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Volume growth a major positive

Jindal Stainless’ (JSL) Q2FY23 performance was ahead of street estimates. Key points: 1) Sales volumes were up 5% YoY (14% QoQ) to an all-time high of 270.4kte; 2) blended realisation however was down 11% QoQ tracking international prices and higher hollow-ware sales in the domestic market; 3) proportion of exports dipped to an all-time low of 5% owing to levy of export duty; 4) capex has accelerated in line with guidance to complete the brownfield expansion underway. Going ahead, we expect JSL to reap advantages of both scale and scope owing to: 1) completion of the ongoing brownfield expansion, 2) merger of JSHL, and 3) acquisition of JUSL. Despite likely debt escalation in the near term and our estimate of lower prices, we see the advantages of synergies from JUSL propelling standalone EBITDA to Rs21,500/te by FY24E. We reinitiate coverage on JSL with a BUY rating. Factoring-in the threat of high imports and lacklustre international prices, we value JSL at 5x FY24E EBITDA resulting in a target price of Rs180, implying ~20% upside to CMP.

* Good performance in a challenging quarter. JSL’s Q2FY23 EBITDA was Rs4.1bn (down 42% YoY, 21% QoQ). Key points: 1) Despite continued influx of imports, sales volumes were up 5% YoY (14% QoQ) to an unprecedented high of 273.4kte; 2) domestic sales volumes grew 30% YoY (45% QoQ) to constitute 95% of overall sales as export duty dried up exports; 3) blended realisation was down 11% QoQ as the company focused on low-priced hollow-ware segment to boost volumes; 4) RM cost/te was up 14% YoY (down 5% QoQ), resulting in standalone EBITDA/te declining by 45% YoY at ~Rs15,220 – lowest since Q1FY21; 5) overseas subsidiaries posted loss of Rs529mn at EBITDA level possibly due to inventory write-down. Going ahead, we expect better days as costs have likely peaked off and volume uptick is visible. Hence, we see little risk to management guidance of EBITDA at Rs18,000/te and expect standalone volumes to be similar to last year.

* Plethora of positives in store. We see a number of positives for the company through to FY24E. The pace of capex (Rs9.7bn in H1FY23 vs Rs7.7bn in FY22) has picked up, indicating that the ongoing brownfield expansion is on track. Additionally, the merger with JSHL would broaden the range of products and propel the company to top-3 position in flat stainless steel products globally, ex-China. Furthermore, the integration of JUSL will likely usher in cost synergies resulting in EBITDA/te regaining Rs21,500/te level by FY24E in our view.

* Outlook & valuations – Primed for growth: Despite significant headwinds from export duty and influx of imports, we find the all-time high level of sales volume impressive. Besides, we expect progressive improvement in profitability as costs have likely peaked off. That said, factoring-in the adverse macro, we value the JSL stock at 5x FY24E EBITDA resulting in a target price of Rs180. Reinitiate with BUY.

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