Sunday, 16 July 2017

Jindal Steel - Turnaround story


In Warren Buffet's words buy a good company in distress.
Let's start with a few examples

As these are cyclic stocks, the downward trend would not go on for ever, demand would eventually increase leading to an increase in prices resulting in an upward trend for the next few years.
of companies in distress in the recent past of  let's say 3-4 years but have given multibagger returns.

First let's talk about Spicejet. It was only 2 years ago when the shares of Spicejet had fallen to Re 14 and everyone on the street thought it to be the next Kingfisher.
During that time the management changed and the controls were taken over by Ajay Singh and ace investor Rakesh Jhunjhunwala bought hefty amount of shares in the company. This  news was flashed in all news channels and the topic of debate was whether Mr. Jhunjhunwala had made a mistake this time. However, in Mr. Jhunjhunwala's  own words 'Test match to roj khelte hai, kabhi 20-20 bhi khelna chahiye'( we play test match everyday but there are times when we should play 20-20 as well). He had taken a calculated risk and rest, as they say, is history. It was a master stroke by the Ace investor and aa missed opportunity for us.

The second turnaround story is of YES Bank. Four years back in 2013 when all Banking stocks were in distress, Yes Bank was embroiled in a family feud within the promoter family. Both external and internal factors seems against it.
The share price fell to Re 250. But with a strong and passionate management, YES Bank delivered spectacular results quarter on quarter and in the last 4 years, the returns provided by the Bank is 6 times over. But many of us missed the bus again.

The turnaround stories of these two stocks can easily be attributed to their strong management and the line of business.
Both companies ailed from short term internal issues while the industry as a whole was in distress. Once these hiccups were over, these companies gave magnificent results.

Now let's come back to Jindal Steels. The entire Steel industry has been in distress for last 4-5 years.
Steel prices are showing a downward trend in the  International market  and we also have China dumping cheap steel into India.
If you follow the Steel industry for a some years, you will realise that the Steel industry, much like the Auto industry, is a cyclical industry. For 4-5 years they will show a downward trend. When the demand is low and the prices are falling, so are the margins of the company.

The International market is already started showing signs of this turnaround. With Donald Trump taking the oath as the US President & his policies of increasing investment in infrastructure and a revival of demand in China, there are signs of steel prices showing an upward trend in the International market. 

As other commodities, steel prices in India is linked with International steel prices. As the prices

increase so will the margins of the companies and with time a loss making unit shall also start operating in profits.

Same would prove to be true for Jindal steel as multiple factors are working in its favour. First improving steel prices, second Interest rates are on decline in India (Jindal steel has high book debts), third and most importantly they have recently commissioned a new plant in the  Angul district,  Orissa. This plant in Angul has a capacity of producing 6 million tonnes steel per year which is almost be the game changer for the company having debt of around 45, 500 cr. Company expects steel production almost double from last year 3.7 mt to almost 6 mt in fy 17-18. It's EBIDTA margin can be improved from 4800 cr to
almost 8000 cr in fy 17-18.

One other side of company  that is now expected to work in favour of the company is the power
business, which comprises 3400 MW of operational power plants. Power business made an annual loss of Rs 464 crore in FY17 on a sales turnover of Rs 3,119 crore. Power plants are operating at a very low PLF (plant load factor) of 32 percent as a result of there being no power purchase agreements (PPA). However, Here also company has changed its strategy.The company has sold 1,000 MW plant to JSW Energy which will give in turn around 4500 crore.
The power business has now come to a stage where it will not deteriorate further. Besides, the sale of power assets will ease the pressure on the liquidity and interest cost for the consolidated entity.

Indian govt. is also very supportive for the domestic steel industry which is evident in the new steel policy.due to this there will be increase in demand of steel.

Share price of jindal steel was at 62 as of 9 Nov 2016 which has been doubled in less than one year and has a potential to go many times up.

If all these factors work well,  we could see another multi-bagger in the making.

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