JSPL top steel pick yet again, SAIL’s debt clouds prospects – ET Infra


MUMBAI: Jindal Steel and Power‘s (JSPL) strong balance sheet and prospects of a further improvement in profitability have analysts vouching for it as the steel sector‘s top pick yet again. They remain wary about state-owned peer SAIL given its high debt levels.

Both the steel majors announced earnings for the June quarter last week.

Most brokerage firms have raised the target price for shares of Jindal Steel and Power by 8-18% while retaining their ‘buy’ rating on the stock, which fell 5.2% to ₹662.25 on Monday.

Jindal Steel’s operating profit surpassed estimates helped by lower raw material costs and other operational efficiencies, while its debt levels fell to a 15-year low even after the company spent nearly ₹1,900 crore on capital expenditure during the quarter.

The company also got approvals for two of its coal mines – Utkal C and Gare Palma IV/6 – which are starting production by the next quarter, reducing the company’s input costs by as much as ₹1,000 per tonne.

Jindal Steel has four captive coal mines, which can fully meet its requirements, even when the company increases its production to around 16 million tonnes.

“With a strong balance sheet to support growth, increasing raw material security and low cost of production, JSP remains well positioned to withstand cyclical challenges…,” JM Financial Institutional Equities said.

SAIL‘s operating profit, meanwhile, fell short of estimates because of lower volumes and high input costs, while debt rose for the fifth consecutive quarter, even after a 72% surge in FY23.

The company’s net debt to operating profit ratio is currently at a little over three times, and Kotak Institutional Equities expects this to continue between 2024-26.

“As SAIL stands at the cusp of the next expansion phase, we see the risk of an extended period of high capex, negative FCF (free cash flow) and rising leverage,” the brokerage said in a note.

SAIL plans to raise its production capacity by around 10 million tonnes through a combination of brownfield and debottlenecking expansions. Its previous capacity expansion phase between 2010-20 saw the company’s net debt rise to ₹53,400 crore from a net cash position of ₹600 crore in FY10, the brokerage said.

Shares of SAIL are “fully priced” in, Motilal Oswal Securities said, expecting lower off-take to weigh on the company’s performance. SAIL shares 4.5% to ₹87 on Monday.

  • Published On Aug 17, 2023 at 12:14 PM IST

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