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Volume growth a major positive

Jindal Stainless’ (JSL) Q3FY23 performance was 22% ahead of our and street estimates. Key points: 1) Sales volumes were up 33% YoY (22% QoQ) to an alltime high of 330.4kte aided by the rolling of third-party stainless steel flats; 2) blended realisation however was down 13% QoQ tracking international raw material prices and higher hollow-ware sales in the domestic market; 3) proportion of exports declined to an all-time low of a mere 3% owing to the levy of export duty; and 4) ‘net debt/EBITDA’ declined further to 0.7x as of Dec’22-end. Going ahead, we expect JSL to reap the advantages of volume growth driven by: 1) significant opportunities in the domestic market in value-added segments such as railways and automotive; and 2) repeal of export duty, which is likely to aid volumes in the premium segment. This is likely to result in a sustainable EBITDA at the higher end of guided range of Rs18,000-20,000/te. Taking cognisance of the Q3FY23 performance and improved profitability outlook, we raise our FY23E/FY24E EBITDA by 6%/3% respectively. Besides, taking into account the larger scale of operations post JSHL merger and imminent increase in profitability post JUSL acquisition, we raise our valuation multiple to 6x (earlier: 5.5x) resulting in a revised target price of Rs300 (earlier: Rs270). Maintain BUY.

* Robust volumes a major positive. J

SL’s Q3FY23 standalone EBITDA at Rs6.2bn (down 16% YoY, up 51% QoQ) was 22% ahead of our and street estimates. Key points: 1) Sales volumes rose 33% YoY (22% QoQ) to 330.4kt as the company utilised the excess capacity at JUSL for rolling stainless flats from third-parties; 2) domestic sales volumes grew 75% YoY (25% QoQ) to 97% of overall as export duty dried up overseas opportunities; 3) blended realisation was down 13% YoY in line with raw material costs and higher proportion of sales to hollow-ware segment in the domestic market to push volumes; 4) EBITDA/t rose 24% QoQ to Rs18,834/te mainly on higher volumes; 5) EBITDA loss at overseas subsidiaries widened QoQ to Rs975mn due to inventory writedown and adverse market conditions, particularly in Europe. Going ahead, we expect better days in store as costs have likely peaked off and volume uptick is visible.

* Volume growth potential ahead.

In our view, JSL stands at vantage point on the volume front with the luxury of being able to ‘pick and choose’. In the domestic market, there is good traction from sectors such as railways, automotive and newgeneration power plants. Furthermore, the removal of export duty is likely to boost premium-range volumes in overseas markets. In our view, all this will aid the company in posting EBITDA/te of ~Rs21,000 through to FY24E.

* Outlook and valuations – Volume focus a positive:

In times of export duty imposition, JSL has shown ability to achieve commendable volume growth. In our view, the new 1.0mtpa capacity is likely to result in volume growth of ~20% in FY24E. We value JSL at 6x FY24E EBITDA resulting in a target price of Rs300 (earlier: Rs270). Maintain BUY.

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