Jindal Steel and Power share price jumps 9% so far this week; steel cycle could help extend rally

On Friday, Jindal Steel and Power shares were trading at Rs 438 apiece, down 0.7% amid the weak market sentiment.
(Image: REUTERS)

Jindal Steel and Power share price is up 9% so far this week while benchmark indices continue to remain range-bound. The stock started rallying after the company informed investors that the company had sold its remaining 51% stake in its Oman unit and concluded its 100% divestment. Along with the divestment, the stock is also reaping the benefits of a strong steel upcycle. But, the sharp uptick in the stock price could continue and brokerage firms believe Jindal Steel and Power could head higher from current levels. On Friday, Jindal Steel and Power shares were trading at Rs 438 apiece, down 0.7% amid the weak market sentiment.

Boosting investor confidence

Jindal Steel and Power may have offset some investor concerns when it comes to divestment by the firm. Analysts at Kotak Securities highlighted that the company had planned divestment 1 GW power plant to – JSW Energy earlier in 2016 and called it off in 2019. Further, an MOU to divest Botswana coal assets in April 2019 is not yet concluded. “The completion of its Oman divestment should boost investor confidence on the company’s ability to divest non-core businesses,” Kotak Securities said.

Morgan Stanley said that the Oman business accounted for ~17% of the company’s sales and ~13% of EBITDA. The business had a net debt of Rs 53bn (~US$710mn) at the time of the agreement. Although the earnings impact from the sale is not expected to be substantial, analysts at Morgan Stanley believe it will boost investor confidence. “… this transaction was much anticipated by investors,and its completion reinforces management’s strategy of focusing on India steel operations and bringing down consolidated net debt to Rs150bn,” they said. Jindal Steel and Power had been showing the Oman asset as held for sale since the last two quarters. 

Well place in steel cycle

Amid the steel price upcycle, Jindal Steel and Power trades at a discount to peers such as Tata Steel owing to multiple overhangs from coal block cancellation and other regulatory issues. “With JSPL delivering strong utilisation and volumes, and due to deleveraging (ND down Rs245bn over FY16-21ii), the discount should narrow,” IIFL Securities said in a note. Continued strong demand in China, along with a supply cut in Tangshan, has supported the surge in global steel prices and spreads. IIFL Securities expect elevated spreads to sustain for longer, during FY22, before tapering down.

Price targets

While Morgan Stanley is overweight on the stock its target price for Jindal Steel and Power does not see any further upside. IIFL Securities has a target of Rs 482 per share with a ‘Buy’ rating. Kotak Securities have the most bullish estimate on the stock. The brokerage firm has increased EPS by 5%/4% for FY2022/23E led by lower interest cost for the current and next financial year driven by credit rating upgrade and repayment of high-cost debt. It also estimates a 1% increase in FY2022E steel realization factoring in the recent price hikes. Kotak Securities have increased their fair value for the stock to Rs 530 per share. 

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