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Stock pick of the week: Why analysts believe the turnaround at JSPL will continue

Improved sales performance, reducing losses, cyclical upturn in the steel sector, benefits of import restrictions has made JSPL analysts’ top pick.

, ET Bureau|
Updated: Oct 02, 2017, 03.14 PM IST
Analysts expect Jindal Steel and Power to start reporting profits from the last quarter of 2017-18.
The expected recovery is continuing at Jindal Steel and Power ( JSPL) and the company reported a decent set of numbers for the first quarter of 2017-18. While its consolidated net sales increased by 24% year on year (y-o-y), its consolidated earnings before interest, tax, depreciation and amortisation (EBITDA) grew 49% y-o-y to Rs 1,291 crore—11 quarter high.

The consolidated net loss for the quarter also came down from Rs 1,240 crore to Rs 421 crore—a 66% fall y-o-y. Analysts expect this turnaround to continue and JSPL will be able to report profit from the last quarter of 2017-18. A global cyclical upturn in steel prices, triggered by China reducing its excess capacities citing environmental issues, is the main reason for this.

The domestic steel sector has also benefitted from the anti-dumping measures taken by the government. However, if the prices move up further from their current levels, the government may reconsider antidumping measures and this may results in increased imports. The import threat is more on flat products (slabs, hot- and cold-rolled coil, coated steel products, etc.) and since JSPL is mostly into long products (wire rod, sections, rails, sheet piles, drawn wire, etc.) the impact of increased imports will be muted. According to consensus estimate, JSPL’s revenue will grow at 30% compound annual growth rate between 2016-17 and 2018-19.

Successful commissioning of its 3.2 mtpa new blast furnace in May 2017 at Angul in Orissa is the main reason for this. The new furnace has already reached 50% capacity utilisation and total volume from the plant is expected at three metric tonne for 2017-18. Improvements in the existing furnace— shifting to basic oxygen furnace—are expected to be commissioned in the fourth quarter.

The cost of production at Angul is expected to fall further once this shift happens. In addition to muted prices for domestic iron ore, coal linkage deal with Coal India should also help JSPL improve its steel segment performance. With several long-term power purchase agreements in place, the situation in the power segment has also started improving. Sale of 1000 MW power plant at Tamnar, Chhattisgarh, will also help JSPL reduce its debt—net debt stands at Rs 45,500 crore as on June 2017. Though a part of JSPL’s turnaround has already been priced in—it has significantly out performed the Sensex— analysts see further potential in the counter.

Selection Methodology
We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts.

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