JSPL’s capacity expansions set to fuel growth

Earlier this week, the company reported a 14% quarter-on-quarter drop in its consolidated Ebitda (earnings before interest, tax, depreciation, and amortization) to 2,444 crore during the three months ended March (Q4FY24). 

A decline in steel prices and an increase in some cost items weighed on profitability despite higher volumes. 

Investors seem more excited about the substantial gains expected from JSPL’s ongoing capacity expansion. Analysts project sharp growth in the company’s volumes and Ebitda over FY24-FY26. 

However, the risk emanates from a slowdown in China—the biggest market for metals—leading to a fall in steel prices and higher imports into India, which could hurt JSPL’s demand prospects.

JSPL has undertaken nearly a dozen projects to be completed by the third quarter of FY26. These projects mainly aim to meet three objectives. First, to increase volumes and achieve economies of scale. Second, to increase the share of value-added grades. Third, to implement backward integration, resulting in lower production costs. 

The expansion would increase its finished steel capacity from 7.2 million tonnes per annum to 13.7 million tonnes.

“The 19% steel volume CAGR, improvement in product mix with commissioning of HSM (hot strip mill), and benefits of captive coal and pellets along with a slurry pipeline/conveyor belt would drive an Ebitda CAGR of 34% over FY24–26E to 18,200 crore and Ebitda per tonne of 16,700 in FY26E,” said analysts from Nuvama Institutional Equities. 

For perspective, in FY24, JSPL’s Ebitda and Ebitda per tonne stood at 10,200 crore and 13,300, respectively.

In line with its objective to increase value-added grades, the company is undertaking a project to convert semi-finished steel into higher grades. 

After commissioning the project, the contribution of semi-finished steel in overall sales would drop significantly from over 15% during FY24, boosting profit margins. 

JSPL’s push into value-added grades has helped it more than double its revenue from steel rebars sold through retail outlets during FY24. This now accounts for nearly 15% of total sales volume.

The third part of its strategy is aimed at backward integration by increasing production from its coal mines and constructing another 1,000 MW power plant to meet the projected increase in captive demand. 

JSPL is awaiting approval for the expansion of two existing mines and to start mining at two other mines. The approval, expected in FY25, would increase its mining capacity to almost two and a half times and meet all its coal requirements, eliminating dependence on high-cost coal procured through the e-auction route.

Most of the expansion is expected to be funded through internal accruals. 

JSPL’s total capex for the expansion is estimated at 31,000 crore, half of which it has already invested, including 8,500 crore in FY24. While its net debt/Ebitda has increased from 0.7 times to 1.1 times during FY24, it is much lower than 4.6 times at the end of FY20.

While the company appears on course to capitalize on its expansion, the challenge will be to meet the execution timeline and find lucrative markets for the increased capacity without sacrificing margins. 

The bigger threat remains the dynamics of China’s steel industry, which is facing demand woes. This contrasts with India’s projected growth of 8% as per the World Steel Association, suggesting excess Chinese capacity could spill over into the Indian market. 

Note that India’s steel imports rose 37% in FY24, turning the country into a net importer. For now, the sharp jump of about 70% in JSPL’s shares over the past year suggests investors are capturing a good share of the optimism.

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