jindal steel & power sell...jindal steel & power . multiple earnings growth, deleveraging...

AMBIT INSIGHTS

Ambit Capital Pvt Ltd 15 September 2020

Jindal Steel & Power Multiple earnings growth, deleveraging levers in FY21 FY20 AR highlights 7-7.5MT production target for FY21 and focus on deleveraging. FY21 production/deleveraging targets appear achievable but Rs150bn net debt target in FY23 is overoptimistic (we see Rs190bn, including ~Rs20bn acceptances). We raise FY21/FY22/FY23 EBITDA by 17%/4%/1% to Rs104bn/Rs88bn/Rs84bn on i) higher steel shipments, ii) stronger steel pricing, iii) lower thermal coal costs in FY21, and iv) slightly higher benefit from Sarda. JSPL will need to book loss on sale (possibly >Rs70bn) on Oman; thus reduction in equity BV. On accounting, we flag high volatility in depreciation rate, unclassified loans & advances and impairment reversal at WCL. On governance, we note high contingent liabilities, lower board rotation and high RPTs. JSPL remains exposed to high litigation risks and excess leverage on promoter’s B/S. Rs160 TP (up from Rs140 on higher EBITDA) implies unchanged EV/FY22 EBITDA of 5.5x (~20% below JSW/TSL), ~0% terminal growth.

Earnings levers in FY21- higher production, lower coal & iron ore costs

In FY20 AR, JSPL stated that it is confident of achieving 7-7.5MT steel production in India in FY21. The economics of coal gasification-based DRI plant at Angul have improved in the face of elevated coal stockpiles in India. The company appears on track to achieving its production targets, so we have raised our estimate for FY21 standalone production from 6.5MT to 7.2MT. Lower thermal coal prices should remain a tailwind for both Angul DRI and JPL through FY21. In AR, JSPL mentioned 11.1MT of available Sarda stockpile at FY20-end, implying consumption of 1.1MT in 4QFY20 (lower than our 1.6MT estimate). JSPL has been delaying the start of Guali mine (though previous lessee RP Sao withdrew its SC petition on 30th July) for one reason or another. Any delay in Guali restart beyond mid-FY22 could provide some uplift to our earnings estimates.

FY21 deleverging target achievable, FY23 target a little overoptimistic

In AR, JSPL has set out a debt reduction target of Rs50-55bn for FY21. We estimate Rs55bn debt reduction for FY21. Additionally, divestiture of JSIS Oman will trim JSPL’s debt by Rs60bn (US$80mn) in FY2021. Refinancing risk for JSPML’s $153mn bullet payment by Sep'20 has been alleviated, though we note another large bullet payment of >$150mn in Mar’21. Investors should also exercise caution on potential capital spend on expansion at Patratu or Angul – senior management has in the recent past reportedly talked up the potential for brownfield expansions.

Loss on sale of Oman asset to drive equity writedown

Recent 48.9% Oman stake sale suggests transaction has approval from JSIS lenders. Remaining 51.1% stake sale looks imminent, pending approval from government of Sultanate of Oman. But we remain concerned over excess leverage on promoter's already stretched personal balance sheet. JSPL’s AR shows book equity value of Rs81bn for Shadeed iron and steel, whereas sale value of ~$1bn EV implies net equity infusion of <Rs10bn (after setting off >$160mn related-party loan from JSISI to JSPML). This would suggest possible loss on sale of >Rs70bn (including reversal of positive revaluation of Rs45bn in FY19) flowing through P&L into equity in FY21.

Poor environmental disclosures – no sustainability/integrated report

JSPL doesn’t file sustainability or integrated annual report; hence unlike its peers Tata Steel and JSW Steel, it has no disclosures on metrics such as Co2 emissions, energy intensity, dust emissions and water consumption. On accounting, ex-CFO Mr Sogani appears to have joined Essar Capital, but JSPL doesn’t have a CFO replacement yet.

SELL Quick Annual Report AnalysisAnalysis Meeting Note

News Impact

Stock information

Bloomberg Code: JSP IN

CMP (Rs): 210

12m TP (Rs): 160

Mcap (Rs bn/US$ bn): 214/2.9

6M ADV (Rs mn/US$ mn): 2674.0/35.7

Ambit Estimates

FY20 FY21E FY22E

Revenue 370 395 394

EBITDA 79 104 88

Research Analysts

Satyadeep Jain, CFA [email protected] Tel: +91 22 6623 3246

[email protected] 2020-09-15 Tuesday 11:11:44

https://www.thehindubusinessline.com/companies/jspl-looking-to-set-up-2-25-mtpa-steel-plant-at-patratu-in-jharkhand/article31088657.ece

mailto:[email protected]

AMBIT INSIGHTS


Our estimates below consensus, Oman asset sale doesn’t impact our TP

While we are raising our expectations, our FY22-23 estimates remain somewhat below consensus. Our cautious stance emanates from i) higher iron ore cost from 144% premium Guali mine, ii) thermal coal savings dissipating somewhat in FY22, and iii) slightly weaker product mix in FY22 vs FY20. Our pricing assumptions for FY22 remain unchanged – domestic HRC at Rs39,500/t and rebar at Rs38,500/t. Our estimates and TP don’t factor in sale of JSIS Oman yet. We will adjust post completion of 100% stake sale. Increase in our TP from Rs140 to Rs160 is predicated almost entirely on higher EBITDA in FY21-22, offset partly by lower valuation of CWIP, while our EBITDA multiple remains intact. While Oman transaction is somewhat accretive, we would adjust EBITDA multiple for JSPL on higher risks stemming from excess leverage on promoter’s B/S. Thus, conclusion of Oman asset sale is not anticipated to have any impact on our TP.

Earnings levers - higher production, lower coal & iron ore costs FY21 standalone steel production target of 7-7.5 MT appears achievable

In its FY20 AR, JSPL stated it is confident of achieving 7-7.5MT steel production in India in FY21, implying 15% YoY growth on standalone basis. In the first 5 months of FY21, the company has already averaged 7MT of annualized production, with output materially higher in the last three months. Higher production has been led by ramp-up at coal gasification-based DRI at Angul; JSPL achieved 72% capacity utilization at DRI based plant in August 2020. Lower thermal coal costs post Covid-19 have provided support for DRI ramp-up. We believe the company appears on track to achieving its production targets and have raised our estimate for FY21 standalone production from 6.5 MT to 7.2 MT.

Exhibit 1: JSPL standalone India steel production in FY21 consistently hitting >7MT annualized on higher Angul DRI production

Source: Company reports, Ambit capital research

Domestic thermal coal oversupply a tailwind for CGP-DRI and JPL in FY21

Lower coal demand post Covid-19 has left storage sites in India brimming with inventories. Coal stockpiles with Indian utilities hit a peak of roughly 50MT in April (>30 days of inventory). Inventories are now down to <40MT but remain elevated relative to historical levels. Stockpiles with Coal India hit ~70MT in Mar/April, but are now down to 62 MT. High stockpile levels poleaxed auction prices for thermal coal in India. Given oversupply of thermal coal in the country, Coal India subsidiaries are selling coal at 0% premium on notified prices (notified prices=reserve prices for even spot auctions). While thermal coal demand has started improving, still elevated stockpile levels would prevent any material pick-up in coal auction prices in the near term. JSPL procures G12-G16 grade thermal coals for i) Angul DRI plant which is based on coal gasification process (CGP) – 1.1 t of thermal coal/t of crude steel

6.6 5.9

7.6 7.2 7.5

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Annualized India production Annualized India salesExports as a % of sales

AMBIT INSIGHTS


production and ii) captive and merchant power plants (0.7-0.8kg of thermal coal/kwh). The economics of coal gasification-based DRI plant at Angul have possibly improved vis-à-vis that for coking coal-dependent blast furnace at Angul. Thermal coal prices in India have dropped more than the 30-35% drop seen in coking coal post Covid-19. As a result, CGP-DRI plant utilization improved to 72% in August 2020. In its FY20 AR, the company mentioned Jindal Power Limited (JPL) has also been “systematically buying through auctions and has booked enough coal for use up to the end of August 2020 at 0% premium”. Lower thermal coal prices should remain a tailwind for both Angul DRI and JPL through FY21. However, some of these coal cost savings would likely dissipate in FY22 on i) pick-up in power demand and ii) lower coal inventories.

Sarda provides cost savings in FY21-22, delays in Guali a key monitorable

In the annual report, JSPL mentioned 11.1MT of available Sarda stockpile at the end of FY20, implying consumption of 1.1MT in 4QFY20 (lower than our 1.6MT estimate). This would suggest higher than anticipated availability of 0.5MT, or Rs1.5bn benefit over FY21-22. We have adjusted our estimates for this. During FY20, JSPL won Guali iron ore mine (reserve base of ~200 MT, EC limit of 5.7 MT) at an auction premium of 144%. The mine is located less than 30km from the company’s Barbil Pellet Plant. However, note that JSPL has been delaying the start of Guali mine (though previous lessee RP Sao withdrew its SC petition on 30th July) for one reason or another. Recently, the company flagged its concerns over discrepancies in the Differential Global Positioning System (DGPS) survey and missed its 7th September deadline for payment of first installment of upfront dues of Rs200mn. We are modeling start of production in 2HFY22 and estimate Rs3bn EBITDA impact in FY22 from higher cost mine. We continue to believe lower Sarda stockpile availability in FY22 (3.3MT in FY22 vs 7.8MT in FY21) and higher Guali (144% auction premium) output would drive iron cost higher - from Rs1,400/t in FY21 to Rs2,400/t in FY22. But any delay in Guali restart beyond mid-FY22 could provide some uplift to our earnings estimates.

Exhibit 2: Sarda mine verdict a tailwind for iron ore costs and EBITDA/t in FY21

Source: Company reports, Ambit capital research

0

1,000

2,000

3,000

4,000

-113579

111315

FY1

9

FY2

0

FY2

1E

FY2

2E

FY2

3E

Rs/

t MT

Tensa Sarda Guali

Third party sourcing Iron ore cost/t (RHS)

AMBIT INSIGHTS


Exhibit 3: Steel EBITDA declined in FY20 on lower realizations though both India and Oman volumes increased

FY2016 FY2017 FY2018 FY2019 FY2020 FY2021E FY2022E FY2023E

JSPL Operations

Total sales volume

Crude Steel & Related Products 3.4 3.4 4.0 5.4 6.0 7.2 7.0 7.0

Pellet (External) 1.0 3.3 3.1 2.9 2.4 3.0 2.6 2.6

Net revenue (Rs mn) 146,933 154,936 175,230 277,160 262,283 289,574 285,349 296,836

EBITDA (Rs mn) 24,411 28,582 39,731 60,170 57,773 82,339 65,218 59,089

Steel ASP per ton (Rs/ tonne) 35,299 - 42,638 49,630 41,927 39,180 39,806 41,148

Raw material Cost (Rs/tonne) 16,644 16,294 17,008 23,833 18,828 14,918 17,637 20,027

Conversion Cost (Rs/tonne) 13,410 15,847 15,559 15,709 14,411 14,206 13,936 13,838

EBITDA (Rs/ tonne) 7,244 8,481 9,883 11,101 9,565 11,500 9,384 8,441

JPL Operations

Power Units Generated 9,542 9,176 10,905 10,396 9,583 9,279 11,132 12,045

Net revenue (Rs mn) 30,008 31,274 40,815 39,657 37,580 36,510 43,415 46,976

EBITDA (Rs millions) 6,351 10,486 14,337 11,600 12,490 14,290 15,585 15,659

Net Sales per unit (Rs/ unit) 3.1 3.4 3.7 3.8 3.9 3.9 3.9 3.9

COP (Rs/unit) 2.0 1.8 1.9 2.2 2.1 1.8 2.0 2.1

Conversion Cost (Rs/unit) 0.5 0.5 0.6 0.5 0.5 0.6 0.5 0.5

EBITDA (Rs/ unit) 0.7 1.1 1.3 1.1 1.3 1.5 1.4 1.3

Jindal Shadeed (Oman)

Sales Volumes 1.1 1.3 1.7 1.8 1.9 1.9 1.7 1.8

Net revenue (Rs millions) 28,158 34,875 56,865 71,228 65,520 63,544 65,637 74,880

EBITDA (Rs millions) 3,678 6,698 14,274 12,652 9,936 8,715 9,009 10,800

Net Sales per tonne (Rs/ tonne) 26,072 27,035 34,051 39,571 34,851 33,269 39,780 41,600

COP (Rs/tonne) NA NA NA NA NA NA NA NA

Conversion Cost (Rs/tonne) NA NA NA NA NA NA NA NA

EBITDA (Rs/ tonne) 3,406 5,192 8,547 7,029 5,285 4,563 5,460 6,000

Source: company, Ambit capital research estimates

Exhibit 4: Sarda mine and lower thermal coal costs are tailwinds in FY21, but tapering of Sarda and coal benefit in FY22-23 along with higher cost Guali output (144% auction premium) to drive India steel EBITDA lower in FY22-23

Source: Company, Ambit capital research

58 13

20 11 20

82 4 13 3 6 65

9 9 2 4 59

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80

100

120

FY2

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FY2

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bn

AMBIT INSIGHTS


Use of acceptances mask actual WC cycle Combination of deterioration in receivable days (9 days) and inventory days (11 days), offset partly by higher creditor days (9 days), led to deterioration (11 days) in cash conversion cycle (43 days in FY20 vs 32 days in FY19).

Exhibit 5: JSPL and JSW Steel working capital days masked to some extent by use of acceptances for working capital financing

Company Working capital days

FY16 FY17 FY18 FY19 FY20

Tata Steel 48 46 52 49 51

JSW Steel (10) (1) 6 15 15

SAIL 146 112 85 82 128

JSPL 61 38 33 32 43

Average 56 46 46 45 57

Source: Company, Ambit Capital Research. Note: Above financials are on consolidated basis.

JSPL’s apparently strong WC control is masked to large extent by use of acceptances for working capital financing (similar for JSW Steel). Management includes some of these interest bearing acceptances in trade payables. For instance, absent acceptances, creditor days would have been 32 days in FY20 (vs 53 days as per JSPL accounts) and working capital days would have been 64 days in FY20 (higher than Tata Steel’s 51 days). Though JSPL’s use of acceptances (6-7% of total sales) is lower than that for JSW Steel (15-20% of total sales), aggressive accounting for these interest bearing liabilities by both JSPL and JSW Steel in their books masks actual WC and hence CFO/EBITDA performance.

Exhibit 6: JSPL’s WC days increased in FY20 on higher inventories and receivables, offset partly by higher payables

Co. Average inventory days Average debtor days Average creditor days

FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20

Tata Steel 71 70 73 69 82 39 36 33 28 26 62 61 53 49 56

JSW Steel 85 60 61 58 71 23 21 23 26 29 118 82 77 69 85

SAIL 153 125 104 100 128 30 25 22 23 39 36 38 40 40 40

JSPL 73 55 56 53 64 28 25 23 23 32 39 42 47 44 53

Average 88 76 75 71 86 33 29 27 26 30 66 60 56 51 59

Source: Company, Ambit Capital Research. Note: Above financials are on consolidated basis

Exhibit 7: JSPL cash conversion improved further in FY20, though use of interest-bearing acceptances leads to optical illusion of higher than actual CFO

Source: Company, Ambit Capital Research

40%

60%

80%

100%

120%

140%

160%

FY1

6

FY1

7

FY1

8

FY1

9

FY2

0

Pre-tax CFO/EBITDA

AMBIT INSIGHTS


Exhibit 8: CFO has been the chief source of funds over FY18-20…

Source: Company, Ambit Capital research

Exhibit 9: …which has been utilised mainly towards debt & interest payments

Source: Company, Ambit Capital research

FY21 deleverging target achievable, FY23 target a little overoptimistic Unlike its peers, JSPL has completed its capex program and is now in the midst of an asset sweating and deleveraging program. Even in FY21, JSPL looks primed for positive FCF and de-leveraging, supported to a large extent by low iron costs (favorable SC verdict on lifting of Sarda iron ore stockpiles). In FY20 AR, JSPL has set out a debt reduction target of Rs50-55bn for FY21. We believe the target is achievable – we estimate Rs55bn debt reduction for FY21. Additionally, divestiture of JSIS Oman will trim JSPL’s debt by Rs60bn (US$80mn) in FY2021. However, we believe management’s net debt target of Rs150bn for FY23 is a little aggressive. We expect Rs170bn debt excluding acceptances and Rs190bn including acceptances by FY23-end. Investors should also exercise caution on potential capital spend on expansion at Patratu or Angul. Senior management has in the recent past reportedly talked up the potential for brownfield expansions, especially at Patratu.

Exhibit 10:Despite recent moratorium on repayments post Covid-19, JSPL has elevated debt maturities in FY21-23

Source: Company, Ambit capital research Note: these debt maturities in table include those for JSIS Oman

Exhibit 11: JSPL should generate strong FCF in FY21-23E on asset sweating, but FCF would remain below consolidated debt repayments, necessitating re-financing


CFO 90%

Sale of investment

1%

Loan collected

0%

Interest received

1%

Increase in equity

7%

Exchange rate gains

1%

Sources of funds FY18-20

Net capex 15% Fixed

deposits 0%

Others 1%

Repayment of

Borrowings 37%

Interest paid 46%

Cash & Bank 1%

Application of funds FY18-20

16 14 14

93

61 75

44

160

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80

100

120

FY21 FY22 FY23 FY24 & beyond

Rs

bn

Rs

bn

Standalone debt maturitiesConsolidated debt maturities (RHS)

(30)

(64) (71)

(27)

2 11 31 39

54 45 43

(100)

(50)

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150

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Capex FCF (adj for interest paid)


https://www.thehindubusinessline.com/companies/jspl-looking-to-set-up-2-25-mtpa-steel-plant-at-patratu-in-jharkhand/article31088657.ece

AMBIT INSIGHTS


Exhibit 12: JSPL increasing reliance on operating and capital acceptances; we treat these as WC financing/debt


Exhibit 13: Repays >=Rs45bn p.a. through FY23E, but debt repayments to decline in FY22-23 on lower EBITDA


Of the Rs61bn debt maturities in FY21, JSPL has already repaid Rs15bn in 1QFY21 (including Rs5bn for JSPL and $55mn for JSPML). But the remaining Rs46bn maturities in FY21 include an estimated Rs11bn for JSPL India standalone, Rs5bn for JPL, Rs6bn for JSIS Oman, >$250mn for JSPML and <$50mn for Australia. Refinancing risk for JSPML’s $153mn bullet payment by Sep'20 has been alleviated. JSPL management has indicated that post the Delhi HC approval as per W.P.(C) 3601/2020 dated 19.06.20, the company has already transmitted $90m before June 30 deadline. Current debt outstanding of $710mn at JSPML suggests $55mn debt payment since FY20-end. JSPL would probably utilize another >$50mn from Oman sale proceeds towards JSPML debt repayment. However, the company has another significant bullet payment of >$150m towards JSPML in Mar’21. JSPL has additional Rs40bn of debt maturities (ex Oman) in FY21 and Rs75bn (Rs55bn ex Oman) in FY22. We estimate FCF (post interest payment) of Rs54bn (including Oman) in FY21, suggesting need for refinancing in both FY21 and FY22.

Exhibit 14: JSPL has another Rs40bn maturities (excluding Oman) in FY21, including another >$150mn bullet payment for JSPML in Mar’21

Source: Ambit Capital research, Company

In conclusion, JSPL has been and is likely continue to tread the path of asset sweating and deleveraging through FY23. In addition, the company has some arrows in the quiver in FY21 to ward off liquidity concerns, including monetization of royalty-paid Sarda iron ore inventory, reliance on export advances for working capital financing and possibly some potential recoveries on DISCOM dues. However, despite these, we see some challenges in the near term, including high promoter pledges and need for debt refinancing.

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AcceptancesAcceptances as % of turnover (RHS)

33

75

116

91

9

(10) (30) (37) (39) (55) (45) (45) (65)

(25)

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95

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Debt repayments in2Q-4QFy21

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Oman

JSPML

Australia

JPL

JSPL India

AMBIT INSIGHTS


Exhibit 15: JSPL targets Rs150bn net debt by FY23; we expect Rs190bn (including acceptances) assuming sale of remaining 50% stake in JSIS Oman; net debt/EBITDA of 3.0x by FY23-end (including acceptances)


Loss on sale of Oman asset to drive equity write-down On June 30, 2020, JSP Mauritius (JSPML), the holding entity for Jindal Shadeed Oman (JSIS Oman), accepted a binding offer of ~$1bn enterprise value (EV) for Oman asset from Mauritius-based promoter-owned investment vehicle Templar Investments. Earlier this month, the company completed the sale of 48.99% stake in JSISI Oman to Vulcan Steel, subsidiary of Templar investments, with the remaining stake sale to be completed post approval from government of Sultanate of Oman. Stake sale of 48.99% suggests the transaction has the backing of JSIS lenders. We expect closure of the transaction (100% stake sale) in due course. JSPL’s consolidated accounts show a book value of Rs81bn for Shadeed Iron and Steel, whereas sale value of ~$1.0bn EV implies net equity infusion of <Rs10bn (after setting off of >$160mn related party loan from JSISI to JSPML). This would suggest loss on sale of >Rs70bn, including possible reversal of positive revaluation of Rs45bn in FY19, flowing through P&L into equity in FY21.

Exhibit 16: With JSIS Oman book value (BV) of Rs81bn > sale value of estimated ~$100mn, JSPL will book loss on sale, driving lower BV of the consolidated equity

Net Assets FY17 FY18 FY19 FY20

Parent

JSPL 218 228 225 237

Indian subsidiaries

JPL 118 111 106 104

Hydro-electric assets 4 4 6 7

Foreign subsidiaries

JSPML -1 -5 -8 -17

Jindal (BVI Ltd) 11 11 6 6

JSPL Mozambique Minerais LDA -4 -4 -4 -5

Shadeed Iron & Steel L.L.C 20 28 76 81

Wollongong Coal Limited -3 -6 -19 -13

Jindal Steel Bolivia SA @ 0 5 5 5

Minority Interest in all Subsidiaries 6 4 -3 -8

Consolidation Adjustments/Elimination -78 -78 -66 -73

others 10 6 0 -4

Total Equity 301 304 324 321

Source: company, Ambit capital research

299 244 209

168

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20 20

20

60

60 60

60

0

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2

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4

5

6

0

100

200

300

400

FY20 FY21E FY22E FY23E

Net

Deb

t/EB

ITD

A (x)

Rs

bn

Legacy Debt AcceptancesOman Net debt/EBITDANet debt/EBITDA (ex Oman)

AMBIT INSIGHTS


International mining assets remain a drag Wollongong Coal Limited (WCL) (majority owned by JSPL) has been incurring losses for a while, including Rs5.4bn loss during FY20. The company has been sustaining losses as a result of closure and issues at both underground coal mines in New South Wales, Australia– Wongawilli and Russel Value. Management expects Australia to be EBITDA positive over FY21 on i) optimization of expenses and ii) conclusion of restructuring of debt and iii) expectation of approval for mining from the Russell Vale mine. However, we remain cautious given company’s checkered track record and therefore expect continued losses through FY23.

Exhibit 17: International operations (ex Shadeed Oman) remain a drag, continue to generate EBITDA los through FY23


Accounting quality Within the Indian steel industry, JSPL has followed the most aggressive and volatile depreciation policy over the past few years. Unclassified loans & advances as a % of net-worth increased in FY20, and remain the highest in the industry. Miscellaneous expenses as a % sales remained flat and lower than those for TSL, but above those for other peers. Volatility in depreciation rate: JSPL’s depreciation rate has been the most

volatile amongst its Indian steel peers. JSPL’s depreciation policy has been the most aggressive in the industry over the past few years. RED

Exhibit 18: Depreciation rate for JSPL has been relatively volatile vs its peers; the company had a 206bps decrease in depreciation rate in FY20

Company Depreciation Rate % Change (bps)

FY16 FY17 FY18 FY19 FY20 FY17 FY18 FY19 FY20

Tata Steel 4% 5% 4% 5% 4% 99bps -34bps 23bps -9bps

JSW Steel 5% 5% 5% 5% 5% 49bps -42bps 50bps -16bps

SAIL 3% 3% 3% 3% 4% 7bps 10bps 3bps 13bps

JSPL 6% 5% 5% 6% 4% -83bps -45bps 147bps -206bps

Average 4% 5% 4% 5% 4% 33bps -28bps 49bps -46bps

Source: Company, Ambit Capital Research. Note: (a) Above financials are on consolidated basis. (b) Above is calculated as a % of average gross block

Miscellaneous expenses as % of revenues were 2.1% in FY20. These remained largely flat in FY20, and significantly lower than those for Tata steel. However, miscellaneous expenses remain somewhat elevated and higher than those for peers JSW and SAIL. AMBER

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AMBIT INSIGHTS


Exhibit 19: Miscellaneous expenses as % of revenues for JSPL, though lower than Tata Steel and JSW Steel, is still high at ~2% of revenues and can be reduced

Company Miscellaneous expenses as % of revenues

FY16 FY17 FY18 FY19 FY20

Tata Steel 2.97% 4.52% 3.28% 5.16% 5.19%

JSW Steel 1.32% 1.12% 1.62% 1.83% 2.58%

SAIL 0.89% 1.04% 0.92% 1.00% NA

JSPL 3.03% 2.49% 2.09% 2.10% 1.90%

Average 2.29% 2.86% 2.29% 3.20% 3.16%


Unclassified loans and advances as a % of net worth increased to 8.9% in FY20. JSPL has by far the largest exposure to this amongst its peers. RED

Exhibit 20: Unclassified loans & advances as % of net worth is highest for JSPL among key steel manufacturers in India

Company Unclassified loans & advances as % of net worth Unclassified loans & advances (Rs mn)

FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20

Tata Steel 4.9% 4.6% 3.8% 5.2% 3.6% 15,807 17,976 23,432 37,089 27,538

JSW Steel 0.5% 0.6% 0.5% 0.5% 1.2% 1,094 1,300 1,420 1,760 4,490

SAIL 2.5% 2.8% 2.9% 3.1% NA 9,974 10,199 10,821 12,385 NA

JSPL 12.8% 13.3% 9.7% 7.2% 8.9% 42,588 40,847 29,904 23,172 28,059


Corporate Governance checks On governance, JSPL doesn’t score well on contingent liabilities, board rotation and managerial and auditor remuneration. Related party transactions (RPTs) declined in FY20 but remain high.

Contingent liabilities: Contingent liabilities as a % of net worth increased to 28% in FY20 (vs 23%) in FY20. These are higher than that for Tata steel (23% in FY20) and JSW Steel (~15% in FY20). RED

Exhibit 21: Contingent liabilities increased in FY20 on higher guarantees and disputes statutory and other demands

In Rs mn As % of Net Worth As % of Net Revenues

Contingent liabilities FY19 FY20 FY19 FY20 FY19 FY20

Guarantees and undertakings

Guarantees issued by the Company's Bankers on behalf of the Company

12,522 20,314 4% 6% 3% 5%

Corporate guarantees/undertakings issued on behalf of third parties 1,921 2,293 1% 1% 0% 1%

Demand/Litigations

0% 0% 0% 0%

Disputed Statutory and Other demands 30,143 37,595 9% 12% 8% 10%

Income Tax demands where the cases are pending at various stages of appeal with the appellate authorities

19,071 17,396 6% 6% 5% 5%

Bonds executed for machinery imports under EPCG Scheme 2,082 421 1% 0% 1% 0%

Commitments

0% 0% 0% 0%

Estimated amount of contracts remaining to be executed on capital account and not provided for (net of advances)

9,144 9,232 3% 3% 2% 2%

Total 74,882 87,251 23% 28% 19% 24%


Auditor Rotation - Long association with company/management can impede an auditor’s independence. Lodha has been the auditor for JSPL since FY17, and should ideally rotate in FY22. Also, auditor remuneration over the last five years recorded 27% CAGR, ahead of 19% CAGR in revenues. AMBER

AMBIT INSIGHTS


Exhibit 22: Lodha & Co. has been the auditor of Jindal Steel & Power since FY17. The company should ideally rotate them by FY22

Company Auditor Since

Tata Steel PWC FY18

JSW Steel S R B C & Co LLP (EY) FY18

SAIL

A K Sabat & Co. FY17

Chatterjee & Co. FY16

Singhi & Co. FY16

V K Dhingra & Co. FY17

JSPL Lodha & Co. FY17

Source: Company, Ambit Capital Research.

Exhibit 23: Over FY17-20, auditor’s remuneration increased sharply (27% CAGR) on sharp jump in certification and other charges in FY20; revenue CAGR was 19%

Payment to Statutory auditors FY17 FY18 FY19 FY20 FY17-20

Statutory audit fees 9 9 10 10 4%

Certification & other charges 2 8 4 14 84%

Reimbursement of expenses 1 0 1 0 -7%

Total 12 18 14 24 27%

growth % -33% 50% -18% 67%

Revenue 155,025 175,230 277,304 262,283 19%

growth % 5% 13% 58% -5%

Source: Company, Ambit Capital Research. Above analysis is on standalone basis

Board independence and independent directors’ rotation: JSPL’s current board constitutes ten members of which five are independent. The board meets the criteria of at least 50% independence without an independent director as chairman. However, 3/5 independent directors have been with the board for >10 years. Long association with management/company may impede independence of the directors. RED

Exhibit 24: JSPL’s board meets the criteria of 50% independence; however 3/5 of these directors are on the board for over 10 years. Also, most independent directors didn’t attend the FY19 AGM

Name of the directors Type of directors Appointed date Attendance as per FY19 AGM

Attendance as per FY20 Board Meetings

Naveen Jindal Chairman -Executive Director 9-May-98 Yes 83%

Mrs. Shallu Jindal Non-Executive Director 27-Apr-12 No 67%

Mr. Ram Vinay Shahi Independent Director 15-Oct-07 No 83%

Mr. Arun Kumar Purwar Independent Director 30-Jul-07 No 100%

Mr. Sudershan Kumar Garg Independent Director 9-Nov-12 Yes 100%

Dr. Aruna Sharma Independent Director 2-Sep-19 Yes 75%

Mr. Hardip Singh Wirk Independent Director 14-Jan-09 No 83%

Mr. V. R. Sharma Managing Director 14-Aug-19 Yes 100%

Mr. Dinesh Kumar Saraogi Whole-time Director 9-Nov-12 No 50%

Mr. Anjan Barua Nominee Director-SBI 14-Feb-17 No 83%


Managerial remuneration: Despite losses in FY17-19, managerial remuneration continued to increase at 4% CAGR over the period and accounted for 3% of PBT in FY20 AMBER


AMBIT INSIGHTS


Exhibit 25: Despite losses in FY17-19, managerial remuneration continued to increase at 4% CAGR over the period and accounted for 3% of PBT in FY20

Particulars (Rs mn) FY17 FY18 FY19 FY20 FY17-20

Managerial Remuneration (MR) (Rs mn) 191 211 207 233 7%

Promoter's remuneration as % of MR 37% 46% 59% 65%

MR as % of Employee cost 4% 4% 3% 3%

MR as % of PBT NM NM NM 3%

Employee Cost 5,316 5,252 6,198 6,787 8%

PBT (14,570) (6,718) (5,698) 8,796 NM


Related-party transactions: Sale and purchase from related parties declined in FY20 – but RPTs remain high. JSPL has related party transactions with entities such as JSW Tradecorp International, Nalwa Steel and Jindal SAW. JSW International Tradecorp (JITPL) remains the main entity used by both JSPL and JSW Steel for bulk raw material purchases (iron ore, coking coal, coke and other raw materials). JSW Steel promoter’s wife Ms. Sangita Jindal owns >99% of shares in Reynold Traders of which JITPL is a wholly-owned subsidiary. JSPL routinely gets job work through Nalwa Steel, but shows that in sales and purchases or receivables and payables - this should be ideally shown as job work only. AMBER

Exhibit 26: Key material/unusual transactions with related parties

Particulars Rs mn As % of net worth As % of net revenue

FY19 FY20 FY19 FY20 FY19 FY20

Purchase of goods/services*

321,266 313,607 393,721 369,955

- Subs, Associates and JVs 2,154 4,120 1% 1% 1% 1%

- Enterprises controlled by KMP/their relatives 28,387 21,342 9% 7% 7% 6%

Sale of goods (inc capital goods)*

- Subs, Associates and JVs 587 900 0% 0% 0% 0%

- Enterprises controlled by KMP/their relatives 31,427 19,852 10% 6% 8% 5%

Interest (Expense)/Income net

- Subs, Associates and JVs (3,841) (3,435) -1% -1% -1% -1%

- Enterprises controlled by KMP/their relatives (443) (379) 0% 0% 0% 0%

Total 58,271 42,399 18% 14% 15% 11%


Exhibit 27: Purchases as % of COGS from related parties sharply increased from 9% FY17 to 22% in FY18. This moderated to 19% in FY20 but is still very high


0%

5%

10%

15%

20%

25%

FY1

6

FY1

7

FY1

8

FY1

9

FY2

0

% of purchases from related parties % of sales from related parties

AMBIT INSIGHTS


Where do we go from here? We have raised our FY21/FY22/FY23 EBITDA estimates by 17%/4%/1% to Rs104bn/Rs88bn/Rs84bn on i) higher steel shipments, ii) stronger steel pricing, iii) benefit of lower thermal coal costs in FY21, and iv) slightly higher than expected benefit from Sarda stockpile (1.1 MT consumed in FY20 vs our 1.6 MT estimate). Our pricing assumptions for FY22 remain unchanged-domestic HRC at Rs39,500/t and rebar at Rs38,500. 4% EBITDA increase for FY22 is driven by to a large extent by slightly higher steel shipments and slightly higher than expected benefit of Sarda stockpile in FY22. Our estimates don’t factor in sale of JSIS Oman yet, which we will adjust post completion of 100% stake sale. While we are raising our expectations, our estimates remain somewhat below consensus. Our cautious stance emanates from

higher iron ore cost from 144% premium Guali mine,

thermal coal savings dissipating somewhat in FY22 - hence lower CGPDRI Angul production and standalone steel production of 7.0 MT in FY22 vs 7.2 MT in FY21, and

slightly weaker product mix in FY22 vs FY20. While higher billet export shipments (lower margin) in FY21 give way to higher rebar/plate shipments in FY22, compared to FY20 higher margin rail and structural shipments get diluted as rebar/plates take higher share in product mix.

We believe management’s net debt target of Rs150bn for FY23 is a little aggressive. We expect Rs107bn debt excluding acceptances and Rs190bn including acceptances by FY23-end. We have removed CWIP from our SOTP valuation for JSPL, considering low probability of any return from hydroelectric assets. With respect to JSPL Oman transaction, recent 48.9% stake sale suggests JSPL has approval from JSIS lenders. The remaining stake sale of 51.1% looks imminent, pending approval from the government of Sultanate of Oman. But post this transaction, we remain concerned over excess leverage/stress on the promoter's already stretched personal B/S.

Our Rs160 TP (up from Rs140) implies EV/FY22 EBITDA of ~5.5x (~20% discount to JSW/TSL), ~0% terminal growth. A ~20% discount for JSPL is apt, in our view, considering litigation risks (coal scam) and high leverage on the promoter’s personal balance sheet. Our valuation doesn’t factor in sale of JSIS Oman till completion of the transaction. Adjusted EV of $800mn against FY22E EBITDA of $115mn for Oman (EV/EBITDA of ~7.0x) somewhat accretive, but we would adjust valuation multiple for JSPL on higher risks stemming from excess leverage on the promoter’s B/S. Therefore, conclusion of Oman asset sale is not anticipated to have any impact on our TP for JSPL.

Risks to our thesis: Material savings from coal block wins, JSPL valuation not appropriately reflecting/discounting litigation & liquidity risks.

Exhibit 28: JSPL consolidated EBITDA (including Oman) would increase to >Rs100bn in FY21E, but drop to ~Rs85bn by FY23E


37 37 24 29 40

60 58 82

65 59

15 17

6 10

14

12 12

14

16 16

5 7

4 7

14

13 10

9

9 11

0%

10%

20%

30%

40%

-10

10

30

50

70

90

110

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

FY1

9

FY2

0

FY2

1E

FY2

2E

FY2

3E

Rs

bn

Standalone JPL Shadeed-Oman

Others EBITDA margin (%) (RHS)

AMBIT INSIGHTS


Exhibit 29: Ambit vs consensus

Rs mn Ambit Consensus % deviation

Net Revenues

FY21E 394,596 381,257 3%

FY22E 393,601 425,523 -8%

FY23E 417,892 444,419 -6%

EBITDA

FY21E 103,955 90,482 15%

FY22E 88,326 98,169 -10%

FY23E 84,048 99,008 -15%


Exhibit 30: JSPL SOTP valuation including Oman

Particulars FY22 EBITDA

(Rs mn) EBITDA

Multiple Value of

assets

JSPL Standalone 65,218 5.5 358,698

JPL 15,585 5.5 84,937

Jindal Shadeed & Others 7,524 5.5 41,005

Total 88,326 5.5 484,640

Enterprise Value (Rs mn) 484,640

Add: CWIP 0

Less: Net Debt -324,390

Less: Valuation of Minority Interest (@ P/B of 0.4) 3,328

Equity Value (Rs mn) 163,578

Shares Outstanding (mn) 1,020

JSPL FY21-end target price 160


Exhibit 31: JSPL SOTP valuation assuming sale of Oman

Particulars FY22 EBITDA

(Rs mn) EBITDA

Multiple Value of

assets

JSPL Standalone 65,218 5.3 347,611

JPL 15,585 5.4 84,625

International assets -1,485 5.4 -8,020

Total 79,317 5.3 424,216

Enterprise Value (Rs mn) 424,216

Add: CWIP 0

Less: Net Debt -264,390

Less: Valuation of Minority Interest (@ P/B of 0.4) 3,328

Equity Value (Rs mn) 163,155

Shares Outstanding (mn) 1,020

JSPL FY21-end target price 160


Ambit HAWK Framework JSPL features in D6 of our HAWK framework for forensic evaluation on account of higher contingent liabilities, higher CWIP, volatility in depreciation rate, higher advances to related-parties/CFO and aggressive accounting in terms of provisioning for debtors due for >180 days. A look at the company’s historical performance on our ‘HAWK’ Framework (refer Exhibit 40) suggests that after several years of ‘Zone of darkness’, the company seems to have done well to move up to D6 from D10 on the back of improved CFO/EBITDA conversion, improvement in CWIP/gross-block ratio on completion of projects, lower expenses classified as miscellaneous in nature, lower advances to related parties and improved cash yields (though cash conversion still seems sub-par). However, note that CFO/EBITDA somewhat masks actual performance as the company books acceptances as current liabilities, while we view it as debt. Also, the related-party transactions are still high though they have come down compared to the earlier years. Though the company’s performance has improved on our framework, we flag some concerns in Exhibit 32 below.

AMBIT INSIGHTS


Exhibit 32: We flag certain concerns around accounting practices

Particulars Management Comment

Our view

As it pertains to coal scam, JSPL has filed a claim against Ministry of Coal for investment made in mining assets including land, infrastructure and clearance etc. of `4.3bn (`6.1bn including a subsidiary), and shows mining net book value of investment as good and recoverable. Auditor has been qualifying this since FY15.

Management believes this amount is recoverable

NA

Impairment reversal of Rs2.9bn at Wollongong Coal Limited in FY20 on higher long-term coking coal price assumptions

Investors should keep an eye on arbitrary change in long-term pricing assumptions

Net carrying value of mining development rights is slightly higher than for Tata Steel’s

Lower returns on JSPL's mining assets suggest book value could probably have been lower, but management probably conscious given it's trying to monetize some of these assets

Related party transactions - JSPL enters into related party transactions with entities such as JSW Tradecorp Intl, Nalwa Steel and Jindal SAW

All transactions at arms- length

We can't ascertain. But highlight JSPL routinely gets job work through Nalwa Steel, but shows that in sales and purchases or receivables and payables - this should be ideally shown as job work only

Disclosure - depreciation in case of the WCL group had inadvertently been recognized lower in the earlier years. The rectification adjustments led to a decrease in the Other Equity by `3.4bn (ex-NCI) and net decrease in Fixed Assets, other assets & liabilities by `5.7bn as at 31st March, 2019 as stated in the Emphasis of Matters paragraph of 2020 Audit Report.

This suggests possibility of aggressive accounting earlier as it pertains to WCL. Changes in depreciation rates should be monitored

Asset revaluation - Shadeed assets revalued higher by `45bn in FY19 more than offsetting impairment of `13bn at Australian mining assets

Asset revaluation for foreign subsidiaries was pending for a long time-needed to fix mismatch b/w Indian and overseas asset valuation

JSPL revalued Shadeed’s capital employed from `80bn in FY18 to `140bn in FY19, even though assets generate `12 bn of EBITDA in FY19-we express concern around this upward revision to carrying value of assets. Shadeed carrying value at $800/t of capacity even though, barring FY18, assets have never generated EBITDA of >$100/t

Source: Company reports, Ambit Capital research

Hawk chart

Exhibit 33: Forensic Accounting Decile

Source: Ambit Capital research

Exhibit 34: Greatness Score


Exhibit 35: Forensic Score Percentile


Exhibit 36: Greatness Score Percentile


AMBIT INSIGHTS


Exhibit 37: Forensic Accounting Contributors


Exhibit 38: Greatness Score Contributors


Exhibit 39: Forensic Score Evolution


Exhibit 40: Movement in accounting checks

Accounting Ratios FY18 FY19 FY20

Pre-tax CFO/ EBITDA 115% 105% 121%

Volatility in depn rates -45bps 147bps -206bps

PFD% for debtors > 6 months NA NA NA

Cash Yield 1% 7% 7%

Changes in Reserves/ (PAT ex-dividends) 164% 91% NM

Contingent Liab. As a % of Net Worth

50% 55%

CWIP/ Gross Block 5% 3% 2%

Misc. exp. as a % of total revenues 2.1% 2.1% 1.9%

Adv. To related parties/ Cum. CFO 0.0% 0.1% 0.3%

Cum. FCF/ Median Revenues -5% 11% 22%

CAGR in auditor's remn/ CAGR in cons. rev. 1.31 2.29 0.82



AMBIT INSIGHTS


Exhibit 41: Greatness score evolution

Source: Company, Ambit Hawk

AMBIT INSIGHTS


Financials – Consolidated Income Statement (Rs bn)

Particulars FY18 FY19 FY20 FY21E FY22E FY23E

Net Sales 278,413 393,721 369,955 394,596 393,601 417,892

% growth 22.7% 41.4% -6.0% 6.7% -0.3% 6.2%

EBITDA (excl. OI) 64,691 84,056 78,538 103,955 88,326 84,048

EBITDA Margin % 23.2% 21.3% 21.2% 26.3% 22.4% 20.1%

% growth 38.9% 29.9% -6.6% 32.4% -15.0% -4.8%

Depreciation 38,830 54,804 38,672 39,318 38,000 38,500

Other Income 29 157 263 606 - -

EBIT 25,890 29,409 40,129 65,243 50,326 45,548

EBIT Margin % 9.3% 7.5% 10.8% 16.5% 12.8% 10.9%

Interest Expense 38,657 42,642 41,493 37,941 34,241 31,241

Adj. PBT (12,767) (13,233) (1,364) 27,302 16,085 14,307

PBT Margin % -4.6% -3.4% -0.4% 6.9% 4.1% 3.4%

Tax (2,398) (3,902) 1,539 9,022 2,021 77

Adj. PAT (8,218) (1,669) 2 18,835 15,064 14,730

PAT Margin % -3.0% -0.4% 0.0% 4.8% 3.8% 3.5%

% growth 57.0% 79.7% NM NM NM -2.2%

Reported PAT (14,091) (16,453) (1,091) 18,835 15,064 14,730

EPS (x) (15.4) (17.0) (1.1) 18.5 14.8 14.4

Source: Source: Ambit Capital research, Company

Balance Sheet (Rs bn)


Shareholder's Equity 968 968 1,020 1,020 1,020 1,020

Other Equity 302,878 323,309 320,351 339,187 348,250 359,134

Net Worth 303,846 324,276 321,371 340,207 349,270 360,154

Minority Interest 4,403 (3,011) (7,764) (8,320) (9,320) (9,820)

Borrowings 429,621 395,590 368,628 313,628 274,628 233,474

Trade Payables 41,899 52,208 55,671 56,602 54,523 58,662

Other Liabilities 112,535 126,790 159,514 180,402 165,905 169,792

Total Liabilities 892,304 895,853 897,420 882,519 835,007 812,262

Net Fixed Assets 646,254 670,041 672,191 645,873 622,873 598,373

CWIP 38,770 29,055 19,745 14,745 9,745 4,745

Intangibles 43,329 31,239 27,038 27,038 27,038 27,038

Goodwill 5,922 6,164 6,098 6,098 6,098 6,098

Financial Assets 4,867 5,078 2,105 2,105 2,105 2,105

Others 12,541 14,004 12,823 14,327 9,840 10,447

Total Non-current assets 751,682 755,580 739,999 710,185 677,698 648,805

Cash & CE 2,635 1,970 5,616 5,416 7,677 5,285

Trade Receivables 18,261 30,292 35,493 40,000 36,664 40,072

Inventories 49,596 65,095 63,687 70,752 63,610 66,313

Financial Assets 21,056 6,908 8,048 9,306 9,296 9,539

Others 49,075 36,009 44,577 46,860 40,063 42,249

Total current assets 140,622 140,273 157,420 172,334 157,309 163,457

Total Assets 892,304 895,853 897,420 882,519 835,007 812,262


AMBIT INSIGHTS


Cash Flow Statements (Rs bn)


Reported PBT (18,641) (28,017) (2,458) 27,302 16,085 14,307

Depreciation 38,830 54,804 38,672 39,318 38,000 38,500

Finance Cost 38,657 42,642 41,493 37,941 34,241 31,241

Other adj. 5,443 14,682 2,443 (606) - -

Changes in WC 10,252 4,654 15,127 2,702 5,208 (1,122)

Taxes Paid (553) 296 35 (9,022) (2,021) (77)

CFO 73,989 89,062 95,311 97,636 91,513 82,849

Net Capex (16,217) (11,897) (16,307) (8,000) (10,000) (9,000)

Invst. & Acq. 2,606 (42) (7) - - -

Others (701) 3,619 315 606 2,489 -

CFI (14,312) (8,321) (15,999) (7,394) (7,511) (9,000)

Eq. Inc. 12,199 - 77 - - -

Borrowings (29,810) (36,897) (38,507) (55,000) (45,000) (45,000)

Interest paid (46,845) (45,699) (40,054) (35,441) (36,741) (31,241)

Dividends Paid - - - - - -

Others 1,699 (18) 2,865 - - -

CFF (62,757) (82,614) (75,620) (90,441) (81,741) (76,241)

Net Inc. in C&CE (3,080) (1,873) 3,693 (200) 2,260 (2,392)

Closing cash bal. 2,635 1,970 5,616 5,416 7,677 5,285

FCF 10,927 31,466 38,950 54,194 44,771 42,608


Ratio Analysis


EBITDA Margin 23.2% 21.3% 21.2% 26.3% 22.4% 20.1%

Adj. ROE -2.7% -0.5% 0.0% 5.8% 4.5% 4.3%

Pre-tax ROCE 3.4% 4.0% 5.6% 9.5% 7.7% 7.4%

Interest Coverage Ratio 0.7 0.7 1.0 1.7 1.5 1.5

Pre-tax CFO/ EBITDA 115% 106% 121% 103% 106% 99%

Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

FCF/ Revenue 3.9% 8.0% 10.5% 13.7% 11.4% 10.2%

CFO/Revenue 26.6% 22.6% 25.8% 24.7% 23.3% 19.8%

Dividend Payout Ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Cap. Employed Turnover 0.4 0.5 0.5 0.6 0.6 0.7

Gross Block Turnover 0.3 0.4 0.5 0.5 0.6 0.6


Valuation Parameters


BV per share 325 319 315 334 342 353

Net Debt/ EBITDA (x) 6.8 4.9 4.9 3.1 3.3 3.0

EV/ Sales 2.3 1.5 1.2 1.2 1.1 1.0

EV/CFO 8.7 6.5 4.8 4.9 4.8 5.2

EV/ EBITDA (x) 10.0 6.9 5.8 4.6 5.0 5.2

EV/EBIT 24.9 19.8 11.4 7.4 8.8 9.5

P/B (x) 0.7 0.6 0.3 0.5 0.5 0.5

P/E (x) (14.6) (11.1) (76.8) 8.7 10.8 13.2


AMBIT INSIGHTS


Jindal Steel & Power Ltd (JSP IN, SELL)

Source: Bloomberg, Ambit Capital research

050

100150200250300350

Aug

-17

Oct

-17

Dec

-17

Feb-

18

Apr

-18

Jun-

18

Aug

-18

Oct

-18

Dec

-18

Feb-

19

Apr

-19

Jun-

19

Aug

-19

Oct

-19

Dec

-19

Feb-

20

Apr

-20

Jun-

20

Aug

-20

Jindal Steel & Power Ltd

AMBIT INSIGHTS


Explanation of Investment Rating - Our target prices are with a 12-month perspective. Returns stated are our internal benchmark

Investment Rating Expected return (over 12-month)

BUY We expect this stock to deliver more than 10% returns over the next12 months

SELL We expect this stock to deliver less than or equal to 10 % returns over the next 12 months

UNDER REVIEW We have coverage on the stock but we have suspended our estimates, TP and recommendation for the time being

NOT RATED We do not have any forward-looking estimates, valuation, or recommendation for the stock.

POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs

NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs

NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

Note: At certain times the Rating may not be in sync with the description above as the stock prices can be volatile and analysts can take time to react to development.

Disclaimer This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital Private Ltd. Ambit Capital Private Ltd. research is disseminated and available primarily electronically, and, in some cases, in printed form. The following Disclosures are being made in compliance with the SEBI (Research Analysts) Regulations, 2014 (herein after referred to as the Regulations).

Disclosures

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Disclosure of financial interest and material conflicts of interest

• Ambit Capital, its associates/group company, Research Analyst(s) or their relative may have any financial interest in the subject company. Ambit Capital and/or its associates/group companies may have actual/beneficial ownership of 1% or more interest in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Ambit Capital and its associate company(ies), may; (a) from time to time, have a long or short position in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company (ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. However the same shall have no bearing whatsoever on the specific recommendations made by the Analyst(s), as the recommendations made by the Analyst(s) are completely independent of the views of the associates of Ambit Capital even though there might exist an apparent conflict in some of the stocks mentioned in the research report. Ambit Capital and/or its associates/group company may have received any compensation from the subject company in the past 12 months and/or Subject Company is or was a client during twelve months preceding the date of distribution of the research report.

• In the last 12 months period ending on the last day of the month immediately preceding the date of publication of this research report, Ambit Capital or any of its associates/group company or Research Analyst(s) may have:

o managed or co-managed public offering of securities for the subject company of this research report,

o received compensation for investment banking or merchant banking or brokerage services from the subject company,

o received compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company of this research report.

o received any compensation or other benefits from the subject company or third party in connection with the research report.

• Ambit Capital and / or its associates/group company do and seek to do business including investment banking with companies covered in its research reports. Compensation of Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

Additional Disclaimer for Canadian Persons

About Ambit Capital:

• Ambit Capital is not registered in the Province of Ontario and /or Province of Québec to trade in securities and/or to provide advice with respect to securities.

• Ambit Capital's head office or principal place of business is located in India.

• All or substantially all of Ambit Capital's assets may be situated outside of Canada.

• It may be difficult for enforcing legal rights against Ambit Capital because of the above.

• Name and address of Ambit Capital's agent for service of process in the Province of Ontario is: Torys LLP, 79 Wellington St. W., 30th Floor, Box 270, TD South Tower, Toronto, Ontario M5K 1N2 Canada.

• Name and address of Ambit Capital's agent for service of process in the Province of Québec is Torys Law Firm LLP, 1 Place Ville Marie, Suite 1919 Montréal, Québec H3B 2C3 Canada.

About Ambit America Inc.:

• Ambit America Inc. is not registered in Canada

• Ambit America Inc. is resident and registered in the United States.

• The name and address of the Agent for service in Quebec is: Lavery, de Billy, L.L.P., Bureau 4000, One Place Ville Marie, Montreal, Quebec, Canada H3B 4M4.

• The name and address of the Agent for service in Toronto is: Sutton Boyce Gilkes Regulatory Consulting Group Inc., 120 Adelaide Street West, Suite 2500, Toronto, ON Canada M5H 1T1.

• A client may have difficulty enforcing legal rights against Ambit America Inc. because it is resident outside of Canada and all substantially all of its assets may be situated outside of Canada.

Additional Disclaimer for Singapore Persons

• Ambit Singapore Pte. Limited is a holder of Capital Market services license and an exempt financial adviser in Singapore, as per the approved agreement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP 289) and Paragraph 11 of First Schedule of Financial Advisors Act (CAP 110) provided to Ambit Singapore Pte. Limited by Monetary Authority of Singapore. In Singapore, Ambit Capital distributes research reports.

• Persons in Singapore should contact either Ambit Capital or Ambit Singapore Pte. Limited in respect of any matter arising from, or in connection with this report/publication/communication. This report is distributed solely to persons who qualify as “Institutional Investors”, of which some of whom may consist of "Accredited Institutional Investors” as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore. Accordingly, if a Singapore person is not or ceases to be such an institutional investor, such Singapore Person must immediately discontinue any use of this Report and inform either Ambit Capital or Ambit Singapore Pte. Limited.


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AMBIT INSIGHTS


Additional Disclaimer for UK Persons

• All of the recommendations and views about the securities and companies in this report accurately reflect the personal views of the research analyst named on the cover. No part of this research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research report. This report may not be reproduced, redistributed or copied in whole or in part for any purpose.

• This report is a marketing communication and has been prepared by Ambit Capital Private Ltd. of Mumbai, India (“Ambit Capital”). Ambit is regulated by the Securities and Exchange Board of India and is registered as a Research Entity under the SEBI (Research Analysts) Regulations, 2014. Ambit is an appointed representative of Aldgate Advisors Limited which is authorized and regulated by the Financial Conduct Authority whose registered office is at 16 Charles II Street, London, SW1Y 4NW.

• In the UK, this report is directed at and is for distribution only to persons who (i) fall within Article 19(5) (persons who have professional experience in matters relating to investments) or Article 49(2)(a) to (d) (high net worth companies, unincorporated associations etc.) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (as amended).

• Ambit Capital is not a US registered broker-dealer. Transactions undertaken in the US in any security mentioned herein must be effected through a US-registered broker-dealer, in conformity with SEC Rule 15a-6.

• Neither this report nor any copy or part thereof may be distributed in any other jurisdictions where its distribution may be restricted by law and persons into whose possession this report comes should inform them about, and observe any such restrictions. Distribution of this report in any such other jurisdictions may constitute a violation of UK or US securities laws, or the law of any such other jurisdictions.

• This report does not constitute an offer or solicitation to buy or sell any securities referred to herein. It should not be so construed, nor should it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. The information in this report, or on which this report is based, has been obtained from publicly available sources that Ambit believes to be reliable and accurate. However, it has not been prepared in accordance with legal requirements designed to promote the independence of investment research. It has also not been independently verified and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties.

• The information or opinions are provided as at the date of this report and are subject to change without notice. The information and opinions provided in this report take no account of the investors’ individual circumstances and should not be taken as specific advice on the merits of any investment decision. Investors should consider this report as only a single factor in making any investment decisions. Further information is available upon request. No member or employee of Ambit accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of this report or its contents.

• The value of any investment made at your discretion based on this Report, or income therefrom, maybe affected by changes in economic, financial and/or political factors and may go down as well as go up and you may not get back the original amount invested. Some securities and/or investments involve substantial risk and are not suitable for all investors.

• Ambit and its affiliates and their respective officers directors and employees may hold positions in any securities mentioned in this Report (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). Ambit and its affiliates may from time to time render advisory and other services, solicit business to companies referred to in this Report and may receive compensation for the same. Ambit has a restrictive policy relating to personal dealing. Ambit has controls in place to manage the risks related to such. An outline of the general approach taken in relation to conflicts of interest is available upon request.

• Ambit and its affiliates may act as a market maker or risk arbitrator or liquidity provider or may have assumed an underwriting commitment in the securities of companies discussed in this Report (or in related investments) or may sell them or buy them from clients on a principal to principal basis or may be involved in proprietary trading and may also perform or seek to perform investment banking or underwriting services for or relating to those companies.

• Ambit may sell or buy any securities or make any investment which may be contrary to or inconsistent with this Report and are not subject to any prohibition on dealing. By accepting this report you agree to be bound by the foregoing limitations. In the normal course of Ambit and its affiliates’ business, circumstances may arise that could result in the interests of Ambit conflicting with the interests of clients or one client’s interests conflicting with the interest of another client. Ambit makes best efforts to ensure that conflicts are identified, managed and clients’ interests are protected. However, clients/potential clients of Ambit should be aware of these possible conflicts of interests and should make informed decisions in relation to Ambit services.

Additional Disclaimer for U.S. Persons

• The Ambit Capital research report is solely a product of Ambit Capital Private Ltd. and may be used for general information only. The legal entity preparing this research report is not registered as a broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and/or the independence of research analysts.

• Ambit Capital is the employer of the research analyst(s) who has prepared the research report.

• Any subsequent transactions in securities discussed in the research reports should be effected through Ambit America Inc. (“Ambit America”).

• Ambit America Inc. does not accept or receive any compensation of any kind directly from US Institutional Investors for the dissemination of the Ambit Capital research reports. However, Ambit Capital Private Ltd. has entered into an agreement with Ambit America Inc. which includes payment for sourcing new MUSSI and service existing clients based out of USA.

• Analyst(s) preparing this report are resident outside the United States and are not associated persons or employees of any US regulated broker-dealer. Therefore the analyst(s) may not be subject to Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by the research analyst.

• In the United States, this research report is available solely for distribution to major U.S. institutional investors, as defined in Rule 15a – 6 under the Securities Exchange Act of 1934. This research report is distributed in the United States by Ambit America Inc., a U.S. registered broker and dealer and a member of FINRA. Ambit America Inc., a US registered broker-dealer, accepts responsibility for this research report and its dissemination in the United States.

• This Ambit Capital research report is not intended for any other persons in the USA. All major U.S. institutional investors or persons outside the United States, having received this Ambit Capital research report shall neither distribute the original nor a copy to any other person in the United States. In order to receive any additional information about or to effect a transaction in any security or financial instrument mentioned herein, please contact a registered representative of Ambit America Inc., by phone at 646 793 6001 or by mail at 370, Lexington Avenue, Suite 803, New York, 10017. This material should not be construed as a solicitation or recommendation to use Ambit Capital to effect transactions in any security mentioned herein.

• This document does not constitute an offer of, or an invitation by or on behalf of Ambit Capital or its affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which Ambit Capital or its Affiliates consider to be reliable. None of Ambit Capital accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.

• Ambit America Inc. or its affiliates or the principals or employees of Ambit Group may have or have had positions, may “beneficially own” as determined in accordance with Section 13(d) of the Exchange Act, 1% or more of the equity securities or may conduct or may have conducted market-making activities or otherwise act or have acted as principal in transactions in any of these securities or instruments referred to herein.

• Ambit America Inc. or its affiliates or the principals or employees of Ambit Group may have managed or co-managed a public offering of securities or received compensation for investment banking services or expects to receive or intends to seek compensation for investment banking or consulting services or serve or have served as a director or a supervisory board member of a company referred to in this research report.

• As of the date of this research report Ambit America Inc. does not make a market in the security reflected in this research report.

Analyst(s) Certification

• The analyst(s) authoring this research report hereby certifies that the views expressed in this research report accurately reflect such research analyst's personal views about the subject securities and issuers and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report.

• The analyst (s) has/have not served as an officer, director or employee of the subject company in the last 12 months period ending on the last day of the month immediately preceding the date of publication of this research report.

• The analyst(s) does not hold one percent or more securities of the subject company, at the end of the month immediately preceding the date of publication of the research report.

• Research Analyst views on Subject Company may vary based on fundamental research and technical research. Proprietary trading desk of Ambit Capital or its associates/group companies maintains arm’s length distance with the research team as all the activities are segregated from Ambit Capital research activity and therefore it can have an independent views with regards to Subject Company for which research team have expressed their views.

Registered Office Address: Ambit Capital Private Limited, 449, Ambit House, Senapati Bapat Marg, Lower Parel, Mumbai-400013

Compliance Officer Details: Sanjay Shah, Email id: [email protected], Contact Number: 91 22 68601965

Other registration details of Ambit Capital: SEBI Stock Broking registration number INZ000259334 (Trading Member of BSE and NSE); SEBI Depository Participant registration number IN-DP-CDSL-374-2006; SEBI Portfolio Managers registration number INP000002221, SEBI Merchant Banking registration number INM000012379, AMFI registration number ARN 36358. © Copyright 2020 Ambit Capital Private Limited. All rights reserved.

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