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Steady performance…

About the stock: Vardhman Special Steel (VSSL) is among India’s leading steel bar producers for automotive applications. It has specialised product offerings that include steel bars & rods & bright bars of various categories of special & alloy steel.

* In August 2019, VSSL had entered into a strategic alliance with Aichi Steel Corporation (ASC) Japan, the main material producer for Toyota Group wherein ASC had participated in equity and had entered into a technical assistance agreement

* VSSL plans to increase export share to ~20-25% in FY25 from 1% in FY21.

Q2FY22 Results: VSSL reported a steady operational performance in Q2FY22.

* For Q2FY22, VSSL reported a topline of | 336 crore, up 36% YoY, 2% QoQ. Subsequent EBITDA was at | 46 crore, up 117% YoY but down 10% QoQ

* PAT for Q2FY22 was at | 24 crore, up 172% YoY but down 13% QoQ

What should investors do?

VSSL’s share price has grown by ~3.9x over the past 12 months (from ~| 67 in October 2020 to ~| 262 levels in October 2021).

* We continue to remain positive and retain our BUY rating on the stock

Target Price and Valuation: We value VSSL at | 340 i.e. 7.5x FY23E EV/EBITDA

Key triggers for future performance:

* In June 2021, VSSL was granted environmental clearance (EC) for expansion of capacity at its existing plant in Ludhiana, to up to 280000 tonnes per annum (TPA) of rolled production. With this approval, the path for enhancement of capacity has been cleared. To begin with, the current rolling capacity of 200000 TPA would be increased to 250000 TPA

* VSSL is focusing on improving capital efficiency and is targeting an EBITDA/capital employed of 25% by FY25

* Going forward, we model EBITDA/tonne of | 10000/tonne each for both FY22E as well as FY23E

* Over FY21-23E, we expect VSSL’s topline to grow at a CAGR of 25% while EBITDA and PAT are expected to register a CAGR of 35% and 64%, respectively.

Alternate Stock Idea: Apart from VSSL, we also like Tata Metaliks (TML).

* By Q4FY23, Tata Metaliks is planning to double the ductile iron (DI) pipe capacity to 4 lakh tonnes

* BUY with a target price of | 1300

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