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Earnings continue to surprise

Jindal Stainless (Hisar) (JSHL) reported better-than-expected Q2FY22 EBITDA, with EBITDA/te increasing by ~Rs2,820/te QoQ. H1FY22 consolidated EBITDA (JSL) of Rs9.8bn with combined volumes of 0.339kte leads to volume as well as margin upgrade for FY22E. Increasing raw material prices (nickel and ferrochrome up ~10/21% QoQ) helped inventory valuation and consequently EBITDA. However, increased proportion of 200 series in the sales mix leads to a QoQ drop in gross margins/te. Increase in working capital didn’t allow deleveraging – net debt increased QoQ from Rs12.9bn to Rs13.6bn. We maintain BUY with a target of Rs250/share (1.8x FY24E P/B). Company’s petition for merger with JSL is pending before NCLT, Chandigarh for approval. All brownfield expansion projects announced in Q1FY22 are on track. JSHL has recently commissioned 26ktpa precision strip mill, taking the total precision strip capacity to 48ktpa.

* Strong H1FY22 print leads to earnings upgrades. H1FY22 EBITDA is up 2.9x YoY. Q2FY22 volume was up 25% QoQ and 21% YoY. We have increased volumes, realisations, gross margins and EBITDA estimates for FY22. Our FY22E EBITDA for JSHL is higher by 47%. FY22E PAT is higher by 37%. The strength in FY22E EBITDA has been partly driven by increased RM costs leading to gains in inventory valuation and by forex gains. Spread has been adjusted and normalised – we have assumed JSHL gross margin to drop from Rs65,000/te in FY22E to Rs55,000/te in FY23E. Similarly, EBITDA/te drops from Rs26,724/te in FY22E to Rs17,948/te in FY23E.

* Management commentary. All end-use segments like Pipe & Tube, Hollowware, white goods along with Railways & Wagons, and Metro Rail grew during the quarter. Sales in the auto segment were weak as the semiconductors’ shortage led to a decline in the production of passenger vehicles. JSHL’s Specialty Product Division’s (SPD) sales grew by 31%YoY in Q2FY22, led by higher sales in the blade steel and precision strips segments. Higher sales volume in SPD was also on account of additional capacity due to recent commissioning of the brownfield expansion project. Current supply chain challenges due to container scarcity did not have any significant impact as domestic sourcing of raw materials has fairly increased. The share of imports in the domestic market in Q2FY22 was at 40% as compared to 35% in Q1FY22.

* Maintain BUY with a target of Rs250/share. Significant buildup in working capital (Rs9.2bn) in H1FY22 didn’t allow for deleveraging as net debt (excluding group company JSHL’s debt) increased to Rs13.6bn from Rs12.9bn QoQ. All brownfield expansion projects announced in Q1FY22 are on track. JSHL has commissioned the 26,000tpa capacity precision strip mill as part of the brownfield expansion under SPD. This takes the total precision strip production capacity to 48,000tpa.

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