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Strong performance; all eyes on merger, maintain Buy

* Standalone Q3 revenue/EBITDA/PAT came in 25%/23%42% higher than our estimates. Subsidiary performance was also robust, with revenue and EBITDA 24%/17% above estimates. Strong 10% blended ASP growth and 13 month-high sales aided performance.

* JSHL repaid Rs3.2bn of loans in Q3 and despite availing moratorium in Q1, it repaid Rs1.7bn of loans in 9MFY21 on a consolidated basis. This has resulted in a structural reduction (18%) in finance cost, leading to balance sheet improvement.

* The govt recently revoked notifications imposing CVD on imports from Indonesia and China. This will lead to a near-term cap on increase in steel prices, in our view. It will also push JSHL to increase its share of niche products and reduce commoditized offerings.

* With the merger with JSHL already announced, the stock price movement of JSHL is pegged to that of JSL. At our fair value of JSL of Rs95 (post transaction), the equivalent TP of JSHL is Rs185 (up from Rs159). The stock currently trades at an attractive valuation of 3.5x FY22E EV/EBITDA, ex-value of 32% stake in JSL with a 30% discount.

* The revocation of notification by government is a dampener:

We believe that the government’s decision to revoke the CVD imposed on imports from Indonesia and China is likely to throw open challenges for the company, especially given that S200 is 45-50% of its total basket. We believe that this also gives an opportunity for the company to structurally move away from the products, which are dumped by these countries and focus on autos, railways, and other value-added segments, which are growing rapidly and where the company has already built a niche. If the government reinstates the CVD, we can expect re-rating of the stock.

* Expansion of SPD - a step in right direction:

JSHL is completing its expansion of Special Products Division capacity from 14kt to 28kt, comprising of precision strips which will be commissioned in Q2FY22 and fully ramped up by Q4, thereby increasing its share of value-added products further. This should push the EBITDA/t structurally.

* Outlook and valuation:

We have raised our FY21/22E EBITDA by 6%/3%, factoring in EBITDA/t of Rs17,737 for FY21E and Rs 16,941 for FY22E. We find the stock attractive at current levels. With a 14% RoE, the stock is available at 1x P/B. Given the deleveraging done the by the company, we expect even 1% reduction in the interest rate for JSHL at the current level will boost its PAT by 33%. Demand for stainless steel in India is likely to remain strong over the next several years as the pace of urbanization improves and new applications of SS are put to use. JSHL with its focus on value added segments will be a direct beneficiary of the same. Maintain Buy with a revised TP of Rs185 (up from Rs159 previously). Key risk remains imports at subsidized prices from Indonesia and China.

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