Falling steel prices, subdued volume growth and rising iron ore prices took a toll on JSPL’s Q4FY15. Following continued capital spending and one-time penalties imposed by the Supreme Court of R3,250 crore, net debt increased to over R40,000 crore, a 24% increase over last year.
Over the last few years,JSPL’s net debt has nearly tripled as it embarked on a strategy to double steel capacity, triple the power capacity and backward integrate into mining outside India. Although the facilities are now largely commissioned, JSPL finds itself short of coal, iron ore, steel/power demand– all at a time when its debt-equity has almost reached two times.
Iron ore availability in India will increase as domestic mines recommence operations and JSPL’s proximity to coal mining areas might make it relatively easier on logistics, but operating the newly commissioned capacity at near full utilisation is a long time away. Until then, JSPL is focusing on cutting costs, reining in capital spending and waiting for the demand situation/mining in India to improve in the near future.
We cut our FY16-17e Ebitda estimates by 3-11% respectively following the lower than expected Q4FY15 earnings. Although the stock price has corrected sharply by 35% in the last three months, the impending challenges prevent us from being more constructive. With our revised fair value target price of R120 (7% downside), we retain our ‘hold’ rating.
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