Jindal Steel & Power SELL

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 20 September 2021

Jindal Steel & Power A long way to go towards closing ESG gap with peers FY21 AR outlined details of capex plan and continued commitment to debt-free balance sheet target in the near term. Capex plan is measured and will be likely funded from internal accruals. JSPL is positioned to outperform its steel peers in 2HFY22 on: 1) narrowing rebar discount to flats, 2) lower exposure to third-party coking coal, 3) outperformance of convertors over integrated players. International assets turned EBITDA-positive in FY21; adjusted for acceptances, JSPL’s WC days remain longer vs peers. JSPL filed first integrated report and disclosed its Co2 emissions. However, higher prevalence of Coal-DRI/EAF means Co2 emissions are above peers, and JSPL will need to ramp up coke oven gas (COG) recycling to close gap. Depreciation rate remains more volatile, unclassified loans and advances high, while related-party transactions increased further. Board is populated by ex-civil servants and entertainment industry professionals. None of the members on audit committee have direct accounting or audit experience.

Balancing growth and deleveraging

JSPL outlined a Rs180bn capex program, including capex on iron ore making (BF, DRI), SMS (BoF, EAF), hot strip mill (HSM) and pellet plants. JSPL’s capex entails capital intensity of $350/t vs >$400/t for JSW and TSL on their brownfield projects. Currently, 70% of JSPL’s portfolio is geared towards longs. Post expansion, flats would constitute 60% of total product portfolio. JSPL’s capex plan is measured, it should be able to fund capex through internal accruals. JSPL has surprised positively on capital allocation, staying committed to its deleveraging goals. Debt free target (excluding acceptances) is in sight, although that would be sub-optimal capital structure.

Positioned to outperform peers in 2HFY22

JSPL is positioned to outperform its steel peers in 2HFY22, driven by: 1) narrowing of rebar discount to flats, 2) lower exposure to third-party coking coal and 3) back to convertor status. Rebar’s discount to flats typically narrows in 2H of the fiscal on improvement in construction activity. JSPL’s DRI plants use thermal and not coking coal. Also, start of Russel Vale coking coal mine in Australia should prove some protection. As such, at a time when coking coal prices have scaled to record high levels, JSPL has relatively lower exposure to coking coals and more to thermal coals vs peers. JSPL is returning to the merchant iron ore market at a time when iron ore prices have collapsed. Steel margins should hold up relatively better compared to iron ore in 2HFY22.

Acceptances mask WC cycle

Interest bearing acceptances are quasi-debt, but are included in accounts payable. As such, they mask true debt and working capital on the balance sheet. Adjusted for acceptances, JSPL has a shorter payable cycle and thus a longer WC cycle vs peers. Its cash conversion (CFO/EBITDA) dropped in FY21. JPL sale should drive Rs25bn reduction in book value of JSPL. International assets turned EBITDA positive in FY21, and may perform even better in FY22 on resumption of mining at Russel Vale.

Environment - A good start, but still a long way to go

JSPL filed its first integrated report and disclosed its environmental performance. Its Co2 emissions at 2.59 Co2/tcs are higher than that of peers through a function of higher share of coal-DRI/EAF in the production process (typically 20% higher Co2 emissions vs BF-BoF). JSPL needs to increase recycling of coke oven gas (COG) through partnership with Midrex, and close the Co2 and water consumption gap with peers. It should also disclose FY25/FY30 targets for environmental metrics.

SELL Quick Annual Report Analysis

Analysis

Meeting Note News Impact

Stock information

Bloomberg Code: JSP IN

CMP (Rs): 387

12m TP (Rs): 405

Mcap (Rs bn/US$ bn): 394/5.4

6M ADV (Rs mn/US$ mn): 5,063/68.9

Stock performance (%)

1m Chng

(%)

3m Chng

(%)

12m Chng

(%)

YTD Chng

(%)

Absolute (5.2) (0.5) 95.0 45.1

Relative to Sensex

(11.9) (13.2) 43.0 21.5

Source: Bloomberg, Ambit Capital research

Ambit Estimates

FY22E FY23E FY24E

Revenue 446 411 432

EBITDA 157 126 135


Research Analysts

Satyadeep Jain, CFA [email protected] Tel: +91 22 6623 3246

Jashandeep Chadha, CFA [email protected] Tel: +91 22 6623 3246

[email protected] 2021-09-22 Wednesday 09:45:43

mailto:[email protected]

AMBIT INSIGHTS


Composition of JSPL Board could be better for relevant industry or technical qualifications A board of directors is an elected group of individuals (nominated by the present board and promoters) that represent shareholders. There are two sets of shareholders in JSPL - promoters and minority. The only link we could come across between JSPL promoters and two of the new independent board members is a polo match. Although independent directors are nominated by the Nominations & Remuneration Committee (NRC), minority shareholders need to question if the current board is competent enough to serve/protect their interests. The rechristened board is populated with members who are either former civil servants or are from the entertainment industry. None of the members on the audit committee of JSPL have any direct accounting or audit experience. This is in sharp contrast to the board structure and experience at a company such as Tata Steel.

JSPL 2.0 – Balancing growth & deleveraging JSPL to double its steelmaking capacity by FY25

JSPL outlined a Rs180bn capex program, including capex on iron ore making (BF, DRI), SMS (BoF, EAF), hot strip mill (HSM) and pellet plants. Assuming Rs45bn investment on 5.5MT of HSM, we estimate JSPL is spending Rs160bn on 6.3MT of crude steel making/5.5MT of finished steel. This would translate into capital intensity of $350/t vs >$400/t for JSW and Tata Steel on their brownfield projects. 40% of iron ore making at Angul II would be through DRI. Management estimates 60% of heat requirement to be met by coke oven gas, higher than 40% at current syngas-based DRI at Angul. Brownfield projects at $400/t still generate IRR above cost of capital. 12MT of brownfield pellet plants would have low payback period and RoCE of almost 50%. Currently, 70% of JSPL’s portfolio is geared towards longs. Post the expansion, flats would constitute 60% of the total product portfolio.

Exhibit 1: Angul Phase II would help JSPL scale up its capacity to almost 16MT by FY25, assuming Angul CTO comes through for 1 MT

Source: Company, Ambit Capital research

Exhibit 2: JSPL to also expand its pellet capacity by 12MT by FY24


3.0

5

.6

1.0

3.3

3.0

15

.9

FY21 FY22 (P) FY24 (P) FY25 (P) FY25 (P)

MTP

A

Raigarh Angul Phase I

Ang

ul

CTO

Ang

ul

Phas

e II

Ang

ul

Phas

e II

9 9

15

21

6

6

FY21 FY22 (P) FY24 (P) FY24 (P)

MTP

A

Ang

ul

Phas

e II A

ngul

Ph

ase

II Barb

il

https://timesofindia.indiatimes.com/entertainment/events/delhi/sharmila-tagore-hosts-polo-match-in-delhi/articleshow/49593193.cms

AMBIT INSIGHTS


Exhibit 3: JSPL is predominantly a long steel producer…

Source: Company, Ambit Capital research estimates

Exhibit 4: …which is set to change post Angul II, with flats (HRC+plates) becoming almost 60% of the portfolio


Debt-free target well in sight, but that would be sub-optimal capital structure

JSPL has surprised positively on capital allocation, staying committed to its deleveraging goals and reducing net debt from Rs470bn pre-Covid to Rs140bn now (including acceptances, after cash receipts for JPL).

Exhibit 5: CFO has been the chief source of funds over FY18-21…


Exhibit 6: …which have been utilised mainly towards debt & interest payments


JSPL aims to become a debt-free company in the near future. JSPL should receive Rs30bn of cash from JPL sale in the next few months and therefore expect JSPL’s net debt (including acceptances) to drop to Rs83bn by FY22-end. The company’s FY22 growth capex is just 13% of its total Rs180bn project spend. We estimate JSPL would be able to meet these capex needs from internal cash generation. However, the company is now reaching under-levered status, and capital misallocation risks are high given the past record. Therefore, incremental RoIC could be lower.

Rail 9%

Structural 5%

Plate - Flat 30%

Rebar 20%

Wire Rod 8%

Billet 26%

Pig Iron 2%

Rail 6%

Structural 6%

Plate - Flat 20%

Rebar 17%

Wire Rod 9%

Billet 3%

Pig Iron 0%

HRC 39%

CFO 94%

Sale of Investment

1%

Interest received

1%

Increase in equity

3%

Exchange rate gains

1%

Sources of funds FY18-21

Debt Repayment

30%

Interest paid 37%

Net Capex 16%

Cash & Bank 17%

Application of funds FY18-21

AMBIT INSIGHTS


Exhibit 7: JSPL’s capital intensity for brownfield expansion at Angul is lower than that of its peers


Exhibit 8: Majority of the Rs180bn Angul Phase II expansion will occur in FY23-25


Exhibit 9: We expect JSPL to generate cumulative FCF of Rs178bn through FY22-24 after growth capex


Exhibit 10: Debt/equity should remain <0.5x in FY22-24, but ROE would drop below cost of equity in FY23-24

Source: Company, Ambit capital research Note: these debt maturities in table include those for JSIS Oman

Exhibit 11: JSPL’s target of <1.5x net-debt/EBITDA is achievable – we forecast <1x through FY24

Source: Company, Ambit capital research

$200

$250

$300

$350

$400

$450

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

JSPL-Angul II JSW Steel-Dolvi II Tata Steel-KPO II

$/t

MT

Capacity Capital Intensity (RHS)

24

47

43

41

25

FY22 FY23 FY24 FY25 FY26 & 27

(Rs bn) Angul Phase II: Capex Plan

(100)

(50)

0

50

100

150FY

12

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

FY1

9

FY2

0

FY2

1

FY2

2E

FY2

3E

FY2

4E

Rs

bn

Capex FCF (adj for interest paid)

-10%-5%0%5%10%15%20%25%30%

0.00.20.40.60.81.01.21.41.61.8

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

FY1

9

FY2

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FY2

1

FY2

2E

FY2

3E

FY2

4E

Debt/Equity ROE (RHS)

0

2

4

6

8

10

12

14

0

100

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400

500

FY1

3

FY1

4

FY1

5

FY1

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FY1

7

FY1

8

FY1

9

FY2

0

FY2

1

FY2

2E

FY2

3E

Rs

bn

Net debt Net debt/EBITDA (x) (RHS)

AMBIT INSIGHTS


Exhibit 12: Net debt should drop to Rs50bn (including acceptances) by FY23-end


Possibility of outperformance in 2HFY22 JSPL is positioned to possibly outperform its steel peers in 2HFY22, driven by:

Narrowing of rebar discount to flats - Rebar prices are trading at a record high discount to flats at present. Both rebar and cement tend to perform well in 2H on pick-up in construction activity post monsoon. Rebar’s discount to flats, therefore, typically narrows in 2H of the fiscal.

Lower exposure to third-party coking coal - Steel-making is comprised of two different processes: 1) iron making and 2) steelmaking. For JSPL, coal-DRI accounts for 35% of iron making capacity. DRI typically requires 1.1t of thermal coal per tonne of steel production. While DRI capacity likely operated at 70% capacity in FY21, its capacity utilization should pick up in 2HFY22. Its CPPs also consume 7-8MT of thermal coal. The Russel Vale coking coal mine in Australia also kicked off production lately and is expected to provide 1.2MT annual supply at arms-length price. Therefore, compared to peers, JSPL is less exposed to coking coal and more to thermal coal. While both thermal and coking coal prices should trade higher in 2HFY22 vs 1HFY22, it is coking coal that is outperforming thermal coal. Compared to peers, JSPL is less exposed to record-high coking coal prices at present.

Back to convertor status - JSPL exhausted its 12.2MT Sarda iron ore inventory in 1QFY22. The Sarda iron ore inventory insulated JSPL from record high iron ore prices of >$150/t during FY21 and 1QFY22. JSPL is returning to merchant iron ore market at a time when iron ore prices have collapsed from >$200/t to <$130/t. Steel conversion margins should also moderate in 2HFY22, but should hold up relatively better compared to the steep fall in iron ore prices.

305 222

63 25 0

24

28

25 25

25

54

0

1

2

3

4

5

6

0

100

200

300

400

FY2

0

FY2

1

FY2

2E

FY2

3E

FY2

4E

Net

Deb

t/EB

ITD

A (x)

Rs

bn

Legacy Debt AcceptancesOman Net debt/EBITDANet debt/EBITDA (ex Oman)

AMBIT INSIGHTS


Exhibit 13: DRI comprises 35% of iron making capacity for JSPL, but since Angul DRI operated at <50% utilization in FY21, coal-DRI route accounted for 29% of production mix

Source: Company, Ambit capital research estimates

Exhibit 14: JSPL consumed 12.6MT of coal (for steelmaking) in FY21 – coal-DRI doesn’t need coking coal, therefore compared to peers, JSPL is less exposed to coking coal


Exhibit 15: JSPL to return to merchant iron market after iron ore price correction


Exhibit 16: Rebar discount tends to narrow in 2HFY on pick-up in construction activity


Use of acceptances mask actual WC cycle JSPL saw improvement in receivable days (9 days) and inventory days (19 days), offset partly by lower creditor days (20 days), which led to an improvement (10 days) in the cash conversion cycle (42 days in FY21 vs 52 days in FY20). However, JSPL has the longest WC cycle amongst majors despite the use of acceptances.

Exhibit 17: JSPL and JSW Steel working capital days masked to some extent by use of acceptances for working capital financing

Company Working capital days

FY16 FY17 FY18 FY19 FY20 FY21

Tata Steel 48 46 52 49 51 40

JSW Steel -10 -1 6 15 15 9

JSPL 61 38 33 32 52 42

Average 33 28 30 32 39 31

Source: Company, Ambit Capital Research. Note: (a) Above financials are on consolidated basis, (b) Calculated on revenue and year end averages

BF 71%

DRI 29%

FY21 iron making split

coking coal 25%

thermal coal for

DRI 17%

thermal coal for

CPPs 58%

FY21 coal consumption-12.6MT

2.8 2.6 2.5 2.7 2.7 2.7 1.1

9.6

1.5 0.0

9.4 9.0

2.8

9.1 13.0 14.5

-1

1

3

5

7

9

11

13

15

FY1

9

FY2

0

FY2

1E

FY2

2E

FY2

3E

FY2

4E

MT

Tensa Sarda Third party sourcing

-5%

0%

5%

10%

15%

20%

25%

30%FY

16

FY1

7

FY1

8

FY1

9

FY2

0

FY2

1

FY2

2

HR

C p

rem

ium

ove

r R

eb

ar 1H 2H


AMBIT INSIGHTS


Exhibit 18: JSPL’s WC days improved in FY21 as lower inventories and receivables more than offset lower payable days

Company Average inventory days Average debtor days Average creditor days

FY17 FY18 FY19 FY20 FY21 FY17 FY18 FY19 FY20 FY21 FY17 FY18 FY19 FY20 FY21

Tata Steel 70 73 69 82 75 36 33 28 26 20 61 53 49 56 55

JSW Steel 60 61 58 71 64 21 23 26 29 21 82 77 69 85 76

JSPL 55 56 53 77 58 25 23 23 39 30 42 47 44 65 45

Average 62 63 60 77 66 27 26 25 31 24 62 59 54 69 59


JSPL includes some of the interest-bearing acceptances in trade payables (similar to JSW Steel). The presence of these acceptances does not provide a fair picture of the WC control the company has applied. For instance, absent acceptances, creditor days would have been 21 days in FY21 (vs 45 days as per JSPL accounts), and working capital days would have been 66 days in FY21. On an ex-acceptance basis, the WC cycle improved by 12 days. Though JSPL’s use of acceptances (6-7% of total sales) is lower than that for JSW Steel (15-20% of total sales), aggressive accounting for these interest-bearing liabilities by JSPL and JSW Steel in their books masks actual WC and hence CFO/EBITDA performance.

Exhibit 19: JSPL increasing reliance on operating and capital acceptances; we treat these as WC financing/debt


Exhibit 20: JSPL and JSW Steel working capital days substantially higher after adjusting for interest-bearing acceptances present in trade payables

Company Working capital days


Tata Steel 48 46 52 49 51 40

JSW Steel 77 56 55 56 65 51

JSPL 73 52 47 48 78 66

Average 66 51 51 51 65 52


Exhibit 21: JSPL and JSW Steel creditor days increase significantly after adjusting for interest-bearing acceptances present in trade payables

Company Average inventory days Average debtor days Average creditor days

FY17 FY18 FY19 FY20 FY21 FY17 FY18 FY19 FY20 FY21 FY17 FY18 FY19 FY20 FY21

Tata Steel 70 73 69 82 75 36 33 28 26 20 61 53 49 56 55

JSW Steel 60 61 58 71 64 21 23 26 29 21 25 29 28 35 34

JSPL 55 56 53 77 58 25 23 23 39 30 29 33 28 38 21

Average 62 63 60 77 66 27 26 25 31 24 38 38 35 43 37


2%

3%

4%

5%

6%

7%

8%

9%

0

5

10

15

20

25

30

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

FY1

9

FY2

0

FY2

1

Rs

bn

Acceptances Acceptances as % of turnover (RHS)

AMBIT INSIGHTS


Exhibit 22: While Tata Steel reported a stellar improvement in cash conversion, both JSPL and JSW reported <100% cash conversion in FY21

Source: Company, Ambit Capital Research

Loss on sale of JPL asset to drive equity write-down JSPL had Rs60bn of equity value for JPL in the books at the end of FY21. Shareholders recently approved the divestment of JPL to promoter-entity Worldone for Rs94bn (Rs30bn cash, assumption of Rs64bn of net debt and cancellation of RPS and inter-company loans). JSPL’s FY21 balance sheet included Rs30bn as discounted value for non-convertible redeemable preference shares (RPS) issued by JPL, Rs44bn for inter-company loans and Rs9bn as investments in JPL. After adjusting for all these, we expect Rs25bn reduction in book value for JSPL as a result of JPL divestment.

Exhibit 23: We expect Rs25bn reduction in JSPL’s book value post the completion of JPL divestment to promoter entity Worldone

Net assets FY17 FY18 FY19 FY20 FY21

Parent

JSPL 218 228 225 237 326

Indian subsidiaries

JPL 118 111 106 104 61

Hydro-electric assets 4 4 6 7

Foreign subsidiaries

JSPML -1 -5 -8 -17 -4

Jindal (BVI Ltd) 11 11 6 6 6

JSPL Mozambique Minerais LDA -4 -4 -4 -5 -6

Shadeed Iron & Steel L.L.C 20 28 76 81 0

Wollongong Coal Limited -3 -6 -19 -13 -5

Jindal Steel Bolivia SA @ 0 5 5 5 5

Minority Interest in all Subsidiaries 6 4 -3 -8 -9

Consolidation Adjustments/Elimination -78 -78 -66 -73 -47

others 10 6 0 -4 -10

Total Equity 301 304 324 321 318

Source: company, Ambit capital research

After write-down, JSPL’s book value should still improve to Rs375/share by FY22-end and Rs425/share by FY23-end. ROE should improve to 26% in FY22, but moderate to 14% in FY23-24E.

17

9%

74

%

50

% 10

4%

12

8%

15

7%

13

7%

14

1%

11

5%

10

6%

10

6%

82

%

99

%

63

%

93

%

90

%

11

2%

76

%


Pre

-ta

x C

FO a

s a

% o

f EB

ITD

A

TATA JSPL JSW

AMBIT INSIGHTS


Exhibit 24: ROE should improve in 1FY22 on record high profitability, but drop below cost of equity in FY23-24 despite book value reduction


Exhibit 25: Despite reduction due to JPL divestment, book value should increase on higher profitability


International assets turned EBITDA positive in FY21 Coal assets in Mozambique and South Africa continued to ramp up production in FY21. Coal production of the former increased 29% YoY while the latter witnessed a 43% YoY jump. These assets contributed $12.3mn EBITDA in FY21. Despite that, JSPL reported just $9.7mn EBITDA from other business (ex-JPL). We believe some of the African EBITDA would have been offset by losses incurred in Australian coal assets. Wollongong and Russell Vale mines in New South Wales, Australia remain under care and maintenance. These assets could account for $2.56mn EBITDA loss in FY21. Reports indicate JSPL has started producing coking coal at Russel Vale mines in Australia, which should boost its profitability given record high coking coal prices at present.

Exhibit 26: EBITDA from international assets turned positive first time since FY17 despite drag from Australian assets


-10%-5%0%5%10%15%20%25%30%

0.00.20.40.60.81.01.21.41.61.8

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

FY1

9

FY2

0

FY2

1

FY2

2E

FY2

3E

FY2

4E

Debt/Equity ROE (RHS)

0

100

200

300

400

500

600

0.0

0.5

1.0

1.5

2.0

2.5

3.0

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

E

FY23

E

FY24

E

P/B Bookvalue per share (RHS)

-3.1

-6.3

-0.1

0.8

-3.7

-0.4

-2.9

0.7

-7

-6

-5

-4

-3

-2

-1

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1

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FY1

4

FY1

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9

FY2

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FY2

1

Rs

bn

AMBIT INSIGHTS


ESG Analysis- A long way to go JSPL falls short of peers in all the aspects of ESG, specifically environment and governance.

Environment JSPL has just started to disclose key environment metrics while its peer Tata Steel has been rated A- for its environmental disclosures by CDP (carbon disclosure project). JSPL has stated its intentions to monetise its international thermal coal assets in Africa in a bid to reduce its carbon footprint. While it is a step in the right direction, we believe JSPL should also focus on its steel making business as its CO2 emissions are the highest amongst the majors (Tata Steel and JSW Steel). The company also has the highest water consumption. However, it scores well on lower energy intensity, largely due to efficient DRI process, waste disposal disclosures and zero liquid discharge. JSPL has increased the use of byproduct gas from 12% to 20% in FY21.

Exhibit 27: JSPL had the highest Co2 emissions in FY21 amongst peers

Year Unit FY16 FY17 FY18 FY19 FY20 FY21

Tata Steel tCO2/tcs 2.30 2.29 2.38 2.35 2.31 2.32

Standalone

TS Netherlands tCO2/tcs 1.74 1.84 1.90 1.87 1.86

TSUK tCO2/tcs 1.80 2.12 2.18 2.21 2.22

TSE Consolidated tCO2/tcs 1.93 1.93 1.99 1.98 1.98 1.97

JSW Steel tCO2/tcs 2.56 2.44 2.59 2.75 2.52 2.49

JSPL tCO2/tcs

2.63 2.59

POSCO tCO2/tcs 1.91 1.88 1.90 1.92 1.94

ArcelorMittal tCO2/tcs 2.14 2.14 2.11 2.12 2.11 2.08

Voestalpine tCO2/tcs 1.61 1.64 1.60 1.69

SSAB tCO2/tcs 1.39 1.39 1.38 1.36 1.41

Nucor tCO2/tcs 0.86 0.86 0.89 0.91 0.93 0.93

US Steel tCO2/tcs 2.38 2.28 2.29 2.31 2.39

Nippon Steel tCO2/tcs 2.02 1.99 2.01 2.02

Global Avg. tCO2/tcs 1.91 1.88 1.91 1.94 2.02 2.06

Source: Ambit capital research, company reports

Exhibit 28: Use of coke oven gas reduces energy requirement – lowest in India


Tata Steel Gcal/tcs 5.77 5.67 6.04 5.83 5.78 5.76

Standalone

TS NED Gcal/tcs 4.68 4.66 4.78 4.73 4.69

TSUK Gcal/tcs 5.07 5.47 5.64 5.78 5.69

TSE Consolidated Gcal/tcs 4.83 4.95 5.07 5.07 5.02

JSW Steel Gcal/tcs 7.71 6.29 6.59 6.25 6.57 6.38

JSPL Gcal/tcs

5.18 5.22

POSCO Gcal/tcs 6.05 2.27 2.26 2.27 2.46

ArcelorMittal Gcal/tcs 5.78 5.74 5.74 5.74 5.78 5.83

Voestalpine Gcal/tcs 4.14 4.18 4.11 4.17

SSAB Gcal/tcs 0.95 0.97 0.99 1.01 1.03

Nucor Gcal/tcs 1.21 1.17 1.2 1.22 1.23 1.26

US Steel Gcal/tcs

Nippon Steel Gcal/tcs 5.59 5.52 5.59 5.62

Global Avg. Gcal/tcs 4.67 4.08 4.18 4.13 4.13 4.89


Exhibit 29: JSPL’s water consumption is the highest amongst Indian peers and no target for reduction is given


Tata Steel Standalone m3/tcs 4.39 3.83 3.93 3.5 3.11 2.70

TS NED m3/tcs 4.49 4.64 4.95 4.96 4.93

TSUK m3/tcs 6.98 6.07 4.48 6.03 6.53

TSE Consolidated m3/tcs 5.44 5.12 4.79 5.29 5.43

JSW Steel m3/tcs 4.52 4.57 4.13 3.79 2.6 2.41

JSPL m3/tcs

2.87 2.93

POSCO m3/tcs 4.09 4.12 3.77 3.69 3.74

ArcelorMittal m3/tcs 5.3 5 3.9 3.9 2.3 2.4


Exhibit 30: Although air emissions are disclosed, JSPL does not disclose dust emissions

Year Unit FY17 FY18 FY19 FY20 FY21

Tata Steel Standalone kg/tcs 0.44 0.46 0.42 0.39 0.34

TS NED kg/tcs 0.28 0.28 0.26 0.28

TSUK kg/tcs 0.48 0.57 0.64 0.57

TSE Consolidated kg/tcs 0.34 0.38 0.38 0.38

JSW Steel kg/tcs 1.06 0.99 0.98

POSCO kg/tcs 0.09 0.09 0.08 0.09

ArcelorMittal kg/tcs 0.67 0.67 0.61 0.63 0.64


AMBIT INSIGHTS


Exhibit 31: BF share to increase >70% in FY5 before falling to <65% as 2.7MT DRI gets commissioned in FY25


Exhibit 32: DRI expansion to be complimented by a 3MT EAF expansion in FY25; BOF to grow by 3.3MT in FY24


Coal-DRI accounts for 35% of JSPL’s steelmaking capacity. This production method generates the highest Co2 emissions, typically 20% above BF-BoF. While JSPL has roped in Midrex Technologies for syngas and COG (coke oven gas) recycling through its patented technology, this technology has apparently not helped JSPL reduce its DRI emissions below that for typical BF-BoF processes yet. Peers are using CDQ (coke dry quenching) for coke oven gas recycling, though Midrex claims its technology can help recycle and re-use much higher coke over gas. We will have to see if JSPL can ramp up coke oven gas recycling above 20% achieved in FY21, and lower Co2 emissions to levels seen for BF-BoF. JSPL has also not disclosed its FY25 and FY30 Co2 targets.

Exhibit 33: Coal-DRI/EAF route (36% of JSPL’s capacity mix) accounts for the highest Co2 emissions – 20% higher than typical BF/BoF route

Source: BHP Billiton, European Parliamentary Research Service, Ellis & Bao, 2020, Company

33% 33% 33% 23%

36%

67% 67% 67% 77%

64%

FY21 FY22 FY23 FY24 FY25

Ca

pa

city

sh

are

(%

)

DRI BF

68% 71% 71% 79% 64%

32% 29% 29% 21% 36%

FY21 FY22 FY23 FY24 FY25

Ca

pa

city

sh

are

(%

)

BOF EAF

0.0 0.5 1.0 1.5 2.0 2.5

Scrap/EAF

NG-DRI/EAF

Global Average

BF/BoF

Coal-DRI/EAF


AMBIT INSIGHTS


Exhibit 34: JSPL uses Midrex gasifier that turns coal into syngas – syngas is potentially more efficient than direct combustion of coal

Source: Midrex, Company Ambit Capital research

Exhibit 35: Midrex’s TRS® allows production of DRI with a variety of fuels, including coke oven gas

Source: Midrex, Company Ambit Capital research

Exhibit 36: Unlike peers, JSPL hasn’t disclosed its FY25/FY30 Co2 targets


Exhibit 37: While TSL leads the water conservation race – JSPL hasn’t started


Exhibit 38: JSPL does not even provide full disclosure of current dust emissions


Governance/accounting Within the Indian steel industry, JSPL has followed the most aggressive and volatile depreciation policy over the past few years. Unclassified loans & advances as a % of net-worth decreased slightly in FY21, but remain the highest in the industry. The only green spot is miscellaneous expenses as a % of sales; these improved and were lower than those for TSL and JSW Steel.

Volatility in depreciation rate: JSPL’s depreciation rate has been the most volatile amongst its Indian steel peers. JSPL’s depreciation policy has been the most aggressive in the industry over the past few years. RED

Exhibit 39: Depreciation rate for JSPL has been relatively volatile vs its peers; the company had a 53.8bps decrease in depreciation rate in FY21

Company Depreciation Rate % Change (bps)

FY17 FY18 FY19 FY20 FY21 FY17 FY18 FY19 FY20 FY21

Tata Steel 4.6% 4.3% 4.5% 4.4% 4.5% 5.6bps -31.5bps 22.5bps -8.5bps 6.6bps

JSW Steel 5.3% 4.9% 5.5% 5.3% 5.5% -16.9bps -39.1bps 50.4bps -17.7bps 21.6bps

JSPL 5.2% 4.7% 6.2% 4.2% 3.6% -41.1bps -44.8bps 146.1bps -203.5bps -53.8bps

Average 5.0% 4.7% 5.4% 4.6% 4.5% -17.5bps -38.5bps 73.bps -76.6bps -8.5bps

Source: Company, Ambit Capital Research. Note: (a) Above financials are on consolidated basis. (b) Above is calculated as a % of average gross block

2.3

2

2.4

9

2.5

9

<2

.0

<1

.8

<1

.95

Tata Steel JSW Steel JSPL

CO

2 e

mis

sio

n

targ

ets

t C

O2

/tcs

FY21 FY25 FY30

2.7

2.4

1

2.9

3

2.0

<

1.5

2.4

1

Tata Steel JSW Steel JSPLWa

ter

con

sum

pti

on

ta

rgets

m3

/tcs

FY21 FY25 FY30

0.3

4

0.4

8

0.4

0.2

8

Tata Steel JSW Steel JSPL

Du

st e

mis

sio

n

targ

ets

kg

/tcs

FY21 FY25 FY30

AMBIT INSIGHTS


Miscellaneous expenses as a % of revenues were 1.7% in FY21. Slight improvement in FY21; remains significantly lower than those for Tata Steel. GREEN

Exhibit 40: Miscellaneous expenses as % of revenues remain well below that for TSL and JSW Steel

Company Miscellaneous expenses as % of revenues


Tata Steel 2.33% 4.46% 4.16% 4.12% 6.42% 5.80%

JSW Steel 1.44% 1.20% 1.80% 1.82% 2.56% 2.51%

JSPL 3.02% 2.49% 2.08% 1.87% 1.89% 1.66%

Average 2.26% 2.72% 2.68% 2.60% 3.62% 3.32%


Unclassified loans and advances as a % of net worth declined slightly to 8.2% in FY21. JSPL has by far the largest exposure to this amongst its peers. RED

Exhibit 41: Unclassified loans & advances as a % of net worth is highest for JSPL among key steel manufacturers in India

Company Unclassified loans & advances as % of net worth Unclassified loans & advances (Rs mn)

FY17 FY18 FY19 FY20 FY21 FY17 FY18 FY19 FY20 FY21

Tata Steel 4.75% 3.85% 5.38% 3.74% 3.85% 15,807 17,976 23,432 37,089 27,538

JSW Steel 1.81% 1.40% 1.38% 1.90% 1.03% 4,100 3,910 4,790 6,970 4,830

JSPL 14.00% 10.98% 7.40% 9.09% 8.19% 42,066 33,368 23,986 29,216 26,056


JSPL doesn’t fare well on contingent liabilities, board rotation, and managerial and auditor remuneration. Related-party transactions (RPTs) increased further in FY21.

Contingent liabilities: Contingent liabilities as a % of net worth increased to 29% in FY21 (vs 27%) in FY20. These are higher than that for Tata steel (25% in FY21). RED

Exhibit 42: Contingent liabilities increased in FY21 on higher guarantees and disputes statutory and other demands

Contingent liabilities In Rs mn As % of Net Wort As % of Net Revenue

FY19 FY20 FY21 FY19 FY20 FY21 FY19 FY20 FY21

Guarantees and undertakings

324,276 321,371 318,147 393,721 369,955 389,886

Guarantees issued by the Company's Bankers on behalf of the Company

12,522 20,314 20,949 4% 6% 7% 3% 5% 5%

Corporate guarantees/undertakings issued on behalf of third parties

1,921 2,293 2,237 1% 1% 1% 0% 1% 1%

Demand/Litigations 0% 0% 0% 0% 0% 0%

Disputed Statutory and Other demands 30,143 37,595 39,725 9% 12% 12% 8% 10% 10%

Income Tax demands where the cases are pending at various stages of appeal with the appellate authorities

19,071 17,396 18,128 6% 5% 6% 5% 5% 5%

Bonds executed for machinery imports under EPCG Scheme

2,082 421 263.6 1% 0% 0% 1% 0% 0%

Commitments 0% 0% 0% 0% 0% 0%

Estimated amount of contracts remaining to be executed on capital account and not provided for (net of advances)

9,144 9,232 10,941 3% 3% 3% 2% 2% 3%

Total 74,883 87,251 92,242 23% 27% 29% 19% 24% 24%


Auditor Rotation - Long association with company/management can impede an auditor’s independence. Lodha has been the auditor for JSPL since FY17, and got re-appointed for another 5 years. Also, auditor remuneration over the last five years recorded 26% CAGR, ahead of 16% CAGR in revenues. RED

AMBIT INSIGHTS


Exhibit 43: Lodha & Co. was re-appointed as the auditor of Jindal Steel & Power for another 5 years

Company Auditor Since

Tata Steel PWC FY18

JSW Steel M/s S R B C & Co LLP FY18

JSPL M/s Lodha & Co. FY17

Source: Company, Ambit Capital Research.

Exhibit 44: Over FY17-21, auditor’s remuneration increased sharply (26% CAGR) on sharp jump in certification and other charges in FY20 & FY21; revenue CAGR was 16%

Payment to Statutory auditors FY17 FY18 FY19 FY20 FY21 FY17-21

Statutory audit fees 9 9 10 10 10 3%

Certification & other charges 2 8 4 14 18.9 75%

Reimbursement of expenses 1 0 1 0 1.2 5%

Total 12 17 15 24 30.1 26%

growth % -33% 42% -12% 60% 25%

Revenue 147,168 155,025 175,230 277,304 262,283 16%

growth % 5% 5% 13% 58% -5%

Source: Company, Ambit Capital Research. Above analysis is on standalone basis

Board independence and independent directors’ rotation: JSPL’s current board constitutes ten members, of which six are independent. The board meets the criteria of at least 50% independence without an independent director as chairman. Although independent directors are nominated by the Nominations & Remuneration Committee (NRC), minority shareholders need to question if the current board is competent enough to serve/protect their interests. Most of the independent directors are retired civil servants or are from the entertainment industry. None of the members of JSPL’s audit committee have any direct accounting or audit experience. Unlike JSPL, the committees of both JSW and Tata Steel are filled with highly experience individuals. Most of the independent directors at JSW and Tata Steel have either experience in the steel/mining industry or have served vast number of years in areas of management, leadership, finance, etc. RED

AMBIT INSIGHTS


Exhibit 45: 50% of JSPL’s independent directors (IDs) are ex-civil servants while 80% of the IDs have no experience in business management. This is in sharp contrast with the highly experienced IDs of JSW Steel and Tata Steel

JSPL JSW Steel Tata Steel

Independent Director

Experience & Qualification Independent

Director Experience & Qualification


Experience & Qualification

Mr. Bhaskar Chatterjee

Former IAS - Secretary to the Government of India, Department of Public Enterprises, Ministry of Heavy Industries & Public Enterprises; Principal Secretary, Steel and Mines, Govt. of Odisha Post Graduate in History, M.Phil, M.B.A., Ph.D. & LLB

Mr. Malay Mukherjee

40+ years of experience in mining and steel industry Master's in Mining, USSR State Commission, Moscow; B.Sc, IIT Kharagpur

Ms. Mallika Srinivasan

36+years of experience, Current Chairman and CEO of TAFE IIM Lucknow, Wharton School of Business

Mr. Sunjay Kapur

~18 years of experience in the automotive component industry BBA, University of Buckingham, UK

Mr. Halgerve Khaitan

26+ years of experience, Senior Partner at Khaitan & Co and heads the Firm’s Corporate / M&A and Private Equity practice LL.B. (Honours), South Kolkata Law College, Kolkata

Mr. O. P. Bhatt

Been the Chairman, SBI Group - which includes the State Bank of India, five associate banks in India, five overseas banks M.A. in Eng. Literature from Meerut University

Mrs. Shivani Wazir Pasrich

Activist and promoter of art, former Miss India Worldwide and a classical dancer Economics Honours, Lady Shri Ram College, Delhi Graduate, Faculty of Law, Delhi

Mr. Seturaman Mahalingam

Former CFO & Exec Director, TCS Global CA

Dr. Peter Blauwhoff

30+ years of experience in the energy industry, in particular the downstream oil and gas business Doctorate in Technical Sciences

Mr. Anil Wadhwa Former IFS - Secretary (East) in the Ministry of External Affairs of India

Dr. (Mrs.) Punita Kumar Sinha

20+ years of experience in fund management B.E, Chemical, IIT New Delhi; Master & PhD in Finance, Wharton School, University of Pennsylvania; MBA and CFA

Mr. Aman Mehta

Former HSBC Asia-Pacific CEO Graduation from Delhi University *( retired on 31st Aug’21)

Dr. Aruna Sharma

Former IAS - Secretary - Steel, Government of India Master degree in Development Studies, University of Bath, UK PhD in Development Economics, Delhi University

Ms Nipurama Rao

40+ years of diplomatic career M.A (English), Marathwada University; and Doctor of Letters (Honoris Causa), Pondicherry Unversity

Mr. Deepak Kapoor

30+ years of experience, former Chairman of PwC India FCA, FCS, ICFE (USA)

Ms. Kanika Agnihotri

~20 years of experience as a lawyer Graduate, Govt. College for Girls, Chandigarh LLB, Panjab University

Mr. Harsh Mariwala

30+ years of experience in consumer products and service industry B.Com., Sydenham College of Commerce and Economics, University of Mumbai


Mr Prithvi Haldea, a leading authority on Indian capital markets and corporate governance in India, and founded-chairman of Prime database, has some interesting observations on independence of board members in Indian companies:

The Nomination and remuneration committees in reality often recommend only such persons as are suggested to them privately by promoter. Home directors (friends, school/college mates, ex-colleagues, relatives (not covered by definition), neighbours, etc) are omni-present in Indian boards.

Retired bureaucrats are often not appointed for their domain expertise. They are appointed by companies so that their voices can be heard in the power corridor.

High majority of ‘value directors’ are retired people, who are significantly dependent on the ID remuneration, thus, becoming dependent independent directors.

Many independent directors typically have no forensic skills, and many do not even have deep knowledge of finance.

https://www.financialexpress.com/opinion/myth-of-independent-directors-they-can-only-be-effective-if-they-are-independent-of-promoters/2104809/

https://www.financialexpress.com/opinion/myth-of-independent-directors-they-can-only-be-effective-if-they-are-independent-of-promoters/2104809/

AMBIT INSIGHTS


Exhibit 46: None of the members of audit committee at JSPL have audit or accounting experience, a sharp contrast to that for JSW and especially TSL

JSPL JSW Steel Tata Steel


Experience & Qualification Independent

Director Experience & Qualification


Experience & Qualification

Mr. Bhaskar Chatterjee

Former IAS - Secretary to the Government of India, Department of Public Enterprises, Ministry of Heavy Industries & Public Enterprises; Principal Secretary, Steel and Mines, Govt. of Odisha Post Graduate in History, M.Phil, M.B.A., Ph.D. & LLB

Mr. Seturaman Mahalingam

42+ years of experience, Former CFO & Exec Director, TCS Global Chartered Accountant

Mr. O. P. Bhatt

Been the Chairman, SBI Group - which includes the State Bank of India, five associate banks in India, five overseas banks M.A. in Eng. Literature from Meerut University

Mrs. Shivani Wazir Pasrich

Activist and promoter of art, former Miss India Worldwide and a classical dancer Economics Honours, Lady Shri Ram College, Delhi Graduate, Faculty of Law, Delhi

Mr. Malay Mukherjee

40+ years of experience in mining and steel industry Master's in Mining, USSR State Commission, Moscow; B.Sc, IIT Kharagpur

Mr. Aman Mehta

40+ years of experience, former CEO of HSBC Group (Asia Pacific) Graduation from Delhi University *retired on 31st Aug’21

Mr. Anil Wadhwa

Former IFS - Secretary (East) in the Ministry of External Affairs of India

Mr. Halgerve Khaitan

30+ years of experience in consumer products and service industry B.Com., Sydenham College of Commerce and Economics, University of Mumbai

Dr. Peter Blauwhoff

30+ years of experience in the energy industry, in particular the downstream oil and gas business Doctrate in Technical Sciences

Mr. Deepak

Kapoor

30+ years of experience, former Chairman of PwC India FCA, FCS, ICFE (USA)


Managerial remuneration: In FY21, the share of promoter’s remuneration grew to 75% vs 65% in FY20. Further, despite the company suffering losses in FY17-19, the managerial remuneration continued to increase at 6% CAGR over FY17-21 and accounted for 4% of Employee cost in FY21. AMBER

Exhibit 47: Despite losses in the recent past, managerial remuneration continued to increase at 6% CAGR over FY17-21 and accounted for 4% of employee cost in FY21

Particulars (Rs mn) FY17 FY18 FY19 FY20 FY21 FY17

-21

Managerial Remuneration (MR) (Rs mn) 191 211 207 233 239 6%

Promoter's remuneration as % of MR 37% 46% 59% 65% 75%

MR as % of Employee cost 4% 4% 3% 3% 4%

MR as % of PBT NM NM NM 3% 0%

Employee Cost 5,316 5,252 6,198 6,787 6,759 6%

PBT -14,570 -6,718 -5,698 8,796 91,192 NM

Source: Company, Ambit Capital Research.

Related-party transactions: Sale and purchase from related parties increased in FY21 as a result RPTs increased significantly in FY21. JSPL has related party transactions with entities such as JSW Tradecorp International, Nalwa Steel and Jindal SAW. JSW International Tradecorp (JITPL) remains the main entity used by both JSPL and JSW Steel for bulk raw material purchases (iron ore, coking coal, coke and other raw materials). JSW Steel promoter’s wife Ms. Sangita Jindal owns >99% of shares in Reynold Traders of which JITPL is a wholly-owned subsidiary. JSPL routinely gets job work through Nalwa Steel (+48% YoY), but shows that in sales and purchases or receivables and payables - this should be ideally shown as job work only. AMBER


AMBIT INSIGHTS


Exhibit 48: Related-party transactions (RPTs) increased materially in FY21

Particulars Rs mn As % of net worth As % of net revenue

FY19 FY20 FY21 FY19 FY20 FY21 FY19 FY20 FY21

Purchase of goods/services* 324,276 321,371 318,147 393,721 369,955 389,886

- Subs, Associates and JVs 2,154 4,120 6,558 1% 1% 2% 1% 1% 2%

- Enterprises controlled by KMP/their relatives 28,387 21,342 22,516 9% 7% 7% 7% 6% 6%

Sale of goods (inc capital goods)*

- Subs, Associates and JVs 587 900 21923.1 0% 0% 7% 0% 0% 6%

- Enterprises controlled by KMP/their relatives 31,427 19,852 20,881 10% 6% 7% 8% 5% 5%

Interest (Expense)/Income net

- Subs, Associates and JVs -3,841 -3,435 -2,848 -1% -1% -1% -1% -1% -1%

- Enterprises controlled by KMP/their relatives -443 -379 -144.7 0% 0% 0% 0% 0% 0%

Total 58,271 42,399 68,885 18% 13% 22% 15% 11% 18%


Exhibit 49: Purchases as % of COGS from related parties sharply increased from 19% FY20 to 27% in FY21 while sales as a % of turnover increased to 11% (8% in FY20)


Where do we go from here? JSPL has surprised positively on capital allocation, staying committed to its deleveraging goals and reducing net debt from Rs470bn pre-Covid to Rs140bn now (including acceptances, after cash receipts for JPL). While margins should decline hereon given higher raw material costs, JSPL should benefit from improvement in rebar-flat spreads and lower iron ore prices in 2HFY22. Capital intensity on Angul II is lower than that for peers; JSPL would turn into a flat-heavy producer. JSPL’s capex plan appears to be more measured (relative to TSL). We estimate JSPL would be able to meet its growth capex needs from internal cash generation. However, the company is now reaching under-levered status, and capital misallocation risks are high given the past record. Therefore, incremental RoIC could be lower. Litigation risks are higher given overhang of legal issues in the coal scam, thus sustained higher cost of equity. Remain SELLers with TP of Rs425 (4x EV/FY23E EBITDA).

Exhibit 50: Ambit vs consensus

Rs mn Ambit Consensus % deviation

Net Revenues

FY22E 446,074 467,467 -5%

FY23E 410,968 444,201 -7%

FY24E 432,156 452,402 -4%

EBITDA

FY22E 156,521 155,410 1%

FY23E 126,246 125,709 0%

FY24E 134,570 124,361 8%

Source: Ambit Capital research, Company

0%

5%

10%

15%

20%

25%

30%


% of purchases from related parties % of sales from related parties

AMBIT INSIGHTS


Exhibit 51: JSPL SOTP valuation post JPL divestment

Particulars FY23 EBITDA

(Rs mn) EBITDA

Multiple Value of

assets

JSPL Standalone 126,274 4.0 509,893

Overseas subsidiaries 0 4.0 0

Total 126,274 4.0 509,893

Add: CWIP @50%

10,000

Less: Net Debt

-87,803

Equity Value (Rs mn)

432,090

Shares Outstanding (mn)

1,020

JSPL FY22-end target price

424


Ambit HAWK Framework JSPL features in D5 of our HAWK framework for forensic evaluation on account of higher contingent liabilities, higher CWIP, volatility in depreciation rate, higher advances to related-parties/CFO and aggressive accounting in terms of provisioning for debtors due for >180 days. A look at the company’s historical performance on our ‘HAWK’ Framework (refer Exhibit 51) suggests that after several years of being in the ‘Zone of darkness’, the company seems to have done well to move up to D5 from D10 on the back of improved CFO/EBITDA conversion, improvement in CWIP/gross-block ratio on completion of projects, lower expenses classified as miscellaneous in nature, lower advances to related parties and improved cash yields (though cash conversion still seems sub-par). However, note that CFO/EBITDA somewhat masks actual performance as the company books acceptances as current liabilities, while we view it as debt. Also, the related-party transactions are high and have increased in the current year.

Exhibit 52: Forensic Accounting Contributors

Source: Ambit Capital research

Exhibit 53: Forensic Score Percentile


AMBIT INSIGHTS


Exhibit 54: Forensic Score Evolution


Exhibit 55: Movement in accounting checks

Accounting Ratios FY19 FY20 FY21

Pre-tax CFO/ EBITDA 106% 123% 82%

Volatility in depn rates 146.1bps -203.5bps -53.8bps

PFD% for debtors > 6 months NA NA NA

Cash Yield 11% 11% 13%

Changes in Reserves/ (PAT ex-div.) 24% 41% 49%

Contingent Liab. As a % of Net Worth 23% 27% 29%

CWIP/ Gross Block 11% 7% 4%

Misc. exp. as a % of total revenues 3% 2% 2%

Adv. To related parties/ Cum. CFO 0.10% 0.30% 0.30%

Cum. FCF/ Median Revenues 37% 95% 134%

CAGR in auditor's remn/ CAGR in cons. rev.

-0.9 1.0 0.8


Exhibit 56: Greatness Score Contributors


Exhibit 57: Greatness Score Percentile


AMBIT INSIGHTS


Exhibit 58: Greatness Score Evolution


AMBIT INSIGHTS


Financials – Consolidated Income Statement (Rs bn)

Particulars FY18 FY19 FY20 FY21E FY22E FY23E FY24E

Net Sales 278 394 305 390 446 411 432

% growth 23% 41% -23% 28% 14% -8% 5%

EBITDA (excl. OI) 65 84 77 144 157 126 135

EBITDA Margin % 23% 21% 25% 37% 35% 31% 31%

% growth 39% 30% -8% 87% 8% -19% 7%

Depreciation 39 55 39 35 24 39 39

EBIT 26 29 39 115 134 88 96

EBIT Margin % 9% 7% 13% 30% 30% 21% 22%

Adj. PBT -13 -13 -3 84 116 73 82

PBT Margin % -5% -3% -1% 22% 26% 18% 19%

Adj. PAT -8 -2 -1 65 88 55 62

PAT Margin % -3% 0% 0% 17% 20% 13% 14%

% growth -57% -80% NM NM 36% -37% 13%

Reported PAT -14 -16 -2 53 88 55 62

EPS (x) -15 -16 -2 52 86 54 61

Source: Source: Ambit Capital research, Company

Balance Sheet (Rs bn)


Shareholder's Equity 1.0 1.0 1.0 1.0 1.0 1.0 1.0

Other Equity 303 323 320 317 334 388 448

Net Worth 304 324 321 318 335 389 449

Borrowings 430 396 369 293 165 146 148

Total Liabilities 584 575 584 469 369 344 344

Net Fixed Assets 646 670 672 519 360 382 401

CWIP 50 40 31 17 12 11 9

Total Non-current assets 749 753 738 575 414 435 452

Cash & CE 2.6 2.0 5.6 60 91 110 155

Total current assets 141 140 157 203 283 291 333

Total Assets 892 896 897 778 698 725 785


Cash Flow Statements (Rs bn)


Reported PBT -19 -28 -2.5 73 116 73 82

Depreciation 39 55 39 35 24 39 39

Changes in WC 10 4.7 15 -26.8 -21 6.1 -0.5

CFO 74 89 95 120 113 114 114

Net Capex -16 -12 -16 -8.4 -30 -60 -55

CFI -14 -8.3 -16 -18.8 1 -60 -55

Borrowings -30 -37 -39 -23 -65 -20 0

Interest paid -47 -46 -40 -23 -18 -15 -14

CFF -63 -83 -76 -46 -83 -35 -14

Closing cash bal. 2.6 2.0 5.6 60 91 110 155

FCF 11 31 39 89 95 39 45



AMBIT INSIGHTS


Ratio Analysis


EBITDA Margin 23% 21% 25% 37% 35% 31% 31%

Adj. ROE -3% -1% 0% 21% 28% 16% 15%

Pre-tax ROCE 3% 4% 5% 17% 23% 16% 17%

Interest Coverage Ratio 0.7 0.7 0.9 3.7 7.3 5.8 6.9

Pre-tax CFO/ EBITDA 115% 106% 123% 82% 86% 105% 100%

FCF/ Revenue 3.9% 8.0% 12.8% 22.7% 21.3% 9.5% 10.3%

CFO/Revenue 27% 23% 31% 31% 25% 28% 26%


Valuation Parameters


BV per share 325 319 315 312 328 381 440

Net Debt/ EBITDA (x) 6.8 4.9 5.0 1.7 0.6 0.4 0.1

EV/ Sales (x) 2.3 1.5 1.5 1.5 1.1 1.1 0.9

EV/ EBITDA (x) 10.0 6.9 5.9 4.1 3.3 3.5 3.0

EV/EBIT (x) 24.9 19.8 11.8 5.1 3.8 5.1 4.2

P/B (x) 0.7 0.6 0.3 1.3 1.2 1.0 0.9

P/E (x) -14.6 -11.1 -35.7 6.7 4.9 7.4 6.5


AMBIT INSIGHTS


Jindal Steel & Power Ltd (JSP IN, SELL)


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Jindal Steel & Power Ltd

AMBIT INSIGHTS


Explanation of Investment Rating - Our target prices are with a 12-month perspective. Returns stated are our internal benchmark

Investment Rating Expected return (over 12-month)

BUY We expect this stock to deliver more than 10% returns over the next12 month

SELL We expect this stock to deliver less than or equal to 10 % returns over the next 12 months

UNDER REVIEW We have coverage on the stock but we have suspended our estimates, TP and recommendation for the time being NOT

NOT RATED We do not have any forward-looking estimates, valuation, or recommendation for the stock.

POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs

NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs

NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

Note: At certain times the Rating may not be in sync with the description above as the stock prices can be volatile and analysts can take time to react to development.

Disclaimer This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital Private Ltd. Ambit Capital Private Ltd. research is disseminated and available primarily electronically, and, in some cases, in printed form. The following Disclosures are being made in compliance with the SEBI (Research Analysts) Regulations, 2014 (herein after referred to as the Regulations).

Disclosures

Ambit Capital Private Limited (“Ambit Capital or Ambit”) is a SEBI Registered Research Analyst having registration number INH000000313. Ambit Capital, the Research Entity (RE) as defined in the Regulations, is also engaged in the business of providing Stock broking Services, Portfolio Management Services, Merchant Banking Services, Depository Participant Services, distribution of Mutual Funds and various financial products. Ambit Capital is a subsidiary company of Ambit Private Limited. The details of associate entities of Ambit Capital are available on its website.

Ambit Capital makes its best endeavor to ensure that the research analyst(s) use current, reliable, comprehensive information and obtain such information from sources which the analyst(s) believes to be reliable. However, such information has not been independently verified by Ambit Capital and/or the analyst(s) and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties. The information, opinions, views expressed in this Research Report are those of the research analyst as at the date of this Research Report which are subject to change and do not represent to be an authority on the subject. Ambit Capital and its affiliates/ group entities may or may not subscribe to any and/ or all the views expressed herein and the statements made herein by the research analyst may differ from or be contrary to views held by other businesses within the Ambit group.

This Research Report should be read and relied upon at the sole discretion and risk of the recipient. If you are dissatisfied with the contents of this Research Report or with the terms of this Disclaimer, your sole and exclusive remedy is to stop using this Research Report and Ambit Capital or its affiliates shall not be responsible and/ or liable for any direct/consequential loss howsoever directly or indirectly, from any use of this Research Report.

If this Research Report is received by any client of Ambit Capital or its affiliates, the relationship of Ambit Capital/its affiliate with such client will continue to be governed by the existing terms and conditions in place between Ambit Capital/ such affiliates and the client.

This Research Report is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied in whole or in part, for any purpose. Neither this Research Report nor any copy of it may be taken or transmitted or distributed, directly or indirectly within India or into any other country including United States (to US Persons), Canada or Japan or to any resident thereof. The distribution of this Research Report in other jurisdictions may be strictly restricted and/ or prohibited by law or contract, and persons into whose possession this Research Report comes should aware of and take note of such restrictions.

Ambit Capital declares that neither its activities were suspended nor did it default with any stock exchange with whom it is registered since inception. Ambit Capital has not been debarred from doing business by any Stock Exchange, SEBI, Depository or other Regulated Authorities, nor has the certificate of registration been cancelled by SEBI at any point in time.

Apart from the case of Manappuram Finance Ltd. where Ambit Capital settled the matter with SEBI without accepting or denying any guilt, there is no material disciplinary action that has been taken by any regulatory authority impacting research activities of Ambit Capital.

A graph of daily closing prices of securities is available at www.nseindia.com and www.bseindia.com

Disclosure of financial interest and material conflicts of interest

Ambit Capital, its associates/group company, Research Analyst(s) or their relative may have any financial interest in the subject company. Ambit Capital and/or its associates/group companies may have actual/beneficial ownership of 1% or more interest in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Ambit Capital and its associate company (ies), may; (a) from time to time, have a long or short position in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company (ies) discussed herein or act as an advisor or lender/borrower to such company (ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. However the same shall have no bearing whatsoever on the specific recommendations made by the Analyst(s), as the recommendations made by the Analyst(s) are completely independent of the views of the associates of Ambit Capital even though there might exist an apparent conflict in some of the stocks mentioned in the research report. Ambit Capital and/or its associates/group company may have received any compensation from the subject company in the past 12 months and/or Subject Company is or was a client during twelve months preceding the date of distribution of the research report.

In the last 12 months period ending on the last day of the month immediately preceding the date of publication of this research report, Ambit Capital or any of its associates/group company or Research Analyst(s) may have:

managed or co-managed public offering of securities for the subject company of this research report,

received compensation for investment banking or merchant banking or brokerage services from the subject company,

received compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company of this research report.

received any compensation or other benefits from the subject company or third party in connection with the research report.

Ambit Capital and / or its associates/group company do and seek to do business including investment banking with companies covered in its research reports. Compensation of Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

Additional Disclaimer for Canadian Persons

About Ambit Capital:

Ambit Capital is not registered in the Province of Ontario and /or Province of Québec to trade in securities and/or to provide advice with respect to securities.

Ambit Capital's head office or principal place of business is located in India.

All or substantially all of Ambit Capital's assets may be situated outside of Canada.

It may be difficult for enforcing legal rights against Ambit Capital because of the above.

Name and address of Ambit Capital's agent for service of process in the Province of Ontario is: Torys LLP, 79 Wellington St. W., 30th Floor, Box 270, TD South Tower, Toronto, Ontario M5K 1N2 Canada.

Name and address of Ambit Capital's agent for service of process in the Province of Québec is Torys Law Firm LLP, 1 Place Ville Marie, Suite 1919 Montréal, Québec H3B 2C3 Canada.

About Ambit America Inc.:

Ambit America Inc. is not registered in Canada

Ambit America Inc. is resident and registered in the United States.

The name and address of the Agent for service in Quebec is: Lavery, de Billy, L.L.P., Bureau 4000, One Place Ville Marie, Montreal, Quebec, Canada H3B 4M4.

The name and address of the Agent for service in Toronto is: Sutton Boyce Gilkes Regulatory Consulting Group Inc., 120 Adelaide Street West, Suite 2500, Toronto, ON Canada M5H 1T1.

A client may have difficulty enforcing legal rights against Ambit America Inc. because it is resident outside of Canada and all substantially all of its assets may be situated outside of Canada.

Additional Disclaimer for Singapore Persons

Ambit Singapore Pte. Limited is a holder of Capital Market services license and an exempt financial adviser in Singapore, as per the approved agreement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP 289) and Paragraph 11 of First Schedule of Financial Advisors Act (CAP 110) provided to Ambit Singapore Pte. Limited by Monetary Authority of Singapore. In Singapore, Ambit Capital distributes research reports.

Persons in Singapore should contact either Ambit Capital or Ambit Singapore Pte. Limited in respect of any matter arising from, or in connection with this report/publication/communication. This report is distributed solely to persons who qualify as “Institutional Investors”, of which some of whom may consist of "Accredited Institutional Investors” as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore. Accordingly, if a Singapore person is not or ceases to be such an institutional investor, such Singapore Person must immediately discontinue any use of this Report and inform either Ambit Capital or Ambit Singapore Pte. Limited.

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AMBIT INSIGHTS


Additional Disclaimer for UK Persons

All of the recommendations and views about the securities and companies in this report accurately reflect the personal views of the research analyst named on the cover. No part of this research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research report. This report may not be reproduced, redistributed or copied in whole or in part for any purpose.

This report is a marketing communication and has been prepared by Ambit Capital Private Ltd. of Mumbai, India (“Ambit Capital”). Ambit is regulated by the Securities and Exchange Board of India and is registered as a Research Entity under the SEBI (Research Analysts) Regulations, 2014. Ambit is an appointed representative of Aldgate Advisors Limited which is authorized and regulated by the Financial Conduct Authority whose registered office is at 16 Charles II Street, London, SW1Y 4NW.

In the UK, this report is directed at and is for distribution only to persons who (i) fall within Article 19(5) (persons who have professional experience in matters relating to investments) or Article 49(2)(a) to (d) (high net worth companies, unincorporated associations etc.) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (as amended).

Ambit Capital is not a US registered broker-dealer. Transactions undertaken in the US in any security mentioned herein must be effected through a US-registered broker-dealer, in conformity with SEC Rule 15a-6.

Neither this report nor any copy or part thereof may be distributed in any other jurisdictions where its distribution may be restricted by law and persons into whose possession this report comes should inform them about, and observe any such restrictions. Distribution of this report in any such other jurisdictions may constitute a violation of UK or US securities laws, or the law of any such other jurisdictions.

This report does not constitute an offer or solicitation to buy or sell any securities referred to herein. It should not be so construed, nor should it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. The information in this report, or on which this report is based, has been obtained from publicly available sources that Ambit believes to be reliable and accurate. However, it has not been prepared in accordance with legal requirements designed to promote the independence of investment research. It has also not been independently verified and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties.

The information or opinions are provided as at the date of this report and are subject to change without notice. The information and opinions provided in this report take no account of the investors’ individual circumstances and should not be taken as specific advice on the merits of any investment decision. Investors should consider this report as only a single factor in making any investment decisions. Further information is available upon request. No member or employee of Ambit accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of this report or its contents.

The value of any investment made at your discretion based on this Report, or income therefrom, maybe affected by changes in economic, financial and/or political factors and may go down as well as go up and you may not get back the original amount invested. Some securities and/or investments involve substantial risk and are not suitable for all investors.

Ambit and its affiliates and their respective officers directors and employees may hold positions in any securities mentioned in this Report (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). Ambit and its affiliates may from time to time render advisory and other services, solicit business to companies referred to in this Report and may receive compensation for the same. Ambit has a restrictive policy relating to personal dealing. Ambit has controls in place to manage the risks related to such. An outline of the general approach taken in relation to conflicts of interest is available upon request.

Ambit and its affiliates may act as a market maker or risk arbitrator or liquidity provider or may have assumed an underwriting commitment in the securities of companies discussed in this Report (or in related investments) or may sell them or buy them from clients on a principal to principal basis or may be involved in proprietary trading and may also perform or seek to perform investment banking or underwriting services for or relating to those companies.

Ambit may sell or buy any securities or make any investment which may be contrary to or inconsistent with this Report and are not subject to any prohibition on dealing. By accepting this report you agree to be bound by the foregoing limitations. In the normal course of Ambit and its affiliates’ business, circumstances may arise that could result in the interests of Ambit conflicting with the interests of clients or one client’s interests conflicting with the interest of another client. Ambit makes best efforts to ensure that conflicts are identified, managed and clients’ interests are protected. However, clients/potential clients of Ambit should be aware of these possible conflicts of interests and should make informed decisions in relation to Ambit services.

Additional Disclaimer for U.S. Persons

THIS RESEARCH REPORT IS BEING DISTRIBUTED IN THE US TO MAJOR INSTITUTIONAL INVESTORS UNDER RLE 15a-6 AND UNDER A GLOBAL BRAND OF AMBIT AMERICA AND AMBIT CAPITAL PRIVATE LTD.

The Ambit Capital research report is solely a product of Ambit Capital Private Ltd. and may be used for general information only. The legal entity preparing this research report is not registered as a broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and/or the independence of research analysts.

Ambit Capital is the employer of the research analyst(s) who has prepared the research report.

Any subsequent transactions in securities discussed in the research reports should be effected through Ambit America Inc. (“Ambit America”).

Ambit America Inc. does not accept or receive any compensation of any kind directly from US Institutional Investors for the dissemination of the Ambit Capital research reports. However, Ambit Capital Private Ltd. has entered into an agreement with Ambit America Inc. which includes payment for sourcing new MUSSI and service existing clients based out of USA.

Analyst(s) preparing this report are resident outside the United States and are not associated persons or employees of any US regulated broker-dealer. Therefore the analyst(s) may not be subject to Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by the research analyst.

In the United States, this research report is available for distribution to major U.S. institutional investors, as defined in Rule 15a – 6 under the Securities Exchange Act of 1934. Additionally, this research report is available to a limited number of individuals as Globally Branded research, as defined in FINRA Rule 2241. This research report is distributed in the United States by Ambit America Inc., a U.S. registered broker and dealer and a member of FINRA. Ambit America Inc., a US registered broker-dealer, accepts responsibility for this research report and its dissemination in the United States.

This Ambit Capital research report is not intended for any other persons in the USA. All major U.S. institutional investors or persons outside the United States, having received this Ambit Capital research report shall neither distribute the original nor a copy to any other person in the United States. In order to receive any additional information about or to effect a transaction in any security or financial instrument mentioned herein, please contact a registered representative of Ambit America Inc., by phone at 646 793 6001 or by mail at 370, Lexington Avenue, Suite 803, New York, 10017. This material should not be construed as a solicitation or recommendation to use Ambit Capital to effect transactions in any security mentioned herein.

This document does not constitute an offer of, or an invitation by or on behalf of Ambit Capital or its affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which Ambit Capital or its Affiliates consider to be reliable. None of Ambit Capital accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.

Ambit America Inc. or its affiliates or the principals or employees of Ambit Group may have or have had positions, may “beneficially own” as determined in accordance with Section 13(d) of the Exchange Act, 1% or more of the equity securities or may conduct or may have conducted market-making activities or otherwise act or have acted as principal in transactions in any of these securities or instruments referred to herein.

Ambit America Inc. or its affiliates or the principals or employees of Ambit Group may have managed or co-managed a public offering of securities or received compensation for investment banking services or expects to receive or intends to seek compensation for investment banking or consulting services or serve or have served as a director or a supervisory board member of a company referred to in this research report.

As of the date of this research report Ambit America Inc. does not make a market in the security reflected in this research report.

Analyst(s) Certification

The analyst(s) authoring this research report hereby certifies that the views expressed in this research report accurately reflect such research analyst's personal views about the subject securities and issuers and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report.

The analyst (s) has/have not served as an officer, director or employee of the subject company in the last 12 months period ending on the last day of the month immediately preceding the date of publication of this research report.

The analyst(s) does not hold one percent or more securities of the subject company, at the end of the month immediately preceding the date of publication of the research report.

Research Analyst views on Subject Company may vary based on fundamental research and technical research. Proprietary trading desk of Ambit Capital or its associates/group companies maintains arm’s length distance with the research team as all the activities are segregated from Ambit Capital research activity and therefore it can have an independent views with regards to Subject Company for which research team have expressed their views.

Registered Office Address: Ambit Capital Private Limited, 449, Ambit House, Senapati Bapat Marg, Lower Parel, Mumbai-400013

Compliance Officer Details: Sanjay Shah, Email id: [email protected], Contact Number: 91 22 68601965

Other registration details of Ambit Capital: SEBI Stock Broking registration number INZ000259334 (Trading Member of BSE and NSE); SEBI Depository Participant registration number IN-DP-CDSL- 374-2006; SEBI Portfolio Managers registration number INP000002221, SEBI Merchant Banking registration number INM000012379, AMFI registration number ARN 36358. © Copyright 2021 Ambit Capital Private Limited. All rights reserved.

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