Invest In This Metals Industry Stock With Strong Financials For Gains Up To 31%

BOB Capital has been optimistic about the stock of Jindal Steel & Power Ltd. (JSP) and recommended investors to buy the stock for potential upside of 31%. Q1 results ahead of consensus but net debt reduction muted with higher working capital build.

1. Stock outlook

The current market price of the mid-cap stock is Rs 352 apiece. Its 52-week high is Rs 577 apiece and 52-week low is Rs 304 apiece. According to BOB Capital, if you buy the stock at its current market price of Rs 352, it can give a return of 31% with the target price of Rs 460 apiece. The stock has given multibagger returns. In three years, it has given a return of 154% and in 5 years, it has given returns of 146%.

2. Results ahead but net debt reduction muted

JSP's Q1FY23 adj. EBITDA/adj. net income at Rs 29.9bn/Rs19.3bn were 37%/95% ahead of consensus. EBITDA of India operations improved by Rs 3.7k/t with above-expected realisations (+Rs 7.4k/t QoQ). Despite Rs 60bn of cash generation in Q1 including inflow for sale of the JPL stake, net debt reduction was muted at Rs 11bn due to Rs 25bn-30bn of working capital build. JSP's new FY23 production guidance at 8.2-8.4mt is lower than the 8.5-9mt communicated during the Q4FY22 call.

Similarly, its export target at 1.5-1.6mt is lower than the 2.5mt posted in FY22. High coking coal costs (down by only US$ 40-50/t QoQ in Q2) are likely to extend margin pressure into the September quarter. We cut our standalone EBITDA/t forecasts by 18%/23% to Rs 13.4k/Rs 13.9k for FY23/FY24. This results in a 13%/15% reduction in our FY23/FY24 consolidated EBITDA estimates.

3. Steel sector adjusting to economic realities

We are starting to see production cuts in China and Europe to balance market supply and demand, in response to sharp declines in prices and margins. Raw material chains are also deflating with coking coal prices reducing to US$ 240-250/t and iron ore prices dropping below US$ 100. These factors should help margins return to mid-cycle levels over the next couple of quarters. A key catalyst for the sector is stabilisation of steel demand in China as the stimulus translates to accelerated infrastructure investments.

4. Valuation

According to BOB Capital, "We cut our TP to Rs 460 (from Rs 555) as we reduce forecasts and also lower our target 1Y forward EV/EBITDA multiple to 4.5x (from 5.0x), while rolling valuations forward to FY24 when India HRC price is forecast at US$ 642/t. We maintain our rating at BUY looking beyond the current uncertainty and factoring in the company's healthy growth and margin profile. JSP is trading at 3.1x FY24E EV/EBITDA. At the stock's average 5Y/10Y multiples of 4.6x/5.6x, it is factoring in EBITDA/t of Rs 11.6k/Rs 9.5k which is below the mid-cycle level."

5. About Jindal Steel & Power Ltd

JSP is an industrial powerhouse with a dominant presence in steel, power, mining and infrastructure sectors. Led by Mr Naveen Jindal, the company's enviable success story has been scripted essentially by its resolve to innovate, set new standards, enhance capabilities, enrich lives and to ensure that it stays true to its cherished value system. The mid-cap company has a market capitalization of Rs 35,973 crore.

Disclaimer

The stock has been picked from the brokerage report of BOB Capital Markets Ltd. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.