Motilal Oswal expects Jindal Steel to become mega producer, sees 27% upside

Brokerage firm Motilal Oswal Financial Services (MOFSL) has retained its ‘buy’ rating on Jindal Steel and Power, on the bet that the firm’s capacity expansion would boost revenue growth and increase margins.

The broking house has retained a ‘buy’ call on the stock and assigned a target price of Rs 720 per share, an upside of 27 percent from the closing price of June 23.

Here are some reasons for the positive sentiment among analysts at the firm.

Rapid expansion

The company has undertaken capital expenditure worth Rs 24,000 crore to expand crude steel capacity by 66 percent to 15.9mt (metric tonnes), MOFSL said in its report. With the capex project, pellet capacity will skyrocket 133 percent to 21mt by FY25.

The analysis suggests that the capex per tonne will be about $390/per tonne, one of the lowest in the industry. “The capacity and margin expansions provide growth visibility to the company,” analysts tracking the sector said.

This gains significance as analysts believe it will increase the mix of flat steel to 70 percent from 30-33 percent. While flats command a premium over long steel products, JSP’s structural shift from being a long steel manufacturer to a flat steel manufacturer bodes well for the company’s long-term strategy.

Easing raw materials costs

Given its cemented position in the industry, analysts are of the view that strong raw material linkages ensure efficient production and timely goods supply, the report stated.

It has also recently acquired four thermal coal blocks Utkal C, Utkal B1 & B2 and Gare Palma IV/6 with a cumulative reproducibility and repeatability (R&R) of 500mt. Once operational, it will cater to 12-15mt of thermal coal requirement of the company, as per Motilal Oswal’s report published on June 23.

Railways’ only private supplier

Jindal Steel and Power is the first private company to be labelled “Regular Rail Supplier” by the Indian Railways, MOFSL’s report added. It has also developed hardened rails; a value-added product (VAP) used in metro projects and high-speed rail corridors.

Jindal Steel and Power closed at Rs 568 apiece on June 23, down 2.7 percent from the previous day’s close on the National Stock Exchange.

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