Rising Environmental Costs And Overcapacity Will Undermine Steel Profitability

Key Takeaways

• Rising compliance costs, environmental regulations, and shifts toward alternative materials threaten margins, volume growth, and export opportunities for Jindal Steel & Power.
  
• High leverage, persistent capital intensity, and input price volatility increase financial risks, potentially compressing earnings and pressuring long-term shareholder returns.
  
• Strategic expansion, cost control, raw material integration, and a shift to value-added products position the company for sustainable growth and improved profitability amid strong domestic demand.

Catalysts

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

• Aggressive new climate policies and the accelerating global push for decarbonization threaten to drive up compliance costs dramatically for Jindal Steel & Power, given its ongoing dependence on coal-based steel production, which could significantly squeeze future operating margins and reduce long-term export opportunities.
  
• The gradual transition toward lightweight alternatives like composites and aluminum in key sectors such as construction and automotive risks undermining the long-term demand growth for steel, leaving JSPL exposed to deteriorating volume growth prospects and sustained overcapacity, which could impair revenue expansion.
  
• High leverage and persistent capital intensity from large-scale expansion plans-including more than Rs 21,000 crores of outstanding capex-raise the probability of increased financial risk and higher borrowing costs, potentially eroding net earnings and compressing ROCE below targets if ramp-ups underperform or market headwinds intensify.
  
• Volatility in raw material prices, particularly for coking coal and iron ore, coupled with rising protectionism globally, may continue to disrupt input cost structures and increase margin pressure, as seen recently with one-off inventory and balance sheet cleanups that have depressed profitability.
  
• Increasingly stringent environmental regulations will likely trigger substantial capex needs for compliance, reduce operational flexibility, and put sustained pressure on free cash flow, risking the company's ability to maintain a net debt to EBITDA ratio below 1.5 and threatening long-term shareholder returns if steel prices stagnate or decline.

Jindal Steel & Power 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 13.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.7% today to 16.4% in 3 years time.
• The bearish analysts expect earnings to reach ₹118.4 billion (and earnings per share of ₹103.81) by about August 2028, up from ₹28.1 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 8.9x on those 2028 earnings, down from 35.3x today. This future PE is lower than the current PE for the IN Metals and Mining industry at 22.8x.
• Analysts expect the number of shares outstanding to grow by 0.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.07%, as per the Simply Wall St company report.

Jindal Steel & Power Future Earnings Per Share Growth

Risks

• Significant capacity expansions at Angul and other facilities are on track, positioning Jindal Steel & Power to unlock substantial volume growth; as these projects ramp up between FY26 and FY28, this will directly support higher top-line revenue and improved asset utilization.
  
• Backward integration in mining, with recent commissioning and ramp-up of multiple captive coal mines, enhances control over raw material costs and supply security, which will strengthen long-term EBITDA margins and insulate the company from global coal price volatility.
  
• Ongoing shift in product mix toward higher-margin, value-added flat steel products-bolstered by plant upgrades and acquisitions-will enable Jindal Steel & Power to benefit from government import protection (such as safeguard duties), potentially driving pricing power and boosting blended net margins over time.
  
• Persistent cost optimization, working capital improvements, and prudent capital allocation have driven net debt/EBITDA below 1.5, which, if maintained through the expansion and commissioning phases, will provide a solid financial base for steady earnings growth and future capital returns.
  
• Robust domestic steel demand, supported by infrastructure buildout, government initiatives like Make in India, and expected reduction in imports following safeguard duties, will underpin stable or rising revenues and mitigate downside risk to earnings in the long term.

Valuation

• The assumed bearish price target for Jindal Steel is ₹683.8, which represents two standard deviations below the consensus price target of ₹988.18. 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 ₹1220.0, and the most bearish reporting a price target of just ₹480.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹722.7 billion, earnings will come to ₹118.4 billion, and it would be trading on a PE ratio of 8.9x, assuming you use a discount rate of 14.1%.
• Given the current share price of ₹974.1, the bearish analyst price target of ₹683.8 is 42.5% 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.