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Strong earnings momentum to drive rerating

Jindal Stainless (JSL) reported better-than-expected Q2FY22 EBITDA, with EBITDA/te increasing by ~Rs3,862/te QoQ. H1FY22 consolidated EBITDA (JSL) of Rs13.5bn with combined volumes of 0.495kte 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. Q2FY22 EBITDA also includes a forex gain of ~ Rs610mn. Increase in working capital and expansion capex didn’t allow deleveraging – net debt [ex ICD from Jindal Stainless (Hissar)] increased QoQ from Rs14.5bn to Rs15.6bn. We maintain BUY with a revised target of Rs250/share (1.8x FY24E P/B). Company’s petition for merger with JSHL is pending before NCLT, Chandigarh for approval. All brownfield expansion projects announced in Q1FY22 are on track.

* Strong H1FY22 print leads to earnings upgrades. H1FY22 EBITDA is up 3.3x YoY. Q2FY22 volume was up 8% QoQ and 11.5% YoY. We have increased volumes, realisations, gross margins and EBITDA estimates for FY22. Our FY22/23E EBITDA for JSL is higher by 35/10% respectively. FY22/23E PAT is higher by 57%/19% respectively. The strength in FY22E EBITDA has been partly driven by increased RM costs leading to gains in inventory valuation and by forex gains. Our FY23E upgrade reflects increase in volumes while spread has been adjusted and normalised – we have assumed JSL gross margin to drop from Rs62,000/te in FY22E to Rs52,000/te in FY23E. Similarly, EBITDA/te drops from Rs26,389/te in FY22E to Rs17,135/te in FY23E.

* Update on the business. All major end-use segments like process industry, pipe & tube, railways & wagons, and metro rail grew during Q2FY22, keeping stainless steel demand firm. As general manufacturing picked up pace, demand for special grades like duplex and super austenitic, where JSL is an established supplier, also gained momentum. Auto segment sales remained weak because of the long waiting period due to semiconductor shortage. Despite prevailing logistical challenges due to container scarcity, JSL managed through advance planning and strategic sourcing of raw materials. Export moved up to 23% of volumes (from 20% QoQ). Management has highlighted the continued increase of imports of stainless steel from China and Chinese funded investments in Indonesia; with imports constituting 40% of domestic market vis-à-vis 35% QoQ.

* Maintain BUY with a revised target of Rs250/share. Significant buildup in working capital (Rs7.5bn) and growth capex (~Rs3.25bn) in H1FY22 didn’t allow for deleveraging as net debt (excluding group company JSHL’s debt) increased to Rs15.6bn from Rs14.5bn QoQ. JSL did a small acquisition (~Rs0.5mn) of JSL Ferrous (promoter entity). Also, under predefined conversion of convertible equity warrants, 14mn and 3mn shares have been allocated to Virtuous Tradecorp and Kotak Special situations fund, respectively

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