Slightly lower than expected; Valuation remains attractive!
* Q1FY19 revenue decreased by 4% yoy but rose by 5% qoq to Rs21.3bn. Realization was down 7% yoy at Rs125,169/tonne (+5% qoq). While offtake rose by 3% yoy, it shrank by 98% qoq to 170kt. This was slightly lower than our estimates.
* EBITDA stood at Rs2.52bn, flat yoy and down 12% qoq. EBITDA/tn decreased by 3% yoy and 3% qoq to Rs14,765. Raw Material cost/tn stood at Rs80,903 (-32.1% yoy/+6.7% qoq). Higher trading activities led to weaker margins.
* Q1FY19 adjusted PAT rose by 7% yoy but declined by 19% qoq to Rs794mn, while other income stood at Rs243mn (-20% yoy/-15% qoq). Interest cost declined by 16% yoy and 7% qoq to Rs868mn. Long-term loans stand at Rs23.08bn as against Rs25.48bn in FY17.
* We have revised our estimates to reflect the recent performance, which we believe will be sustainable. Subsidiaries’ performance has been strong. Also, CARE’s rating upgrade of the company is a positive. We maintain BUY with a revised TP of Rs269.
Sustainable performance with improved balance sheet
Q1FY19 performance of the company remained stable. Volume offtake grew marginally by 3% yoy to 170kt on the back of moderate demand for Stainless Steel. Although the Raw Material (RM) cost per tonne declined by 9.6% yoy, the same was up by 7% qoq to Rs80,903 due to increase in Nickel and Electrode prices. Consequently, EBITDA/tn declined by 2.5% qoq to Rs14,765. Long-term debt fell to Rs23.08bn from Rs25.48bn in FY17. This led to a fall of 16% yoy/7% qoq in the interest cost to Rs868mn. Subsidiaries continued to perform satisfactorily. Jindal Stainless Steelway Ltd (JSSL) and JSL Lifestyle Ltd reported Q1FY19 net sales of Rs3.38bn and Rs1.14bn, respectively, while their PBT stood at Rs180bn and Rs170bn, respectively.
Prospects of improved demand for Stainless Steel in India remains intact. In fact, demand for Stainless Steel products increased from Railways, Automobiles and Infrastructure sectors. The management expects new BS-VI norms to further boost Stainless Steel demand. JSHL’s focus on specialty products will remain intact and will help it to cater to the above-mentioned avenues. On the balance sheet front, the company has been getting stronger with deleveraging (LT debt/EBITDA at 2.3x). CARE rating has also upgraded its rating to “A-" from “BBB+”.
Valuation continues to be attractive; Maintain BUY
JSHL’s recent performance has been slightly lower than our estimates. While we continue to believe on the strength of the company, we have aligned our estimates with the recent trend. Also, we have cut our target EV/EBITDA multiple to 6x from 6.5x. On this basis, our 1-year forward (FY20E) SOTP-based TP has been revised to Rs269 – after giving 40% discount for its stake in JSL. We continue to maintain BUY. We understand that higher cash flow would result in further deleveraging and higher valuation.
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