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Gross margins/te expanded QoQ; export duty imposition drives EBITDA weakness

Jindal Stainless (JSL) reported better than expected EBIDTA of Rs23,294/te, down 25.5% QoQ. Decline in EBIDTA (QoQ) was mainly due to higher other expenses – presumably due to export duty paid. Q1FY23 consolidated EBITDA (JSL) at ~Rs5,486.5mn, with volumes of 0.236mnte (down ~1% YoY), was lower by ~8.7% YoY. Net external debt increased to Rs20.98bn in Q1FY23 as against Rs15.46bn in Q4FY22. Company’s petition for merger with JSHL is pending before NCLT, Chandigarh, for approval. All brownfield expansion projects announced in Q1FY22 are on track. The imposition of export duty on stainless steel has impacted ~70- 80% of JSL’s export portfolio, thus reducing the export share to 20% in Q1FY23 as against 32% in Q4FY22. Company announced its intention to acquire JUSL’S 26% stake and make it a wholly-owned subsidiary. Maintain BUY with an unchanged target price of Rs200/share (1.4x FY24E P/B).

* Decreased proportion of export mix (20% in Q1FY23 from 32% in Q2FY22) compensated for the higher domestic sales in certain sectors. The imposition of export duty on stainless steel has impacted ~70-80% of JSL’s exports, thus reducing the export share to 20% in Q1FY23 as against 32% in Q4FY22. Dumping of imported and subsidised material from China and Indonesia led to muted domestic demand and reduced price levels. This also resulted in the share of imports rising to 49% of demand in Q1FY23 vs 35% in Q1FY22. The decline in export volumes was partly offset by higher domestic sales.

* Merger update – timeline gets extended. Majority of shareholders and creditors of JSL and JSHL approved the ‘scheme of arrangement’ for the merger between the two companies (JSL and JSHL) on 24th Apr’22. The companies have filed the second motion petition with NCLT on 13t Jul’22. Management now expects other relevant processes to be completed in due time (next 4-5 months).

* Integrated stainless steel operations through JUSL acquisition. JSL will acquire Jindal United Steel Limited (JUSL) as a wholly-owned subsidiary. This would improve synergies between the two entities. JUSL has been operating the hot strip mill (HSM) for rolling stainless steel and carbon steel slabs with its total capacity being enhanced to 3.6mtpa. JUSL is also operating a cold rolling mill (CRM) with capacity of 0.2mtpa for stainless steel applications.

* Sector-wise offtake. Auto offtake increased by ~40% QoQ (much higher traction as compared to conventional steel majors). JSL is undertaking joint development of new stainless steel grades with auto OEMs. It is also developing special stainless steel finishes for lift and elevator segments. Demand from metro sector continues to be steady. Pipes and tubes segment witnessed a low market demand and negative price sentiment due to a major price drop during the period. Offtake for railway coaches and wagons also remain strong.

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