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JUSL acquisition? Capital allocation in the right direction 

Jindal Stainless (JDSL) reported marginally below estimates consol EBITDA of Rs5.48bn (CentrumE: Rs5.82bn) owing to lower overseas subsidiaries operational performance. The  standalone  numbers  stood in line with EBITDA  of Rs5.2bn  (CentrumE: Rs5.0bn) down 31% QoQ. The decline is despite increase in gross margin from 28% in Q4 to 32% in  Q1FY23.  Lower  volume  (down  12%  QoQ  impacted  by  export  duty  imposition  in May2022), higher power and other expenses dented profitability. EBITDA/t stood at Rs22,216,  though  higher  than  our  estimates  (CentrumE:  Rs21,180/t)  but  down  21% QoQ. JDSL is set to acquire remaining 74% stake in its associate company, Jindal United Steel Limited (JUSL) for cash consideration of Rs9.6bn (expected by June 2023), which is positive  for  JDSL. We  reduce FY23E EBITDA by 6%  to  factor in lower volumes but increase FY24E EBITDA by 10% to factor in saving of conversion cost in JUSL. On account of higher earnings in FY24E, we increase our TP to Rs229 (earlier Rs200), based on 5.0x FY24E EV/EBITDA. Reiterate BUY.

India EBITDA/t at Rs22,216, down 21% QoQ; overseas subsidiaries’ EBITDA lower QOQ

During Q1, JDSL sold 236kt of stainless steel (SS), down 12.5% QoQ. JDSL exports stood lower at 25% (vs 32% in Q4FY22) of volume, affected by imposition of 15% export duty on 21st May 2022. The share of SS imports from China and Indonesia stood at 49% as on Q1FY23.  Domestic volume was down 3% QoQ at 177kt, while export volume was down ~32% QoQ to 59kt.  Despite increase in gross margin from 28% in Q4 to 32% in Q1FY23, lower  volume,  higher  power  and  other  expenses  dented  profitability  thereby  JDSL recording EBITDA/t of Rs22,216, down 21% QoQ but still healthy compared to historical margins  (FY17?22  average  EBITDA/t  was  Rs17,295).  Overseas  subsidiaries  reported EBITDA of Rs254mn v/s Rs805mn in Q4FY22. Consequently, it reported consol EBITDA of Rs5.5bn, down 35% QoQ.During Q1, JDSL sold 236kt of stainless steel (SS), down 12.5% QoQ. JDSL exports stood lower at 25% (vs 32% in Q4FY22) of volume, affected by imposition of 15% export duty on 21st May 2022. The share of SS imports from China and Indonesia stood at 49% as on Q1FY23.  Domestic volume was down 3% QoQ at 177kt, while export volume was down ~32% QoQ to 59kt.  Despite increase in gross margin from 28% in Q4 to 32% in Q1FY23, lower  volume,  higher  power  and  other  expenses  dented  profitability  thereby  JDSL recording EBITDA/t of Rs22,216, down 21% QoQ but still healthy compared to historical margins  (FY17?22  average  EBITDA/t  was  Rs17,295).  Overseas  subsidiaries  reported EBITDA of Rs254mn v/s Rs805mn in Q4FY22. Consequently, it reported consol EBITDA of Rs5.5bn, down 35% QoQ.

Net debt increased; to acquire 74% stake in its Associate company, Jindal United Steel

JDSL’s external net debt increased by ~Rs5.6bn QoQ to ~Rs24.3bn due to higher working capital. Interest cost was flat at Rs721mn. We expect easing of working capital in H2FY23 which will lead to debt reduction. The Board decided to buy remaining 74% stake in its Associate  company,  JUSL,  at  cash  consideration  of  Rs9.6bn  which  is  expected  to  be completed by June 2023 (effective from April 2022). JUSL has net debt of Rs21bn at FY22? end.  This  along  with  other  liabilities  makes  the  JUSL’s  EV  at  ~Rs38bn.  JUSL  recorded EBITDA of Rs5.9bn in FY22 and has a potential to make EBITDA of ~Rs10bn/year  from FY25 onwards, once it commissions its HSM to 3.6mtpa.

Margins remain high; removal of export tax essential for earnings; reiterate BUY

Management  continues  to  guide  sustainable  EBITDA/t  of  Rs18?20,000/t  which  is encouraging. The  1mtpa expansion is expected  to be commissioned by FY23?end and export market is essential  for incremental volume.  JDSL’s merger with  JSL  (Hisar) will now file the second motion petition with NCLT and is expected to be concluded by CY22? end. The buying out of remaining 74% stake in its Associate company, JUSL is a long term positive.  The  major  trigger  for  the  stock  is  the  removal  of  15%  export  duty  which Government has imposed on 21st May’22. We recommend BUY with TP of Rs229

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