant Profitability is expected to see structural turnaround on the back of higher scale and lower variable costs. Management’s guidance of Rs3,000/t reduction in cost would be led by 60% reduction in power consumption, higher scale (Fixed cost/t to fall by 55% to Rs1000) and lower conversion costs.