Rising Carbon Taxes Will Crush Coal-Based Steel Margins

Key Takeaways

• Heavy reliance on coal-based production and high financial leverage expose Jindal Steel to regulatory, cost, and profit risks amid decarbonization and tightening compliance.
  
• Global steel overcapacity, declining demand growth, and persistent pricing pressures threaten the company's long-term revenue and limit prospects for sustainable earnings expansion.
  
• Capacity growth, higher value-added product mix, integrated raw material sources, and supportive policy combine to drive margin stability and strong long-term revenue prospects.

Catalysts

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

• The accelerating pace of global decarbonization is likely to subject Jindal Steel to rising carbon taxes, regulatory constraints, and potential exclusion from green capital, given its continued heavy reliance on coal-based steelmaking processes, which will increase production costs and sharply compress operating margins over the next decade.
  
• As mature economies reduce fixed-asset heavy infrastructure spend in favor of digital and service sectors, and global steel recycling rates rise, long-run global steel demand and pricing power will structurally decline, undermining Jindal Steel's revenue growth potential and causing earnings stagnation or decline.
  
• Persistent global overcapacity in steel, particularly due to subsidized Chinese producers exporting at record levels, will continue to depress international prices and limit any margin expansion, threatening the sustainability of Jindal Steel's earnings even as it ramps up new capacity.
  
• The company's heavy debt load and high financial leverage increases vulnerability to interest rate hikes and economic downturns, which could erode net margins and make it difficult to fund long-term expansion or ESG compliance requirements, ultimately pressuring future profits.
  
• Increasing regulatory scrutiny and tightening on mining and environmental compliance will drive input cost inflation and operational delays, further squeezing profitability and increasing the likelihood of earnings volatility over multiple cycles.

Jindal Steel Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Jindal Steel compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Jindal Steel's revenue will grow by 14.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.1% today to 15.1% in 3 years time.
• The bearish analysts expect earnings to reach ₹108.4 billion (and earnings per share of ₹107.8) by about August 2028, up from ₹29.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.7x on those 2028 earnings, down from 33.5x today. This future PE is lower than the current PE for the IN Metals and Mining industry at 23.0x.
• Analysts expect the number of shares outstanding to grow by 0.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.15%, as per the Simply Wall St company report.

Jindal Steel Future Earnings Per Share Growth

Risks

• Ongoing capacity expansions, including the imminent commissioning of new blast furnace and BOF units, position Jindal Steel to materially increase future output, supporting higher revenues and improved operating leverage as these projects ramp up.
  
• The increasing share of value-added products-now at an industry-leading 72%-enhances margins and cushions revenue from price volatility in commodity steel, suggesting greater resiliency in earnings and net margins.
  
• Accelerated integration of captive raw material sources such as coal and iron ore mines is expected to further reduce input costs, supporting stable or expanding net margins and lowering cost risks over the long term.
  
• Sustained government focus on infrastructure development and policy support for domestic steel demand, coupled with anti-dumping duties on low-cost imports, creates a favorable demand environment, which may lead to stronger volume growth and higher revenues.
  
• Significant progress in project execution (including galvanizing and color coating lines, pellet plant utilization, and mine ramp-ups) provides multi-year growth visibility, positioning the company for long-term topline and EBITDA expansion.

Valuation

• The assumed bearish price target for Jindal Steel is ₹749.85, which represents two standard deviations below the consensus price target of ₹1021.19. This valuation is based on what can be assumed as the expectations of Jindal Steel's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1225.0, and the most bearish reporting a price target of just ₹600.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹719.6 billion, earnings will come to ₹108.4 billion, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 14.1%.
  
• Given the current share price of ₹975.4, the bearish analyst price target of ₹749.85 is 30.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.