Shares of Jindal Steel and Power Ltd (JSPL) have surged by 42% so far in 2022 on the NSE. It is also the top performer in the Nifty Metals index. The optimism is understandable. JSPL sources significant portion of coking coal requirement from its own mines and this places it in a relatively better position amid the rage in steel prices driven by the ongoing Russia-Ukraine war.
Note that coking coal is crucial for the production of steel and Russia is the third largest exporter of coking coal. “In the current scenario of elevated coking coal prices, JSPL has been able to start shipments from its Wollongong mines that can result in savings of up to $200m in FY23E (assuming the coal prices remain at current market price),” said analysts at Motilal Oswal Financial Services in a report on 23 March.
It is worth observing that steel is used across many industries and this could keep the demand outlook bright. The company expects steady domestic demand even at current price levels, point out analysts at Motilal Oswal. “The company does not expect any major demand destruction but believes there will be some demand deferrals due to the record high steel prices,” added the report. Further, the increased spend on infrastructure by the government of India would also aid demand.
Also, there are increased opportunities for JSPL in the export market especially in Europe as the latter imports heavily from Russia and the ongoing conflict has resulted in supply chain disruptions.
In this backdrop, cost benefits would aid earnings. “We have raised our target price to Rs605 (from Rs533) driven by an Ebitda uplift of 7%/35% for FY23E/FY24E, factoring in savings from captive coking coal from Australia and Mozambique. Australian mines have recently started production and the benefits will accrue to JSPL at the right time when coking coal prices are at the peak,” said the Motilal Oswal report. Ebitda is earnings before interest, tax, depreciation and amortization.
To be sure, a significant correction in coking coal prices in future could bite into the benefits that JSPL enjoys through its captive coking coal mines. For now, investors seem to be pricing in a good share of the gains in the current scenario, although this may cap meaningful upsides in the near-term.
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