Investors in Jindal Steel & Power Ltd stock have more to worry about than the forgettable September quarter (Q2FY24) results. The main problem areas are further delays in capacity expansion and raising the capital expenditure (capex) guidance.
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Jindal now expects the commissioning of key projects like blast furnace plant and basic oxygen furnace plant to be completed by the end of FY25. Recall that it pushed the commissioning schedule to Q2FY25 from Q3FY24 in Q1. Postponing the capacity expansion timeline is likely to weigh on volume in the medium term. Against this backdrop, Kotak Institutional Equities cut its volume estimates by 10% and 12% for FY25 and FY26, respectively.
Little surprise, Jindal’s shares fell nearly 8% on Wednesday. It goes without saying that further project delays would dampen investor sentiment. With this, Jindal’s shares are about 19% lower than their 52-week highs ₹722.80 apiece seen in September.
That said, the commissioning of a hot strip mill in Q3 should provide some comfort on a volume and product mix front. In Q2, steel sales volume was two million tonnes, up 9% sequentially but flat year on year.
Capex requirements have been inched up. Jindal now expects capex to be above FY22-FY26 ₹31,000 crore compared to its earlier guidance ₹24,000 crore. The incremental spending is focused on changes in plant configuration and capex for coal mines. Certainly, the ongoing capex would mean more value-added products in Jindal’s portfolio. But, “Extending capex timeline coupled with increasing cash outflows will continue to put pressure on cash flow,” analysts at Motilal Oswal Financial Services said in a report on October 31. Coal mine is the margin for the long term. Gare Palma coal mine started production in Q3 and Utkal C is also expected to start this quarter. Kotak analysts estimate that this could reduce Jindal’s cost by approx ₹1,000 per tonne of steel on full ramp up. Also, starting the slurry pipeline would save transport costs. That said, Jindal expects coking coal costs to rise $50-60 per ton sequentially in Q3. Sure, steel prices rose towards the end of Q2, but it remains to be seen if they are sustaining. In Q2, the fall in realizations more than offset the benefit of lower coking coal costs, resulting in a sequential decline in standalone Ebitda per tonne of 23% year to date. ₹11,160, lower than Street expectations.
Because of this, near-term catalysts for Jindal’s stock appear to be few and far between.
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