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EC approval received; clears path for expansion plan...

Vardhman Special Steel (VSSL) has recently been granted the environmental clearance (EC) for expansion of capacity at its existing plant in Ludhiana, to up to 280000 tonnes per annum of rolled production. The company applied for the said approval in CY19. With this approval, the path for enhancement of capacity has been cleared. To begin with, the current rolling capacity of 200000 tonnes per annum would be increased to 250000 tonnes per annum. Total capex for the plan is expected to be ~| 250 crore.

Price hikes augur well….

Recently, VSSL has also completed price negotiation with OEMs for Q1FY22. The price increase received by the company for Q1FY22 is in the range of ~| 5000-6000/tonne. On the back of price increase coupled with good demand from user industry we upward revise our EBITDA/tonne estimate for both FY22E and FY23E. We now model an EBITDA/tonne of | 8500/tonne for FY22E (upward revised from | 7000/tonne earlier) and | 9000/tonne for FY23E (upward revise from | 8000/tonne earlier). Going forward, over the medium to long term horizon, export proportion in overall volume-mix is likely to increase notably. In FY20, exports contributed ~3% of total volume. Going forward, by FY25E export contribution is likely to increase to ~20- 25% of total volume.

Upward revise estimates….

On the back of the recent price hike received by the company from OEMs, we upward revise our estimates both for FY22E and FY23E. We upward revise our EBITDA estimate by 21% for FY22E and by 9% for FY23E. We now model EBITDA margin of 11.0% for FY22E (upward revise from 9.4% earlier) and EBITDA margin of 11.3% for FY23E (upward revise from 10.5% earlier). We also upward revise our PAT estimate by 27% for FY22E and by 17% for FY23E.

Valuation & Outlook

VSSL is currently in a sweet spot on the back of a) recent price hike received from OEMs, b) receipt of the long-awaited environmental clearance (EC), which has cleared the pathway for expansion plans, c) good demand from the user industry segment. On the back of healthy operating environment, we remain positive on the stock. On the back of recent price hike received by the company from OEMs, we upward revise our estimates both for FY22E and FY23E. We value the stock at 7.5x FY23E EV/EBITDA and arrive at a target price of | 300 (earlier | 240). We maintaining BUY recommendation on the stock.

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