Upcoming Investments In Galvanizing And Color Coating Will Improve Product Mix And Optimize Costs

Key Takeaways

• Strategic focus on infrastructure and logistics expansion aims to optimize costs and enhance margins through efficiency improvements and enhanced product offerings.
  
• Commitment to financial flexibility through controlled leverage could support future growth initiatives, potentially enhancing earnings per share.
  
• The company's ambitious expansion and financial commitments may strain resources, with potential revenue pressure from price imbalances and market risks impacting profitability.

Catalysts

Operates in the steel, mining, and infrastructure sectors in India and internationally.

• Jindal Steel & Power Limited is in the final stages of commissioning their blast furnace at Angul, which is expected to increase production volumes significantly. This could boost revenue as output scales up.
  
• The company is focusing on value-added products, such as galvanizing and color coating lines, which can enhance product mix and pricing, potentially improving net margins.
  
• Jindal Steel & Power is expanding their logistics capabilities, including port and rail logistics, which are expected to optimize supply chain costs and lead to better net margins.
  
• CapEx projects geared towards increasing raw material efficiency, such as slurry pipelines and coal conveyors, are expected to reduce operational costs in the long term, positively impacting earnings.
  
• The company maintains a strategic focus on managing their leverage, with a commitment to keeping net debt to EBITDA under 1.5x, which provides financial flexibility for future growth initiatives, potentially enhancing earnings per share.

Jindal Steel & Power Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Jindal Steel & Power's revenue will grow by 17.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.2% today to 14.7% in 3 years time.
• Analysts expect earnings to reach ₹119.0 billion (and earnings per share of ₹117.52) by about April 2028, up from ₹40.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹68.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.5x on those 2028 earnings, down from 21.3x today. This future PE is lower than the current PE for the IN Metals and Mining industry at 20.4x.
• Analysts expect the number of shares outstanding to decline by 0.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.87%, as per the Simply Wall St company report.

Jindal Steel & Power Future Earnings Per Share Growth

Risks

• The slowdown in domestic steel consumption compared to production growth suggests an imbalance that could pressure prices and revenue growth. (Revenue)
  
• Declining HRC prices due to increased imports, despite a resilient TMT market, indicate potential revenue pressure from price competition. (Revenue, Net Margins)
  
• A significant rise in net debt due to project-related payouts, as seen in the increased debt-to-EBITDA ratio, could impact financial stability and flexibility. (Earnings)
  
• The announced extensive CapEx plan without a corresponding increase in upstream capacity raises concerns about potential returns and could strain financial resources. (Net Margins, Earnings)
  
• Prolonged realization of increased production capacity and market conditions that necessitate project adjustments pose execution risks that could affect profitability timelines. (Revenue, Earnings)

Valuation

• The analysts have a consensus price target of ₹984.037 for Jindal Steel & Power based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1220.0, and the most bearish reporting a price target of just ₹480.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹809.3 billion, earnings will come to ₹119.0 billion, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 14.9%.
• Given the current share price of ₹854.25, the analyst price target of ₹984.04 is 13.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.