Stock pick of the week: Factors that have made JSPL a favourite of analysts
JSPL is expected to win the Chhattisgarh’s Gare Palma coal block allotment, as it is the highest bidder and also a former allottee of this mine. It will help the firm to make an annual savings of around Rs 500 crore and raise its EBITDA by around 7%.
JSPL now is planning to deal with the the ongoing slowdown by increasing production, improving efficiency of its operations and introducing more value added products. For example, JSPL was able to put up a 10% volume growth in second quarter, thanks to increased production from its direct reduction of iron (DRI) plant in Angul, Odisha. To fight the price fall in traditional TMT bars, JSPL has doubled volume of rails, a better margin product.
JSPL also emerged as the highest bidder in Chhattisgarh’s Gare Palma coal block allocation. As per reports, JPSL has placed an attractive bid of Rs 230/tonne. Once this coal mine reaches its full capacity of 6mtpa, it will reduce the coal cost of JSPL by around Rs 1,000/tonne. This can result in an annual savings of around Rs 500 crore in coal cost and increase its 2020-21 EBITDA by around 7%.
In addition to cost savings, Gare Palma coal block will also provide the much-needed raw material security as JSPL can increase its steel production now without worrying about the shortage of domestic coal. The allocation is not expected to face any major hiccup as JSPL was also the former allottee of this mine and therefore is quite familiar with its geology and coal grade. Several other factors favouring JSPL are: having a dedicated screening and washery facilities, 1.4mtpa sponge iron ore plant hardly 40 km away from the mines, enough land for storage of dump, etc. These factors should make this mine profitable for JSPL.
Its subsidiary, Jindal Power, is now working on a low plant load factor (PLF) of around 30% and therefore, there is huge scope for improvement. Management has started taking steps to bring its debt under control. After reducing Rs 2,580 crore in the first half of 2019-20, its consolidated net debt remains at Rs 36,500 crore. Since some capex is expected now, debt reduction is expected to be around Rs 1,000 crore to Rs 1,500 crore in the second half. Any ramp up in power generation and further reduction of debt will be major triggers for the counter.
JSPL compared with ET Metal and Sensex. Stock price and index values normalised to a base of 100. Source: ETIG and Bloomberg.
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