Strong tailwinds for Steel production in India – Jindal Steel and Power

Update on Indian Equity Market:

On Monday, markets ended at an all-time closing high with Nifty closing 226 points higher to close at 16,931. BHARTIARTL (5.0%), DIVISLAB (4.2%), and AXISBANK (4.0%) were the top gainers on the index while TECHM (-1.4%), NESTLEIND (-1.1%), and EICHERMOT(-1.1%) were the top losers for the day. Among the sectoral indices,  METAL  (2.5%), PSU BANK (2.0%), and BANK (2.0%) were the top gainers, while IT (-0.6%) was the only laggard.

Excerpts of the Interview with Mr. VR Sharma, Managing Director at Jindal Steel and Power Ltd on Economic Times, dated 24th August 2021:

• The steep fall in Iron Ore prices has lifted the market spirits across the world. However, that hasn’t translated to a fall in steel prices due to stiffness in coking coal prices and high input costs for other ferrous metals. 
• The lower iron prices aided by a $1000/MT steel price in international markets are translating into improved gross margins for producers, and the market will likely stabilise at these levels.
• India has to reach a level of about 300 million tonnes by 2030. In nine years, it may be producing about 300 million tonnes of steel and consuming the same quantity. 
• Overnight it is very difficult to build up capacities. Building up capacities takes about three to four years, all-steel producers are bullish about India’s prospects, and a Rs. 2 tn investment is expected to be made over the next 5 years.
• The sector is showing healthy growth and the demand has already begun to pick up, the company expects the entire steel sector to shine in the upcoming years.
• Steel demand will continue because infrastructure projects are in offing and there are a lot many projects on the table now. The construction sector is booming and the shipbuilding sector, defence sector, and the oxygen cryogenic plants are increasing in terms of number.
• Headwinds such as adverse Chinese Steel Policy, logistical bottlenecks, Covid induced supply disruptions have led to coking coal prices being inflated. This is putting pressure on steel prices which are not expected to recover in the short term.
• The industry expects to shift from coking coal to indigenous coal, which is both cost friendly and environment friendly and offers protection from such price shocks.
• The Chinese steel industry has seen a  dip in production and consequently exports, being the second-largest steel producer, India is well poised to take the benefits of  Chinese fallback,

Asset Multiplier Comments:

• The cyclical recovery in the steel sector may have finally arrived. With the tailwinds for this industry, it is likely to grow fast over new capex and recovery cycle for the decade. 
• Jindal Steel and Power is one of the largest steel producers in India. It is well poised to reap the benefits of scale and the tailwinds. It is likely to deliver great value to its shareholders.

Consensus Estimates (Source: market screener website): 

• The closing price of Jindal Steel and Power was ₹ 379/- as of 30-August-2021.  It traded at 7x/5x the EPS estimate of ₹56/₹ 77  for FY22E/23E. 
• The consensus price target is ₹ 538/- implies a PE multiple of 7x on FY23E EPS of ₹ 77/-.

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