MUMBAI: The Indian Railways proposal of Rs.1.46 lakh crore for the next fiscal year’s Budget has triggered renewed buying interest in the stock of Jindal Steel and Power (JSPL), which is the leading private sector producer of long steel used in railroad tracks.
Derivatives data on the JSPL stock, which climbed 11 per cent Thursday, indicate that while an immediate correction could not be ruled out, the trend remains bullish for the month ahead of the Union Budget on February 1.
According to reports, the railways will commission 4,000 km of new rail tracks, with the exercise entailing the construction of new lines, doubling of existing railroads, and gauge conversion. It will also renew 4,000 km of track route.
The Naveen Jindal-owned JSPL is India’s leading manufacturer of long steel products other than state-owned SAIL. About three quarters of JSPL’s product mix is long steel, and the remaining 25 per cent consists of HR plates. The company, which is at the end of its capex cycle, recently commissioned its 2.5 mtpa basic oxygen furnace, taking its crude steel capacity to 8.6 mtpa. Prices of long steel products are more dependent on domestic demand and supply unlike flat steel, which is dictated more by global output.
Long steel products find their use mainly in the infra and construction projects. Enhanced capacity and firm long steel prices should help JSPL deliver 30 per cent volume growth from FY17 to FY20, with operating profit at 35 per cent during the same period. Analysts also expect its Oman steel facility and power plants to turn free cash flow positive. Improving profits and likely monetization of its power assets could lead to sharp deleveraging. End-September, the company’s total debt was Rs 38,703 crore. Against this, analysts expect the company to report Rs 9,500 crore EBIDTA in FY19 and Rs 10,500 crore in FY20. The stock is trading at 0.8 times its estimated FY1 book value and is the cheapest in comparison with top global steel players. Average valuation of the top 10 steel global players is 1.7 times price to book.
In terms of EV by FY19 estimated EBIDTA valuation method, it is in line with the global average of 7 times. The possibility of a short correction, which analysts say will be bought into, is indicated by the spike in the put-call ratio to 1.39 Thursday from 0.91 the day before. Also, significant selling of ‘in the money’ calls at the 240 strike signifies sellers’ belief that the price momentum could pause, and that they could pocket some of the premium paid by call buyers.
However, analysts such as Ashish Chaturmohta, who helms the derivatives desk at Sanctum Wealth Management, believe that heavy put selling during an uptrend is an indication of “more” bullishness “to come.” The stock rose 11 per cent to 243 on Thursday, but it did not stop traders from selling 22.23 lakh shares at the 240 put. While an equal number of traders have purchased that put, the fact that option sellers are usually smarter and wealthier than option buyers means they expect Rs 230 (240 minus current price of option) to be a strong support and that the stock could experience further upside during the month.