Post on 03-Oct-2021
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Jindal Steel & Power A long way to go towards closing ESG gap with peers FY21 AR outlined details of capex plan and continued commitment to debt-free balance sheet target in the near term. Capex plan is measured and will be likely funded from internal accruals. JSPL is positioned to outperform its steel peers in 2HFY22 on: 1) narrowing rebar discount to flats, 2) lower exposure to third-party coking coal, 3) outperformance of convertors over integrated players. International assets turned EBITDA-positive in FY21; adjusted for acceptances, JSPL’s WC days remain longer vs peers. JSPL filed first integrated report and disclosed its Co2 emissions. However, higher prevalence of Coal-DRI/EAF means Co2 emissions are above peers, and JSPL will need to ramp up coke oven gas (COG) recycling to close gap. Depreciation rate remains more volatile, unclassified loans and advances high, while related-party transactions increased further. Board is populated by ex-civil servants and entertainment industry professionals. None of the members on audit committee have direct accounting or audit experience.
Balancing growth and deleveraging
JSPL outlined a Rs180bn capex program, including capex on iron ore making (BF, DRI), SMS (BoF, EAF), hot strip mill (HSM) and pellet plants. JSPL’s capex entails capital intensity of $350/t vs >$400/t for JSW and TSL on their brownfield projects. Currently, 70% of JSPL’s portfolio is geared towards longs. Post expansion, flats would constitute 60% of total product portfolio. JSPL’s capex plan is measured, it should be able to fund capex through internal accruals. JSPL has surprised positively on capital allocation, staying committed to its deleveraging goals. Debt free target (excluding acceptances) is in sight, although that would be sub-optimal capital structure.
Positioned to outperform peers in 2HFY22
JSPL is positioned to outperform its steel peers in 2HFY22, driven by: 1) narrowing of rebar discount to flats, 2) lower exposure to third-party coking coal and 3) back to convertor status. Rebar’s discount to flats typically narrows in 2H of the fiscal on improvement in construction activity. JSPL’s DRI plants use thermal and not coking coal. Also, start of Russel Vale coking coal mine in Australia should prove some protection. As such, at a time when coking coal prices have scaled to record high levels, JSPL has relatively lower exposure to coking coals and more to thermal coals vs peers. JSPL is returning to the merchant iron ore market at a time when iron ore prices have collapsed. Steel margins should hold up relatively better compared to iron ore in 2HFY22.
Acceptances mask WC cycle
Interest bearing acceptances are quasi-debt, but are included in accounts payable. As such, they mask true debt and working capital on the balance sheet. Adjusted for acceptances, JSPL has a shorter payable cycle and thus a longer WC cycle vs peers. Its cash conversion (CFO/EBITDA) dropped in FY21. JPL sale should drive Rs25bn reduction in book value of JSPL. International assets turned EBITDA positive in FY21, and may perform even better in FY22 on resumption of mining at Russel Vale.
Environment - A good start, but still a long way to go
JSPL filed its first integrated report and disclosed its environmental performance. Its Co2 emissions at 2.59 Co2/tcs are higher than that of peers through a function of higher share of coal-DRI/EAF in the production process (typically 20% higher Co2 emissions vs BF-BoF). JSPL needs to increase recycling of coke oven gas (COG) through partnership with Midrex, and close the Co2 and water consumption gap with peers. It should also disclose FY25/FY30 targets for environmental metrics.
SELL Quick Annual Report Analysis
Analysis
Meeting Note News Impact
Stock information
Bloomberg Code: JSP IN
CMP (Rs): 387
12m TP (Rs): 405
Mcap (Rs bn/US$ bn): 394/5.4
6M ADV (Rs mn/US$ mn): 5,063/68.9
Stock performance (%)
1m Chng
(%)
3m Chng
(%)
12m Chng
(%)
YTD Chng
(%)
Absolute (5.2) (0.5) 95.0 45.1
Relative to Sensex
(11.9) (13.2) 43.0 21.5
Source: Bloomberg, Ambit Capital research
Ambit Estimates
FY22E FY23E FY24E
Revenue 446 411 432
EBITDA 157 126 135
Source: Bloomberg, Ambit Capital research
Research Analysts
Satyadeep Jain, CFA satyadeep.jain@ambit.co Tel: +91 22 6623 3246
Jashandeep Chadha, CFA jashandeep.chadha@ambit.co Tel: +91 22 6623 3246
sutharshan.k@kotak.com 2021-09-22 Wednesday 09:45:43
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Composition of JSPL Board could be better for relevant industry or technical qualifications A board of directors is an elected group of individuals (nominated by the present board and promoters) that represent shareholders. There are two sets of shareholders in JSPL - promoters and minority. The only link we could come across between JSPL promoters and two of the new independent board members is a polo match. Although independent directors are nominated by the Nominations & Remuneration Committee (NRC), minority shareholders need to question if the current board is competent enough to serve/protect their interests. The rechristened board is populated with members who are either former civil servants or are from the entertainment industry. None of the members on the audit committee of JSPL have any direct accounting or audit experience. This is in sharp contrast to the board structure and experience at a company such as Tata Steel.
JSPL 2.0 – Balancing growth & deleveraging JSPL to double its steelmaking capacity by FY25
JSPL outlined a Rs180bn capex program, including capex on iron ore making (BF, DRI), SMS (BoF, EAF), hot strip mill (HSM) and pellet plants. Assuming Rs45bn investment on 5.5MT of HSM, we estimate JSPL is spending Rs160bn on 6.3MT of crude steel making/5.5MT of finished steel. This would translate into capital intensity of $350/t vs >$400/t for JSW and Tata Steel on their brownfield projects. 40% of iron ore making at Angul II would be through DRI. Management estimates 60% of heat requirement to be met by coke oven gas, higher than 40% at current syngas-based DRI at Angul. Brownfield projects at $400/t still generate IRR above cost of capital. 12MT of brownfield pellet plants would have low payback period and RoCE of almost 50%. Currently, 70% of JSPL’s portfolio is geared towards longs. Post the expansion, flats would constitute 60% of the total product portfolio.
Exhibit 1: Angul Phase II would help JSPL scale up its capacity to almost 16MT by FY25, assuming Angul CTO comes through for 1 MT
Source: Company, Ambit Capital research
Exhibit 2: JSPL to also expand its pellet capacity by 12MT by FY24
Source: Company, Ambit Capital research
3.0
5
.6
1.0
3.3
3.0
15
.9
FY21 FY22 (P) FY24 (P) FY25 (P) FY25 (P)
MTP
A
Raigarh Angul Phase I
Ang
ul
CTO
Ang
ul
Phas
e II
Ang
ul
Phas
e II
9 9
15
21
6
6
FY21 FY22 (P) FY24 (P) FY24 (P)
MTP
A
Ang
ul
Phas
e II A
ngul
Ph
ase
II Barb
il
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Exhibit 3: JSPL is predominantly a long steel producer…
Source: Company, Ambit Capital research estimates
Exhibit 4: …which is set to change post Angul II, with flats (HRC+plates) becoming almost 60% of the portfolio
Source: Company, Ambit Capital research estimates
Debt-free target well in sight, but that would be sub-optimal capital structure
JSPL has surprised positively on capital allocation, staying committed to its deleveraging goals and reducing net debt from Rs470bn pre-Covid to Rs140bn now (including acceptances, after cash receipts for JPL).
Exhibit 5: CFO has been the chief source of funds over FY18-21…
Source: Company, Ambit Capital research
Exhibit 6: …which have been utilised mainly towards debt & interest payments
Source: Company, Ambit Capital research
JSPL aims to become a debt-free company in the near future. JSPL should receive Rs30bn of cash from JPL sale in the next few months and therefore expect JSPL’s net debt (including acceptances) to drop to Rs83bn by FY22-end. The company’s FY22 growth capex is just 13% of its total Rs180bn project spend. We estimate JSPL would be able to meet these capex needs from internal cash generation. However, the company is now reaching under-levered status, and capital misallocation risks are high given the past record. Therefore, incremental RoIC could be lower.
Rail 9%
Structural 5%
Plate - Flat 30%
Rebar 20%
Wire Rod 8%
Billet 26%
Pig Iron 2%
Rail 6%
Structural 6%
Plate - Flat 20%
Rebar 17%
Wire Rod 9%
Billet 3%
Pig Iron 0%
HRC 39%
CFO 94%
Sale of Investment
1%
Interest received
1%
Increase in equity
3%
Exchange rate gains
1%
Sources of funds FY18-21
Debt Repayment
30%
Interest paid 37%
Net Capex 16%
Cash & Bank 17%
Application of funds FY18-21
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Exhibit 7: JSPL’s capital intensity for brownfield expansion at Angul is lower than that of its peers
Source: Company, Ambit Capital research estimates
Exhibit 8: Majority of the Rs180bn Angul Phase II expansion will occur in FY23-25
Source: Company, Ambit Capital research
Exhibit 9: We expect JSPL to generate cumulative FCF of Rs178bn through FY22-24 after growth capex
Source: Company, Ambit Capital research
Exhibit 10: Debt/equity should remain <0.5x in FY22-24, but ROE would drop below cost of equity in FY23-24
Source: Company, Ambit capital research Note: these debt maturities in table include those for JSIS Oman
Exhibit 11: JSPL’s target of <1.5x net-debt/EBITDA is achievable – we forecast <1x through FY24
Source: Company, Ambit capital research
$200
$250
$300
$350
$400
$450
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
JSPL-Angul II JSW Steel-Dolvi II Tata Steel-KPO II
$/t
MT
Capacity Capital Intensity (RHS)
24
47
43
41
25
FY22 FY23 FY24 FY25 FY26 & 27
(Rs bn) Angul Phase II: Capex Plan
(100)
(50)
0
50
100
150FY
12
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1
FY2
2E
FY2
3E
FY2
4E
Rs
bn
Capex FCF (adj for interest paid)
-10%-5%0%5%10%15%20%25%30%
0.00.20.40.60.81.01.21.41.61.8
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1
FY2
2E
FY2
3E
FY2
4E
Debt/Equity ROE (RHS)
0
2
4
6
8
10
12
14
0
100
200
300
400
500
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1
FY2
2E
FY2
3E
Rs
bn
Net debt Net debt/EBITDA (x) (RHS)
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Exhibit 12: Net debt should drop to Rs50bn (including acceptances) by FY23-end
Source: Company, Ambit capital research
Possibility of outperformance in 2HFY22 JSPL is positioned to possibly outperform its steel peers in 2HFY22, driven by:
Narrowing of rebar discount to flats - Rebar prices are trading at a record high discount to flats at present. Both rebar and cement tend to perform well in 2H on pick-up in construction activity post monsoon. Rebar’s discount to flats, therefore, typically narrows in 2H of the fiscal.
Lower exposure to third-party coking coal - Steel-making is comprised of two different processes: 1) iron making and 2) steelmaking. For JSPL, coal-DRI accounts for 35% of iron making capacity. DRI typically requires 1.1t of thermal coal per tonne of steel production. While DRI capacity likely operated at 70% capacity in FY21, its capacity utilization should pick up in 2HFY22. Its CPPs also consume 7-8MT of thermal coal. The Russel Vale coking coal mine in Australia also kicked off production lately and is expected to provide 1.2MT annual supply at arms-length price. Therefore, compared to peers, JSPL is less exposed to coking coal and more to thermal coal. While both thermal and coking coal prices should trade higher in 2HFY22 vs 1HFY22, it is coking coal that is outperforming thermal coal. Compared to peers, JSPL is less exposed to record-high coking coal prices at present.
Back to convertor status - JSPL exhausted its 12.2MT Sarda iron ore inventory in 1QFY22. The Sarda iron ore inventory insulated JSPL from record high iron ore prices of >$150/t during FY21 and 1QFY22. JSPL is returning to merchant iron ore market at a time when iron ore prices have collapsed from >$200/t to <$130/t. Steel conversion margins should also moderate in 2HFY22, but should hold up relatively better compared to the steep fall in iron ore prices.
305 222
63 25 0
24
28
25 25
25
54
0
1
2
3
4
5
6
0
100
200
300
400
FY2
0
FY2
1
FY2
2E
FY2
3E
FY2
4E
Net
Deb
t/EB
ITD
A (x)
Rs
bn
Legacy Debt AcceptancesOman Net debt/EBITDANet debt/EBITDA (ex Oman)
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Exhibit 13: DRI comprises 35% of iron making capacity for JSPL, but since Angul DRI operated at <50% utilization in FY21, coal-DRI route accounted for 29% of production mix
Source: Company, Ambit capital research estimates
Exhibit 14: JSPL consumed 12.6MT of coal (for steelmaking) in FY21 – coal-DRI doesn’t need coking coal, therefore compared to peers, JSPL is less exposed to coking coal
Source: Company, Ambit capital research estimates
Exhibit 15: JSPL to return to merchant iron market after iron ore price correction
Source: Company, Ambit capital research estimates
Exhibit 16: Rebar discount tends to narrow in 2HFY on pick-up in construction activity
Source: Company, Ambit capital research estimates
Use of acceptances mask actual WC cycle JSPL saw improvement in receivable days (9 days) and inventory days (19 days), offset partly by lower creditor days (20 days), which led to an improvement (10 days) in the cash conversion cycle (42 days in FY21 vs 52 days in FY20). However, JSPL has the longest WC cycle amongst majors despite the use of acceptances.
Exhibit 17: JSPL and JSW Steel working capital days masked to some extent by use of acceptances for working capital financing
Company Working capital days
FY16 FY17 FY18 FY19 FY20 FY21
Tata Steel 48 46 52 49 51 40
JSW Steel -10 -1 6 15 15 9
JSPL 61 38 33 32 52 42
Average 33 28 30 32 39 31
Source: Company, Ambit Capital Research. Note: (a) Above financials are on consolidated basis, (b) Calculated on revenue and year end averages
BF 71%
DRI 29%
FY21 iron making split
coking coal 25%
thermal coal for
DRI 17%
thermal coal for
CPPs 58%
FY21 coal consumption-12.6MT
2.8 2.6 2.5 2.7 2.7 2.7 1.1
9.6
1.5 0.0
9.4 9.0
2.8
9.1 13.0 14.5
-1
1
3
5
7
9
11
13
15
FY1
9
FY2
0
FY2
1E
FY2
2E
FY2
3E
FY2
4E
MT
Tensa Sarda Third party sourcing
-5%
0%
5%
10%
15%
20%
25%
30%FY
16
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1
FY2
2
HR
C p
rem
ium
ove
r R
eb
ar 1H 2H
sutharshan.k@kotak.com 2021-09-22 Wednesday 09:45:43
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Exhibit 18: JSPL’s WC days improved in FY21 as lower inventories and receivables more than offset lower payable days
Company Average inventory days Average debtor days Average creditor days
FY17 FY18 FY19 FY20 FY21 FY17 FY18 FY19 FY20 FY21 FY17 FY18 FY19 FY20 FY21
Tata Steel 70 73 69 82 75 36 33 28 26 20 61 53 49 56 55
JSW Steel 60 61 58 71 64 21 23 26 29 21 82 77 69 85 76
JSPL 55 56 53 77 58 25 23 23 39 30 42 47 44 65 45
Average 62 63 60 77 66 27 26 25 31 24 62 59 54 69 59
Source: Company, Ambit Capital Research. Note: (a) Above financials are on consolidated basis, (b) Calculated on revenue and year end averages
JSPL includes some of the interest-bearing acceptances in trade payables (similar to JSW Steel). The presence of these acceptances does not provide a fair picture of the WC control the company has applied. For instance, absent acceptances, creditor days would have been 21 days in FY21 (vs 45 days as per JSPL accounts), and working capital days would have been 66 days in FY21. On an ex-acceptance basis, the WC cycle improved by 12 days. Though JSPL’s use of acceptances (6-7% of total sales) is lower than that for JSW Steel (15-20% of total sales), aggressive accounting for these interest-bearing liabilities by JSPL and JSW Steel in their books masks actual WC and hence CFO/EBITDA performance.
Exhibit 19: JSPL increasing reliance on operating and capital acceptances; we treat these as WC financing/debt
Source: Company, Ambit capital research
Exhibit 20: JSPL and JSW Steel working capital days substantially higher after adjusting for interest-bearing acceptances present in trade payables
Company Working capital days
FY16 FY17 FY18 FY19 FY20 FY21
Tata Steel 48 46 52 49 51 40
JSW Steel 77 56 55 56 65 51
JSPL 73 52 47 48 78 66
Average 66 51 51 51 65 52
Source: Company, Ambit Capital Research. Note: (a) Above financials are on consolidated basis, (b) Calculated on revenue and year end averages
Exhibit 21: JSPL and JSW Steel creditor days increase significantly after adjusting for interest-bearing acceptances present in trade payables
Company Average inventory days Average debtor days Average creditor days
FY17 FY18 FY19 FY20 FY21 FY17 FY18 FY19 FY20 FY21 FY17 FY18 FY19 FY20 FY21
Tata Steel 70 73 69 82 75 36 33 28 26 20 61 53 49 56 55
JSW Steel 60 61 58 71 64 21 23 26 29 21 25 29 28 35 34
JSPL 55 56 53 77 58 25 23 23 39 30 29 33 28 38 21
Average 62 63 60 77 66 27 26 25 31 24 38 38 35 43 37
Source: Company, Ambit Capital Research. Note: (a) Above financials are on consolidated basis, (b) Calculated on revenue and year end averages
2%
3%
4%
5%
6%
7%
8%
9%
0
5
10
15
20
25
30
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1
Rs
bn
Acceptances Acceptances as % of turnover (RHS)
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Exhibit 22: While Tata Steel reported a stellar improvement in cash conversion, both JSPL and JSW reported <100% cash conversion in FY21
Source: Company, Ambit Capital Research
Loss on sale of JPL asset to drive equity write-down JSPL had Rs60bn of equity value for JPL in the books at the end of FY21. Shareholders recently approved the divestment of JPL to promoter-entity Worldone for Rs94bn (Rs30bn cash, assumption of Rs64bn of net debt and cancellation of RPS and inter-company loans). JSPL’s FY21 balance sheet included Rs30bn as discounted value for non-convertible redeemable preference shares (RPS) issued by JPL, Rs44bn for inter-company loans and Rs9bn as investments in JPL. After adjusting for all these, we expect Rs25bn reduction in book value for JSPL as a result of JPL divestment.
Exhibit 23: We expect Rs25bn reduction in JSPL’s book value post the completion of JPL divestment to promoter entity Worldone
Net assets FY17 FY18 FY19 FY20 FY21
Parent
JSPL 218 228 225 237 326
Indian subsidiaries
JPL 118 111 106 104 61
Hydro-electric assets 4 4 6 7
Foreign subsidiaries
JSPML -1 -5 -8 -17 -4
Jindal (BVI Ltd) 11 11 6 6 6
JSPL Mozambique Minerais LDA -4 -4 -4 -5 -6
Shadeed Iron & Steel L.L.C 20 28 76 81 0
Wollongong Coal Limited -3 -6 -19 -13 -5
Jindal Steel Bolivia SA @ 0 5 5 5 5
Minority Interest in all Subsidiaries 6 4 -3 -8 -9
Consolidation Adjustments/Elimination -78 -78 -66 -73 -47
others 10 6 0 -4 -10
Total Equity 301 304 324 321 318
Source: company, Ambit capital research
After write-down, JSPL’s book value should still improve to Rs375/share by FY22-end and Rs425/share by FY23-end. ROE should improve to 26% in FY22, but moderate to 14% in FY23-24E.
17
9%
74
%
50
% 10
4%
12
8%
15
7%
13
7%
14
1%
11
5%
10
6%
10
6%
82
%
99
%
63
%
93
%
90
%
11
2%
76
%
FY16 FY17 FY18 FY19 FY20 FY21
Pre
-ta
x C
FO a
s a
% o
f EB
ITD
A
TATA JSPL JSW
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Exhibit 24: ROE should improve in 1FY22 on record high profitability, but drop below cost of equity in FY23-24 despite book value reduction
Source: company, Ambit capital research
Exhibit 25: Despite reduction due to JPL divestment, book value should increase on higher profitability
Source: company, Ambit capital research
International assets turned EBITDA positive in FY21 Coal assets in Mozambique and South Africa continued to ramp up production in FY21. Coal production of the former increased 29% YoY while the latter witnessed a 43% YoY jump. These assets contributed $12.3mn EBITDA in FY21. Despite that, JSPL reported just $9.7mn EBITDA from other business (ex-JPL). We believe some of the African EBITDA would have been offset by losses incurred in Australian coal assets. Wollongong and Russell Vale mines in New South Wales, Australia remain under care and maintenance. These assets could account for $2.56mn EBITDA loss in FY21. Reports indicate JSPL has started producing coking coal at Russel Vale mines in Australia, which should boost its profitability given record high coking coal prices at present.
Exhibit 26: EBITDA from international assets turned positive first time since FY17 despite drag from Australian assets
Source: company, Ambit capital research
-10%-5%0%5%10%15%20%25%30%
0.00.20.40.60.81.01.21.41.61.8
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1
FY2
2E
FY2
3E
FY2
4E
Debt/Equity ROE (RHS)
0
100
200
300
400
500
600
0.0
0.5
1.0
1.5
2.0
2.5
3.0
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
E
FY23
E
FY24
E
P/B Bookvalue per share (RHS)
-3.1
-6.3
-0.1
0.8
-3.7
-0.4
-2.9
0.7
-7
-6
-5
-4
-3
-2
-1
0
1
2
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1
Rs
bn
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
ESG Analysis- A long way to go JSPL falls short of peers in all the aspects of ESG, specifically environment and governance.
Environment JSPL has just started to disclose key environment metrics while its peer Tata Steel has been rated A- for its environmental disclosures by CDP (carbon disclosure project). JSPL has stated its intentions to monetise its international thermal coal assets in Africa in a bid to reduce its carbon footprint. While it is a step in the right direction, we believe JSPL should also focus on its steel making business as its CO2 emissions are the highest amongst the majors (Tata Steel and JSW Steel). The company also has the highest water consumption. However, it scores well on lower energy intensity, largely due to efficient DRI process, waste disposal disclosures and zero liquid discharge. JSPL has increased the use of byproduct gas from 12% to 20% in FY21.
Exhibit 27: JSPL had the highest Co2 emissions in FY21 amongst peers
Year Unit FY16 FY17 FY18 FY19 FY20 FY21
Tata Steel tCO2/tcs 2.30 2.29 2.38 2.35 2.31 2.32
Standalone
TS Netherlands tCO2/tcs 1.74 1.84 1.90 1.87 1.86
TSUK tCO2/tcs 1.80 2.12 2.18 2.21 2.22
TSE Consolidated tCO2/tcs 1.93 1.93 1.99 1.98 1.98 1.97
JSW Steel tCO2/tcs 2.56 2.44 2.59 2.75 2.52 2.49
JSPL tCO2/tcs
2.63 2.59
POSCO tCO2/tcs 1.91 1.88 1.90 1.92 1.94
ArcelorMittal tCO2/tcs 2.14 2.14 2.11 2.12 2.11 2.08
Voestalpine tCO2/tcs 1.61 1.64 1.60 1.69
SSAB tCO2/tcs 1.39 1.39 1.38 1.36 1.41
Nucor tCO2/tcs 0.86 0.86 0.89 0.91 0.93 0.93
US Steel tCO2/tcs 2.38 2.28 2.29 2.31 2.39
Nippon Steel tCO2/tcs 2.02 1.99 2.01 2.02
Global Avg. tCO2/tcs 1.91 1.88 1.91 1.94 2.02 2.06
Source: Ambit capital research, company reports
Exhibit 28: Use of coke oven gas reduces energy requirement – lowest in India
Year Unit FY16 FY17 FY18 FY19 FY20 FY21
Tata Steel Gcal/tcs 5.77 5.67 6.04 5.83 5.78 5.76
Standalone
TS NED Gcal/tcs 4.68 4.66 4.78 4.73 4.69
TSUK Gcal/tcs 5.07 5.47 5.64 5.78 5.69
TSE Consolidated Gcal/tcs 4.83 4.95 5.07 5.07 5.02
JSW Steel Gcal/tcs 7.71 6.29 6.59 6.25 6.57 6.38
JSPL Gcal/tcs
5.18 5.22
POSCO Gcal/tcs 6.05 2.27 2.26 2.27 2.46
ArcelorMittal Gcal/tcs 5.78 5.74 5.74 5.74 5.78 5.83
Voestalpine Gcal/tcs 4.14 4.18 4.11 4.17
SSAB Gcal/tcs 0.95 0.97 0.99 1.01 1.03
Nucor Gcal/tcs 1.21 1.17 1.2 1.22 1.23 1.26
US Steel Gcal/tcs
Nippon Steel Gcal/tcs 5.59 5.52 5.59 5.62
Global Avg. Gcal/tcs 4.67 4.08 4.18 4.13 4.13 4.89
Source: Ambit capital research, company reports
Exhibit 29: JSPL’s water consumption is the highest amongst Indian peers and no target for reduction is given
Year Unit FY16 FY17 FY18 FY19 FY20 FY21
Tata Steel Standalone m3/tcs 4.39 3.83 3.93 3.5 3.11 2.70
TS NED m3/tcs 4.49 4.64 4.95 4.96 4.93
TSUK m3/tcs 6.98 6.07 4.48 6.03 6.53
TSE Consolidated m3/tcs 5.44 5.12 4.79 5.29 5.43
JSW Steel m3/tcs 4.52 4.57 4.13 3.79 2.6 2.41
JSPL m3/tcs
2.87 2.93
POSCO m3/tcs 4.09 4.12 3.77 3.69 3.74
ArcelorMittal m3/tcs 5.3 5 3.9 3.9 2.3 2.4
Source: Ambit capital research, company reports
Exhibit 30: Although air emissions are disclosed, JSPL does not disclose dust emissions
Year Unit FY17 FY18 FY19 FY20 FY21
Tata Steel Standalone kg/tcs 0.44 0.46 0.42 0.39 0.34
TS NED kg/tcs 0.28 0.28 0.26 0.28
TSUK kg/tcs 0.48 0.57 0.64 0.57
TSE Consolidated kg/tcs 0.34 0.38 0.38 0.38
JSW Steel kg/tcs 1.06 0.99 0.98
POSCO kg/tcs 0.09 0.09 0.08 0.09
ArcelorMittal kg/tcs 0.67 0.67 0.61 0.63 0.64
Source: Ambit capital research, company reports
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Exhibit 31: BF share to increase >70% in FY5 before falling to <65% as 2.7MT DRI gets commissioned in FY25
Source: Company, Ambit Capital research
Exhibit 32: DRI expansion to be complimented by a 3MT EAF expansion in FY25; BOF to grow by 3.3MT in FY24
Source: Company, Ambit Capital research
Coal-DRI accounts for 35% of JSPL’s steelmaking capacity. This production method generates the highest Co2 emissions, typically 20% above BF-BoF. While JSPL has roped in Midrex Technologies for syngas and COG (coke oven gas) recycling through its patented technology, this technology has apparently not helped JSPL reduce its DRI emissions below that for typical BF-BoF processes yet. Peers are using CDQ (coke dry quenching) for coke oven gas recycling, though Midrex claims its technology can help recycle and re-use much higher coke over gas. We will have to see if JSPL can ramp up coke oven gas recycling above 20% achieved in FY21, and lower Co2 emissions to levels seen for BF-BoF. JSPL has also not disclosed its FY25 and FY30 Co2 targets.
Exhibit 33: Coal-DRI/EAF route (36% of JSPL’s capacity mix) accounts for the highest Co2 emissions – 20% higher than typical BF/BoF route
Source: BHP Billiton, European Parliamentary Research Service, Ellis & Bao, 2020, Company
33% 33% 33% 23%
36%
67% 67% 67% 77%
64%
FY21 FY22 FY23 FY24 FY25
Ca
pa
city
sh
are
(%
)
DRI BF
68% 71% 71% 79% 64%
32% 29% 29% 21% 36%
FY21 FY22 FY23 FY24 FY25
Ca
pa
city
sh
are
(%
)
BOF EAF
0.0 0.5 1.0 1.5 2.0 2.5
Scrap/EAF
NG-DRI/EAF
Global Average
BF/BoF
Coal-DRI/EAF
sutharshan.k@kotak.com 2021-09-22 Wednesday 09:45:43
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Exhibit 34: JSPL uses Midrex gasifier that turns coal into syngas – syngas is potentially more efficient than direct combustion of coal
Source: Midrex, Company Ambit Capital research
Exhibit 35: Midrex’s TRS® allows production of DRI with a variety of fuels, including coke oven gas
Source: Midrex, Company Ambit Capital research
Exhibit 36: Unlike peers, JSPL hasn’t disclosed its FY25/FY30 Co2 targets
Source: Company, Ambit Capital research
Exhibit 37: While TSL leads the water conservation race – JSPL hasn’t started
Source: Company, Ambit Capital research
Exhibit 38: JSPL does not even provide full disclosure of current dust emissions
Source: Company, Ambit Capital research
Governance/accounting Within the Indian steel industry, JSPL has followed the most aggressive and volatile depreciation policy over the past few years. Unclassified loans & advances as a % of net-worth decreased slightly in FY21, but remain the highest in the industry. The only green spot is miscellaneous expenses as a % of sales; these improved and were lower than those for TSL and JSW Steel.
Volatility in depreciation rate: JSPL’s depreciation rate has been the most volatile amongst its Indian steel peers. JSPL’s depreciation policy has been the most aggressive in the industry over the past few years. RED
Exhibit 39: Depreciation rate for JSPL has been relatively volatile vs its peers; the company had a 53.8bps decrease in depreciation rate in FY21
Company Depreciation Rate % Change (bps)
FY17 FY18 FY19 FY20 FY21 FY17 FY18 FY19 FY20 FY21
Tata Steel 4.6% 4.3% 4.5% 4.4% 4.5% 5.6bps -31.5bps 22.5bps -8.5bps 6.6bps
JSW Steel 5.3% 4.9% 5.5% 5.3% 5.5% -16.9bps -39.1bps 50.4bps -17.7bps 21.6bps
JSPL 5.2% 4.7% 6.2% 4.2% 3.6% -41.1bps -44.8bps 146.1bps -203.5bps -53.8bps
Average 5.0% 4.7% 5.4% 4.6% 4.5% -17.5bps -38.5bps 73.bps -76.6bps -8.5bps
Source: Company, Ambit Capital Research. Note: (a) Above financials are on consolidated basis. (b) Above is calculated as a % of average gross block
2.3
2
2.4
9
2.5
9
<2
.0
<1
.8
<1
.95
Tata Steel JSW Steel JSPL
CO
2 e
mis
sio
n
targ
ets
t C
O2
/tcs
FY21 FY25 FY30
2.7
2.4
1
2.9
3
2.0
<
1.5
2.4
1
Tata Steel JSW Steel JSPLWa
ter
con
sum
pti
on
ta
rgets
m3
/tcs
FY21 FY25 FY30
0.3
4
0.4
8
0.4
0.2
8
Tata Steel JSW Steel JSPL
Du
st e
mis
sio
n
targ
ets
kg
/tcs
FY21 FY25 FY30
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Miscellaneous expenses as a % of revenues were 1.7% in FY21. Slight improvement in FY21; remains significantly lower than those for Tata Steel. GREEN
Exhibit 40: Miscellaneous expenses as % of revenues remain well below that for TSL and JSW Steel
Company Miscellaneous expenses as % of revenues
FY16 FY17 FY18 FY19 FY20 FY21
Tata Steel 2.33% 4.46% 4.16% 4.12% 6.42% 5.80%
JSW Steel 1.44% 1.20% 1.80% 1.82% 2.56% 2.51%
JSPL 3.02% 2.49% 2.08% 1.87% 1.89% 1.66%
Average 2.26% 2.72% 2.68% 2.60% 3.62% 3.32%
Source: Company, Ambit Capital Research
Unclassified loans and advances as a % of net worth declined slightly to 8.2% in FY21. JSPL has by far the largest exposure to this amongst its peers. RED
Exhibit 41: Unclassified loans & advances as a % of net worth is highest for JSPL among key steel manufacturers in India
Company Unclassified loans & advances as % of net worth Unclassified loans & advances (Rs mn)
FY17 FY18 FY19 FY20 FY21 FY17 FY18 FY19 FY20 FY21
Tata Steel 4.75% 3.85% 5.38% 3.74% 3.85% 15,807 17,976 23,432 37,089 27,538
JSW Steel 1.81% 1.40% 1.38% 1.90% 1.03% 4,100 3,910 4,790 6,970 4,830
JSPL 14.00% 10.98% 7.40% 9.09% 8.19% 42,066 33,368 23,986 29,216 26,056
Source: Company, Ambit Capital Research
JSPL doesn’t fare well on contingent liabilities, board rotation, and managerial and auditor remuneration. Related-party transactions (RPTs) increased further in FY21.
Contingent liabilities: Contingent liabilities as a % of net worth increased to 29% in FY21 (vs 27%) in FY20. These are higher than that for Tata steel (25% in FY21). RED
Exhibit 42: Contingent liabilities increased in FY21 on higher guarantees and disputes statutory and other demands
Contingent liabilities In Rs mn As % of Net Wort As % of Net Revenue
FY19 FY20 FY21 FY19 FY20 FY21 FY19 FY20 FY21
Guarantees and undertakings
324,276 321,371 318,147 393,721 369,955 389,886
Guarantees issued by the Company's Bankers on behalf of the Company
12,522 20,314 20,949 4% 6% 7% 3% 5% 5%
Corporate guarantees/undertakings issued on behalf of third parties
1,921 2,293 2,237 1% 1% 1% 0% 1% 1%
Demand/Litigations 0% 0% 0% 0% 0% 0%
Disputed Statutory and Other demands 30,143 37,595 39,725 9% 12% 12% 8% 10% 10%
Income Tax demands where the cases are pending at various stages of appeal with the appellate authorities
19,071 17,396 18,128 6% 5% 6% 5% 5% 5%
Bonds executed for machinery imports under EPCG Scheme
2,082 421 263.6 1% 0% 0% 1% 0% 0%
Commitments 0% 0% 0% 0% 0% 0%
Estimated amount of contracts remaining to be executed on capital account and not provided for (net of advances)
9,144 9,232 10,941 3% 3% 3% 2% 2% 3%
Total 74,883 87,251 92,242 23% 27% 29% 19% 24% 24%
Source: company, Ambit capital research
Auditor Rotation - Long association with company/management can impede an auditor’s independence. Lodha has been the auditor for JSPL since FY17, and got re-appointed for another 5 years. Also, auditor remuneration over the last five years recorded 26% CAGR, ahead of 16% CAGR in revenues. RED
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Exhibit 43: Lodha & Co. was re-appointed as the auditor of Jindal Steel & Power for another 5 years
Company Auditor Since
Tata Steel PWC FY18
JSW Steel M/s S R B C & Co LLP FY18
JSPL M/s Lodha & Co. FY17
Source: Company, Ambit Capital Research.
Exhibit 44: Over FY17-21, auditor’s remuneration increased sharply (26% CAGR) on sharp jump in certification and other charges in FY20 & FY21; revenue CAGR was 16%
Payment to Statutory auditors FY17 FY18 FY19 FY20 FY21 FY17-21
Statutory audit fees 9 9 10 10 10 3%
Certification & other charges 2 8 4 14 18.9 75%
Reimbursement of expenses 1 0 1 0 1.2 5%
Total 12 17 15 24 30.1 26%
growth % -33% 42% -12% 60% 25%
Revenue 147,168 155,025 175,230 277,304 262,283 16%
growth % 5% 5% 13% 58% -5%
Source: Company, Ambit Capital Research. Above analysis is on standalone basis
Board independence and independent directors’ rotation: JSPL’s current board constitutes ten members, of which six are independent. The board meets the criteria of at least 50% independence without an independent director as chairman. Although independent directors are nominated by the Nominations & Remuneration Committee (NRC), minority shareholders need to question if the current board is competent enough to serve/protect their interests. Most of the independent directors are retired civil servants or are from the entertainment industry. None of the members of JSPL’s audit committee have any direct accounting or audit experience. Unlike JSPL, the committees of both JSW and Tata Steel are filled with highly experience individuals. Most of the independent directors at JSW and Tata Steel have either experience in the steel/mining industry or have served vast number of years in areas of management, leadership, finance, etc. RED
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Exhibit 45: 50% of JSPL’s independent directors (IDs) are ex-civil servants while 80% of the IDs have no experience in business management. This is in sharp contrast with the highly experienced IDs of JSW Steel and Tata Steel
JSPL JSW Steel Tata Steel
Independent Director
Experience & Qualification Independent
Director Experience & Qualification
Independent Director
Experience & Qualification
Mr. Bhaskar Chatterjee
Former IAS - Secretary to the Government of India, Department of Public Enterprises, Ministry of Heavy Industries & Public Enterprises; Principal Secretary, Steel and Mines, Govt. of Odisha Post Graduate in History, M.Phil, M.B.A., Ph.D. & LLB
Mr. Malay Mukherjee
40+ years of experience in mining and steel industry Master's in Mining, USSR State Commission, Moscow; B.Sc, IIT Kharagpur
Ms. Mallika Srinivasan
36+years of experience, Current Chairman and CEO of TAFE IIM Lucknow, Wharton School of Business
Mr. Sunjay Kapur
~18 years of experience in the automotive component industry BBA, University of Buckingham, UK
Mr. Halgerve Khaitan
26+ years of experience, Senior Partner at Khaitan & Co and heads the Firm’s Corporate / M&A and Private Equity practice LL.B. (Honours), South Kolkata Law College, Kolkata
Mr. O. P. Bhatt
Been the Chairman, SBI Group - which includes the State Bank of India, five associate banks in India, five overseas banks M.A. in Eng. Literature from Meerut University
Mrs. Shivani Wazir Pasrich
Activist and promoter of art, former Miss India Worldwide and a classical dancer Economics Honours, Lady Shri Ram College, Delhi Graduate, Faculty of Law, Delhi
Mr. Seturaman Mahalingam
Former CFO & Exec Director, TCS Global CA
Dr. Peter Blauwhoff
30+ years of experience in the energy industry, in particular the downstream oil and gas business Doctorate in Technical Sciences
Mr. Anil Wadhwa Former IFS - Secretary (East) in the Ministry of External Affairs of India
Dr. (Mrs.) Punita Kumar Sinha
20+ years of experience in fund management B.E, Chemical, IIT New Delhi; Master & PhD in Finance, Wharton School, University of Pennsylvania; MBA and CFA
Mr. Aman Mehta
Former HSBC Asia-Pacific CEO Graduation from Delhi University *( retired on 31st Aug’21)
Dr. Aruna Sharma
Former IAS - Secretary - Steel, Government of India Master degree in Development Studies, University of Bath, UK PhD in Development Economics, Delhi University
Ms Nipurama Rao
40+ years of diplomatic career M.A (English), Marathwada University; and Doctor of Letters (Honoris Causa), Pondicherry Unversity
Mr. Deepak Kapoor
30+ years of experience, former Chairman of PwC India FCA, FCS, ICFE (USA)
Ms. Kanika Agnihotri
~20 years of experience as a lawyer Graduate, Govt. College for Girls, Chandigarh LLB, Panjab University
Mr. Harsh Mariwala
30+ years of experience in consumer products and service industry B.Com., Sydenham College of Commerce and Economics, University of Mumbai
Source: Company, Ambit Capital research
Mr Prithvi Haldea, a leading authority on Indian capital markets and corporate governance in India, and founded-chairman of Prime database, has some interesting observations on independence of board members in Indian companies:
The Nomination and remuneration committees in reality often recommend only such persons as are suggested to them privately by promoter. Home directors (friends, school/college mates, ex-colleagues, relatives (not covered by definition), neighbours, etc) are omni-present in Indian boards.
Retired bureaucrats are often not appointed for their domain expertise. They are appointed by companies so that their voices can be heard in the power corridor.
High majority of ‘value directors’ are retired people, who are significantly dependent on the ID remuneration, thus, becoming dependent independent directors.
Many independent directors typically have no forensic skills, and many do not even have deep knowledge of finance.
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Exhibit 46: None of the members of audit committee at JSPL have audit or accounting experience, a sharp contrast to that for JSW and especially TSL
JSPL JSW Steel Tata Steel
Independent Director
Experience & Qualification Independent
Director Experience & Qualification
Independent Director
Experience & Qualification
Mr. Bhaskar Chatterjee
Former IAS - Secretary to the Government of India, Department of Public Enterprises, Ministry of Heavy Industries & Public Enterprises; Principal Secretary, Steel and Mines, Govt. of Odisha Post Graduate in History, M.Phil, M.B.A., Ph.D. & LLB
Mr. Seturaman Mahalingam
42+ years of experience, Former CFO & Exec Director, TCS Global Chartered Accountant
Mr. O. P. Bhatt
Been the Chairman, SBI Group - which includes the State Bank of India, five associate banks in India, five overseas banks M.A. in Eng. Literature from Meerut University
Mrs. Shivani Wazir Pasrich
Activist and promoter of art, former Miss India Worldwide and a classical dancer Economics Honours, Lady Shri Ram College, Delhi Graduate, Faculty of Law, Delhi
Mr. Malay Mukherjee
40+ years of experience in mining and steel industry Master's in Mining, USSR State Commission, Moscow; B.Sc, IIT Kharagpur
Mr. Aman Mehta
40+ years of experience, former CEO of HSBC Group (Asia Pacific) Graduation from Delhi University *retired on 31st Aug’21
Mr. Anil Wadhwa
Former IFS - Secretary (East) in the Ministry of External Affairs of India
Mr. Halgerve Khaitan
30+ years of experience in consumer products and service industry B.Com., Sydenham College of Commerce and Economics, University of Mumbai
Dr. Peter Blauwhoff
30+ years of experience in the energy industry, in particular the downstream oil and gas business Doctrate in Technical Sciences
Mr. Deepak
Kapoor
30+ years of experience, former Chairman of PwC India FCA, FCS, ICFE (USA)
Source: Company, Ambit Capital research
Managerial remuneration: In FY21, the share of promoter’s remuneration grew to 75% vs 65% in FY20. Further, despite the company suffering losses in FY17-19, the managerial remuneration continued to increase at 6% CAGR over FY17-21 and accounted for 4% of Employee cost in FY21. AMBER
Exhibit 47: Despite losses in the recent past, managerial remuneration continued to increase at 6% CAGR over FY17-21 and accounted for 4% of employee cost in FY21
Particulars (Rs mn) FY17 FY18 FY19 FY20 FY21 FY17
-21
Managerial Remuneration (MR) (Rs mn) 191 211 207 233 239 6%
Promoter's remuneration as % of MR 37% 46% 59% 65% 75%
MR as % of Employee cost 4% 4% 3% 3% 4%
MR as % of PBT NM NM NM 3% 0%
Employee Cost 5,316 5,252 6,198 6,787 6,759 6%
PBT -14,570 -6,718 -5,698 8,796 91,192 NM
Source: Company, Ambit Capital Research.
Related-party transactions: Sale and purchase from related parties increased in FY21 as a result RPTs increased significantly in FY21. JSPL has related party transactions with entities such as JSW Tradecorp International, Nalwa Steel and Jindal SAW. JSW International Tradecorp (JITPL) remains the main entity used by both JSPL and JSW Steel for bulk raw material purchases (iron ore, coking coal, coke and other raw materials). JSW Steel promoter’s wife Ms. Sangita Jindal owns >99% of shares in Reynold Traders of which JITPL is a wholly-owned subsidiary. JSPL routinely gets job work through Nalwa Steel (+48% YoY), but shows that in sales and purchases or receivables and payables - this should be ideally shown as job work only. AMBER
sutharshan.k@kotak.com 2021-09-22 Wednesday 09:45:43
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Exhibit 48: Related-party transactions (RPTs) increased materially in FY21
Particulars Rs mn As % of net worth As % of net revenue
FY19 FY20 FY21 FY19 FY20 FY21 FY19 FY20 FY21
Purchase of goods/services* 324,276 321,371 318,147 393,721 369,955 389,886
- Subs, Associates and JVs 2,154 4,120 6,558 1% 1% 2% 1% 1% 2%
- Enterprises controlled by KMP/their relatives 28,387 21,342 22,516 9% 7% 7% 7% 6% 6%
Sale of goods (inc capital goods)*
- Subs, Associates and JVs 587 900 21923.1 0% 0% 7% 0% 0% 6%
- Enterprises controlled by KMP/their relatives 31,427 19,852 20,881 10% 6% 7% 8% 5% 5%
Interest (Expense)/Income net
- Subs, Associates and JVs -3,841 -3,435 -2,848 -1% -1% -1% -1% -1% -1%
- Enterprises controlled by KMP/their relatives -443 -379 -144.7 0% 0% 0% 0% 0% 0%
Total 58,271 42,399 68,885 18% 13% 22% 15% 11% 18%
Source: Company, Ambit Capital Research
Exhibit 49: Purchases as % of COGS from related parties sharply increased from 19% FY20 to 27% in FY21 while sales as a % of turnover increased to 11% (8% in FY20)
Source: Company, Ambit Capital Research
Where do we go from here? JSPL has surprised positively on capital allocation, staying committed to its deleveraging goals and reducing net debt from Rs470bn pre-Covid to Rs140bn now (including acceptances, after cash receipts for JPL). While margins should decline hereon given higher raw material costs, JSPL should benefit from improvement in rebar-flat spreads and lower iron ore prices in 2HFY22. Capital intensity on Angul II is lower than that for peers; JSPL would turn into a flat-heavy producer. JSPL’s capex plan appears to be more measured (relative to TSL). We estimate JSPL would be able to meet its growth capex needs from internal cash generation. However, the company is now reaching under-levered status, and capital misallocation risks are high given the past record. Therefore, incremental RoIC could be lower. Litigation risks are higher given overhang of legal issues in the coal scam, thus sustained higher cost of equity. Remain SELLers with TP of Rs425 (4x EV/FY23E EBITDA).
Exhibit 50: Ambit vs consensus
Rs mn Ambit Consensus % deviation
Net Revenues
FY22E 446,074 467,467 -5%
FY23E 410,968 444,201 -7%
FY24E 432,156 452,402 -4%
EBITDA
FY22E 156,521 155,410 1%
FY23E 126,246 125,709 0%
FY24E 134,570 124,361 8%
Source: Ambit Capital research, Company
0%
5%
10%
15%
20%
25%
30%
FY16 FY17 FY18 FY19 FY20 FY21
% of purchases from related parties % of sales from related parties
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Exhibit 51: JSPL SOTP valuation post JPL divestment
Particulars FY23 EBITDA
(Rs mn) EBITDA
Multiple Value of
assets
JSPL Standalone 126,274 4.0 509,893
Overseas subsidiaries 0 4.0 0
Total 126,274 4.0 509,893
Add: CWIP @50%
10,000
Less: Net Debt
-87,803
Equity Value (Rs mn)
432,090
Shares Outstanding (mn)
1,020
JSPL FY22-end target price
424
Source: Company, Ambit Capital research
Ambit HAWK Framework JSPL features in D5 of our HAWK framework for forensic evaluation on account of higher contingent liabilities, higher CWIP, volatility in depreciation rate, higher advances to related-parties/CFO and aggressive accounting in terms of provisioning for debtors due for >180 days. A look at the company’s historical performance on our ‘HAWK’ Framework (refer Exhibit 51) suggests that after several years of being in the ‘Zone of darkness’, the company seems to have done well to move up to D5 from D10 on the back of improved CFO/EBITDA conversion, improvement in CWIP/gross-block ratio on completion of projects, lower expenses classified as miscellaneous in nature, lower advances to related parties and improved cash yields (though cash conversion still seems sub-par). However, note that CFO/EBITDA somewhat masks actual performance as the company books acceptances as current liabilities, while we view it as debt. Also, the related-party transactions are high and have increased in the current year.
Exhibit 52: Forensic Accounting Contributors
Source: Ambit Capital research
Exhibit 53: Forensic Score Percentile
Source: Ambit Capital research
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Exhibit 54: Forensic Score Evolution
Source: Ambit Capital research
Exhibit 55: Movement in accounting checks
Accounting Ratios FY19 FY20 FY21
Pre-tax CFO/ EBITDA 106% 123% 82%
Volatility in depn rates 146.1bps -203.5bps -53.8bps
PFD% for debtors > 6 months NA NA NA
Cash Yield 11% 11% 13%
Changes in Reserves/ (PAT ex-div.) 24% 41% 49%
Contingent Liab. As a % of Net Worth 23% 27% 29%
CWIP/ Gross Block 11% 7% 4%
Misc. exp. as a % of total revenues 3% 2% 2%
Adv. To related parties/ Cum. CFO 0.10% 0.30% 0.30%
Cum. FCF/ Median Revenues 37% 95% 134%
CAGR in auditor's remn/ CAGR in cons. rev.
-0.9 1.0 0.8
Source: Ambit Capital research
Exhibit 56: Greatness Score Contributors
Source: Ambit Capital research
Exhibit 57: Greatness Score Percentile
Source: Ambit Capital research
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Exhibit 58: Greatness Score Evolution
Source: Ambit Capital research
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Financials – Consolidated Income Statement (Rs bn)
Particulars FY18 FY19 FY20 FY21E FY22E FY23E FY24E
Net Sales 278 394 305 390 446 411 432
% growth 23% 41% -23% 28% 14% -8% 5%
EBITDA (excl. OI) 65 84 77 144 157 126 135
EBITDA Margin % 23% 21% 25% 37% 35% 31% 31%
% growth 39% 30% -8% 87% 8% -19% 7%
Depreciation 39 55 39 35 24 39 39
EBIT 26 29 39 115 134 88 96
EBIT Margin % 9% 7% 13% 30% 30% 21% 22%
Adj. PBT -13 -13 -3 84 116 73 82
PBT Margin % -5% -3% -1% 22% 26% 18% 19%
Adj. PAT -8 -2 -1 65 88 55 62
PAT Margin % -3% 0% 0% 17% 20% 13% 14%
% growth -57% -80% NM NM 36% -37% 13%
Reported PAT -14 -16 -2 53 88 55 62
EPS (x) -15 -16 -2 52 86 54 61
Source: Source: Ambit Capital research, Company
Balance Sheet (Rs bn)
Particulars FY18 FY19 FY20 FY21E FY22E FY23E FY24E
Shareholder's Equity 1.0 1.0 1.0 1.0 1.0 1.0 1.0
Other Equity 303 323 320 317 334 388 448
Net Worth 304 324 321 318 335 389 449
Borrowings 430 396 369 293 165 146 148
Total Liabilities 584 575 584 469 369 344 344
Net Fixed Assets 646 670 672 519 360 382 401
CWIP 50 40 31 17 12 11 9
Total Non-current assets 749 753 738 575 414 435 452
Cash & CE 2.6 2.0 5.6 60 91 110 155
Total current assets 141 140 157 203 283 291 333
Total Assets 892 896 897 778 698 725 785
Source: Source: Ambit Capital research, Company
Cash Flow Statements (Rs bn)
Particulars FY18 FY19 FY20 FY21E FY22E FY23E FY24E
Reported PBT -19 -28 -2.5 73 116 73 82
Depreciation 39 55 39 35 24 39 39
Changes in WC 10 4.7 15 -26.8 -21 6.1 -0.5
CFO 74 89 95 120 113 114 114
Net Capex -16 -12 -16 -8.4 -30 -60 -55
CFI -14 -8.3 -16 -18.8 1 -60 -55
Borrowings -30 -37 -39 -23 -65 -20 0
Interest paid -47 -46 -40 -23 -18 -15 -14
CFF -63 -83 -76 -46 -83 -35 -14
Closing cash bal. 2.6 2.0 5.6 60 91 110 155
FCF 11 31 39 89 95 39 45
Source: Source: Ambit Capital research, Company
sutharshan.k@kotak.com 2021-09-22 Wednesday 09:45:43
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Ratio Analysis
Particulars FY18 FY19 FY20 FY21E FY22E FY23E FY24E
EBITDA Margin 23% 21% 25% 37% 35% 31% 31%
Adj. ROE -3% -1% 0% 21% 28% 16% 15%
Pre-tax ROCE 3% 4% 5% 17% 23% 16% 17%
Interest Coverage Ratio 0.7 0.7 0.9 3.7 7.3 5.8 6.9
Pre-tax CFO/ EBITDA 115% 106% 123% 82% 86% 105% 100%
FCF/ Revenue 3.9% 8.0% 12.8% 22.7% 21.3% 9.5% 10.3%
CFO/Revenue 27% 23% 31% 31% 25% 28% 26%
Source: Ambit Capital research, Company
Valuation Parameters
Particulars FY18 FY19 FY20 FY21E FY22E FY23E FY24E
BV per share 325 319 315 312 328 381 440
Net Debt/ EBITDA (x) 6.8 4.9 5.0 1.7 0.6 0.4 0.1
EV/ Sales (x) 2.3 1.5 1.5 1.5 1.1 1.1 0.9
EV/ EBITDA (x) 10.0 6.9 5.9 4.1 3.3 3.5 3.0
EV/EBIT (x) 24.9 19.8 11.8 5.1 3.8 5.1 4.2
P/B (x) 0.7 0.6 0.3 1.3 1.2 1.0 0.9
P/E (x) -14.6 -11.1 -35.7 6.7 4.9 7.4 6.5
Source: Ambit Capital research, Company
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Jindal Steel & Power Ltd (JSP IN, SELL)
Source: Bloomberg, Ambit Capital research
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Jindal Steel & Power Ltd
AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
Explanation of Investment Rating - Our target prices are with a 12-month perspective. Returns stated are our internal benchmark
Investment Rating Expected return (over 12-month)
BUY We expect this stock to deliver more than 10% returns over the next12 month
SELL We expect this stock to deliver less than or equal to 10 % returns over the next 12 months
UNDER REVIEW We have coverage on the stock but we have suspended our estimates, TP and recommendation for the time being NOT
NOT RATED We do not have any forward-looking estimates, valuation, or recommendation for the stock.
POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
Note: At certain times the Rating may not be in sync with the description above as the stock prices can be volatile and analysts can take time to react to development.
Disclaimer This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital Private Ltd. Ambit Capital Private Ltd. research is disseminated and available primarily electronically, and, in some cases, in printed form. The following Disclosures are being made in compliance with the SEBI (Research Analysts) Regulations, 2014 (herein after referred to as the Regulations).
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AMBIT INSIGHTS
Ambit Capital Pvt Ltd 20 September 2021
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