Photographer: Vivek Prakash/Bloomberg

Jindal Steel Turns Top Performer on Modi's Building Optimism

Updated on
  • Reverses share slump to lead returns on Indian benchmark
  • Company’s top priority is debt reduction, says CEO Uppal

After dropping six straight years on weak sales and high debt, a remarkable turnaround in fortunes has made Jindal Steel & Power Ltd. the best performer this year among India’s top 200 stocks.

Investors are betting that Jindal Steel will be a major beneficiary of Prime Minister Narendra Modi’s plans to improve the country’s infrastructure. In the past month, six brokerages, including Deutsche Bank AG, have upgraded the stock, which has roughly doubled over 12 months and leads the S&P BSE 200 Index this year.

One big advantage Jindal Steel has over peers such as Tata Steel Ltd. and JSW Steel Ltd. is its focus on making billets, reinforcing bars and rails used in construction as well as products for the automotive sector, Vishal Kulkarni, a Singapore-based analyst at S&P Global Ratings, said by phone. “As Indian housing and infrastructure spending picks up, it will boost JSPL’s operations.”

The Modi government has announced proposals to spend a record 3.96 trillion rupees ($61 billion) in the financial year starting April to build railways, airports and roads. The domestic steel industry as a whole is benefiting from rising product prices, burgeoning demand and the reduced threat from overseas competition after tariffs were imposed.

Jindal Steel plans to ramp up capacity after commissioning a blast furnace in the eastern state of Odisha next month that’ll produce 3.2 million metric tons a year. The new facility will boost sales by about 30 percent to 6.8 million tons over three years, according to Edelweiss Financial Services Ltd., which raised the stock to a buy on March 9.

All this good news is welcome. The company reported nine straight quarters of losses as it struggled to boost revenues amid a surge in imports, low capacity utilization and weak power demand.

Shares of the Naveen Jindal-controlled company rose as much as 2.5 percent to 124 rupees on Monday, and have rallied 79 percent this year, outpacing the 14 percent gain seen in the BSE 200. That’s also topped a 16 percent advance in JSW Steel and Tata Steel’s 25 percent advance.

Debt Worries

The stock was stuck in a narrow range in 2016 while other steelmakers rallied, offering more scope now for the shares to rise, according to Edelweiss Financial analyst Amit Dixit. The company’s expansion will improve its balance sheet significantly, he said. The company was among the three worst performers on the BSE 200 in the first quarter of last year.

Jindal Steel has the second highest borrowings among Indian steel mills of 452 billion rupees as of December, according to data compiled by Bloomberg. The company embarked on a new round of fund raising last week.

Last year, the steelmaker missed interest payments on loans for three months, blaming short-term cash flow mismatches. However, the company has made regular payments of interest this year, while its loss halved last quarter from the year ago period.

“We will give the highest priority to debt reduction,” Chief Executive Officer Ravi Uppal said by phone from New Delhi. “That remains the undisputed agenda of the company. One way is to not make any more investments or add any more debt. Secondly, whatever earnings we make we will use it to reduce the debt.”

Growth in domestic steel demand is expected to recover to levels of 5 percent to 6 percent in the year starting April, due to the government’s focus on infrastructure and affordable housing, and a recovery in vehicle purchases, Pallav Agarwal, an analyst with Antique Stock Broking Ltd., said March 23. He has a ‘buy’ on the stock with a 12-month target price of 131 rupees.

(Updates with CEO comment in 11th paragraph.)
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