SC Judgment can extend the steel producers’ worries despite promising performance of its core operational business
Jindal Steel and Power Limited (JSPL) is an industrial powerhouse with a dominant presence in steel, power, mining, oil and gas and infrastructure sectors in India. It is an Indian steel and energy company, having turnover of approx USD 3.3 billion and is a part of the USD 18 billion diversified Jindal Group conglomerate. The company produces economical and efficient steel and power through backward integration from its own captive coal and iron-ore mines and also from forward integration.
From the widest flat products to a whole range of long products, JSPL today has a product portfolio that caters to markets across the steel value chain. The company produces the world's longest 121-meter rails and it is the first in the country to manufacture large-size parallel flange beams.
In terms of tonnage, it is the third largest steel producer in India. The company manufactures and sells from sponge iron, mild steel slabs, ferro chrome, iron ore, mild steel, structural, hot rolled plates and coils to coal-based sponge iron plant. The company also manufactures long products in its state-of-the-art rail and universal beam mill (RUBM). JSPL is also a pioneer in manufacturing large-sized H-beams and columns for the infrastructure and construction sectors. The organization is backed by a highly driven and dedicated workforce of 15000 people and its business operations span across Asia, Africa and Australia.
The steel-major operates the largest coal-based sponge iron plant in the world and has an installed capacity of 3 mtpa (million tonnes per annum) of steel at Raigarh in Chhattisgarh. Additionally, it has set up a 0.6 mtpa wire rod mill and one mtpa capacity bar mill at Patratu, Jharkhand, a medium and light structural mill at Raigarh, Chhattisgarh and 2.5 mtpa steel melting shop and a plate mill to produce up to 5.00-meter-wide plates at Angul, Odisha. The company is commissioning a 3.2mtpa blast furnace at Angul that will uptick its domestic steel capacity to 8.5mtpa by 2019.
The SC verdict- an overhang on the steel-miners’ stock
The Supreme Court (SC) acting on Central Empowered Committee’s (CEC) recommendation has imposed 100 per cent penaltyon the miners’ total value of illegal extracts over the years. This decision came as some of the top players including Jindal Steel and Power have indulged in illegal mining activity such as mining iron and manganese ore from mines without forest and environment clearances, mining outside lease or permitted area and encroaching beyond the mining area in Odisha. The court has allowed Odisha government to recover up to 100 per cent of the value of illegally mined iron and manganese ore from erring players.
In addition, Sarda Mines Pvt ltd (Sarda), a long-term supplier of JSPL has been held liable for Rs 1940 crore which could potentially fall on JSPL as the CEC report also mentions Sarda’s mining lease is actually owned by JSPL in breach of Rule 37 of Mineral Concession Rules (MCR), 1960, despite the state government had given its yes for the arrangement between two entities.
In 2016, Odisha High Court has given its judgment in favour of JSPL. Even in the worst case scenario, Jindal Steel and Power is liable for the penalty on behalf of Sarda; the possibility to restart the mine and JSPL being allowed to lift fines lying at Sarda could reduce the financial risk to some extent.
Although the core business of the steel company remains intact and the financial risk could be partially mitigated if the company is allowed to lift fines, still SC’s decree will be an overhang on the stock. Moreover, an outflow of Rs 21 per share is likely to worsen the leverage and will be negative for cash flow in the short-term. It is very much required to keep tab on these developments.
Operational story intact
JPL's 2,400MW power plant is fully capitalized, however, it is operating at a low plant load factor (PLF) due to lack of power purchase agreement (PPAs), continues to remain a cause of concern. The company's international mining operations are being ramped up and are expected to contribute to deliver positive EBITDA in the forecast period due to high coal prices.
JSPL's growth for the next three years is likely to be driven by volume ramp up at the new 3.2mtpa furnace at Angul. However, there is a risk for the company that the increase in volumes at Angul is lower than expectations. At the current market price of Rs 142, the stock is trading at 5.6 times its expected 2019 EBITDA, which is at discount to other major domestic and global peers.
Apart from the Supreme Court’s ruling, the key risks for the steel-manufacturer are continued low utilisation at Jindal Power Ltd, sharp decline in steel prices and slowdown in commissioning of blast furnace at Angul.