Jindal Steel's Potential: Motilal Oswal Predicts 23% Upside

Latest News: Motilal Oswal Financial Services, a domestic brokerage, anticipates that Jindal Steel & Power Ltd (JSP) will experience growth and improved margins through its capacity expansion. The brokerage firm foresees the company seizing the opportunity presented by the escalating demand for domestic steel driven by the rapid expansion of infrastructure, railways, housing, and construction projects.

Motilal Oswal, a brokerage firm, expresses the belief that Jindal Steel & Power is strategically expanding its capacity at a crucial moment to leverage a promising growth opportunity. With its capacity expansion plans on the right track, the company is poised to transform into a prominent player in the steel industry, positioning itself as a mega steel producer.

According to the brokerage's report, Jindal Steel & Power (JSP) currently fulfills approximately 60% of its iron ore needs through captive mines. Once its thermal coal mines become operational, they will be able to fulfill 12-15 million tons of JSP's thermal coal requirements. This development is expected to result in significant cost reduction for the company, positioning JSP as one of the most cost-effective steel producers worldwide.

As per the report, Jindal Steel & Power's stock currently trades at a 4.5 times Enterprise value to EBITDA ratio for FY25E (earnings before interest, taxes, depreciation, and amortization). The brokerage has reiterated its 'buy' rating on the stock, setting a target price of ₹720, which suggests a 23% growth in value compared to the current market price of ₹583.

The brokerage anticipates an uptick in demand as customers rush to build inventory prior to the monsoon season. The demand is expected to strengthen further in the second half of the year. Additionally, improvements in steel prices are anticipated to contribute to better margins for Jindal Steel & Power.

As of FY23, the company's net debt stood at ₹67 billion, marking a reduction of approximately ₹27 billion from FY22. The net debt-to-EBITDA ratio (ND/EBITDA) is an impressive 0.7 times. Jindal Steel & Power boasts one of the lowest ND/EBITDA ratios in the steel industry and aims to maintain it below 1.5 times.

The brokerage firm highlights two primary reasons to consider investing in the stock. Firstly, the completion delay of the Angul plant and coal mines is identified as a key drawback that could potentially postpone growth and hinder margin improvement. Secondly, the brokerage emphasizes that any substantial write-off in international subsidiaries could impact the company's margins.

Jindal Steel & Power (JSP) is making significant strides to enhance its capacity and achieve growth targets. The company has initiated a ₹240 billion capital expenditure program aimed at expanding its crude steel capacity by 66% to 15.9 million tons and pellet capacity by 133% to 21 million tons by FY25. Remarkably, the capital expenditure per tonne stands at approximately USD 390, making it one of the lowest in the industry. This capacity expansion, coupled with margin improvement, instills confidence in JSP's growth prospects, as stated by the brokerage.

The brokerage report outlines several measures undertaken by JSP to raise margins and improve cost efficiency. These include the establishment of coal and iron ore mines to ensure a stable supply of raw materials and reduce costs, the construction of a 12 million ton pellet facility in Angul to increase pellet availability and lower freight expenses from Barbil, the implementation of an 18 million ton 200-kilometer slurry pipeline, the acquisition of power assets from Monnet Power in close proximity to the Angul facility to drive cost synergies, and the commissioning of the Angul facility. These strategic initiatives aim to bolster integration, streamline operations, and optimize cost structures for JSP.

Jindal Steel & Power (JSP) stands to benefit from robust domestic demand in India. In CY22, India demonstrated remarkable growth in crude steel production, with a year-on-year increase of 5.5% to nearly 125 million tonnes. India is emerging as a prominent global steel hub, fueled by the government's strong emphasis on infrastructure development, housing projects, construction activities, as well as the rising demand for automobiles and renewable energy, all of which are expected to drive domestic steel consumption.

According to the brokerage's report, India is on track to expand its crude steel capacity to 300 million tonnes by FY31, creating substantial room for further growth in steel consumption within the country. This positive outlook for the Indian steel industry bodes well for JSP's prospects, positioning the company to capitalize on the increasing demand and participate in the country's ambitious growth trajectory.

According to Rajesh Bhosale, an Equity Technical and Derivative Analyst at Angel One, Jindal Steel & Power's stock performance this year has seen a slight decline of 1%. However, in recent months, there has been notable upward momentum, with the stock experiencing a strong recovery of 15% from its May low of around 500.

Looking ahead, the overall outlook remains positive, with buying opportunities expected during price dips. The stock has a robust support level at 550, while the immediate resistance is anticipated around the 600-610 range. If the stock manages to surpass the 610 mark, it could trigger a significant rally in its price.

On Friday, Jindal Steel's share price on the BSE saw a decline of over 2%, trading at ₹569.65 per share.