Cost savings and expansion plans are important for JSPL

Now the focus has shifted to expansion plans. Analysts are happy after they visited JSPL’s Angul plant recently. The Angul manufacturing facility, which has received approval for 1 million tonnes per annum (MTPA) expansion, takes its steelmaking capacity to 6.6 MTPA. JSPL has a total steel production capacity of 9.6 million tonnes per annum including its Raipur facility. The company is on track to increase Angul’s capacity by 6 MTPA and plans to reach a total capacity of over 15 MTPA by the end of FY23.

Most of the ongoing expansion is being done through internal sources. JSPL intends to limit its net debt to 1.5 times of earnings before interest, tax, depreciation and amortization (Ebitda) at all times. That said, how well the execution is and what efforts JSPL will make to keep leverage under control, remains to be seen. “Performance is rarely as linear as the plan seems,” said analysts at ICICI Securities Ltd, although they have upgraded their rating on JSPL stock.

Successful implementation of these expansion plans is the key to driving volume growth, achieving cost savings and improving profitability. Expansion and cost-saving measures are also needed as steel prices soften till the end of 2021 after rising steadily since the second half of 2020. Domestic demand has slowed over the past few months. The fall in international steel prices has also weighed on domestic steel prices. Weak demand in China, the largest producer of the commodity, is a cause for concern, as it could keep global steel prices low. Analysts say that even if domestic demand improves, this could adversely impact domestic steel prices.

For JSPL, structural initiatives such as a slurry pipeline to improve fuel mix, raw material utilization and reduce logistics cost, are critical to boost the margin outlook when input costs rise. The company’s safe iron ore mines should help. JSPL may also buy some coal from its mines in Australia.

Meanwhile, shares of JSPL have fallen nearly 22% from their 52-week high in May on the NSE. Analysts say the risk-reward is favorable. Nevertheless, weak demand and low steel prices remain concerns for the near future.