IGI Logo

Spread guidance upped

Higher working capital doesn’t allow deleveraging for converters in an upcycle. Same trend is being seen for Jindal Stainless (JSL). WC has increased by Rs30bn in 9MFY22, leading to an increase in net debt during the same period. Due to continued strength in European and US prices, JSL has been able to withstand the sharp fall witnessed in regional markets (China 300 series). This, coupled with inventory valuation gains (Scrap, Nickel and Ferrochrome), explains the continued strength in margins. Management now has extended FY22E spread guidance to 9MFY22 average spreads while maintaining long-term sustainable spread guidance at Rs18-20,000/te. Management’s focus remains on localization of supply chain, and thus reduce inventory holding period and reduce EBITDA volatility on account of inventory valuation. Post the expansion (which remains on track), the medium-term focus remains on backward integration. Maintain BUY.

Update on project capex. 70-75% of capital costs are committed. SPD in Jindal Stainless (Hissar) is ramping up well (delivered ahead of time), reached 70-80% of utilisation on entire capacity. Steel melting shop (SMS) of 1.1mtpa is being commissioned, 80-90% of civil work is completed and ~20% of equipment has started arriving; project is well ahead of time. For CR combo line, 60% of civil work is completed and part of the equipment has started arriving. For the ferrochrome plant, equipment has been ordered and civil work has just started. On JSHL, the first phase of precision strip line has just been commissioned; witnessed delay of 1 month because of Covid. JSHL has attained 75% of total estimated capacity; management expects to achieve 100% utilisation by Q2FY23. Phase 2 of precision strip line is also well ahead of time; the company has ordered the equipment and civil work is going on. For blade steel, civil is 80% completed and equipment has been ordered.

Medium-term focus. Management wants to focus on backward integration as the current expansion will take care of domestic demand. Trafigura has set up yard close to JSL's Jajpur plant and also the company is planning to set up multiple yards globally. Medium-term objectives are to maintain domestic leadership in stainless steel (as easy target as per us), strategic acquisition given current strength of balance sheet (not many assets are available barring Salem steel plant of SAIL), ESG and CSR. There is also conscious effort of reducing buying from far off markets and localising sourcing – this allows JSL leverage in terms of costs and inventory fluctuation.

Higher coal costs. JSL is yet to be fully impacted on account of rise in costs (coal/power) as it is buying from Coal India on an LTL basis. Management is hopeful that it will not have to venture into import market. Rake allocation has been put on last priority for captive power plant (CPP); management hopes the situation resolves in a couple of months

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer