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EBITDA/tonne declined both QoQ , YoY …

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

* VSSL, incorporated in May 2010, is headquartered in Ludhiana, Punjab

*  In August 2019, VSSL 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

Q1FY23 Results: For Q1FY23, Vardhman Special Steel’s EBITDA/tonne declined both QoQ as well as YoY.

* For Q1FY23, Vardhman Special Steel reported topline of | 469 crore, up 42% and 37% QoQ. During the quarter, VSSL reported sales volume of 52265 tonnes, up 20% YoY and 26% QoQ.

* During the quarter, Vardhman Special Steel reported EBITDA/tonne of |8744/tonne as compared to | 9148/tonne in Q4FY22 and | 11684/tonne in Q1FY22. EBITDA for the quarter was at |46 crore, up 20% QoQ however down 11% YoY. EBITDA margin for the quarter stood at 9.7% in Q1FY23 as compared to 15.5% in Q1FY22 and 11.1% in Q4FY22.

* The ensuing PAT of Vardhman Special Steel for Q1FY23 stood at | 30 crore, up 9% YoY and 4% QoQ.

What should investors do? VSSL’s share price has given a return of ~321% over the last 2 years (from ~| 57 in July 2020 to ~| 240 levels in July 2022).

* We downgrade the stock from BUY to HOLD. VSSL’s EBITDA/tonne is likely to witness a softening trend going forward.

Target Price and Valuation: We value VSSL at | 250 i.e. 6.5x FY24E EV/EBITDA

Key triggers for future performance:

* Over FY22-24E, we expect the topline to grow at a CAGR of 14% while EBITDA, PAT are expected to register CAGR of 2%, 6% respectively.

 * Going forward, we have assumed EBITDA/tonne of | 8250/tonne for FY23E (downward revised from | 9500/tonne earlier) and | 9000/tonne for FY24E (downward revised from | 10000/tonne earlier)

Alternate Stock Idea: In our sector coverage, we like Ratnamani Metals and Tubes.

* Ratnamani Metal and Tubes (RMTL) is a niche player with superior capabilities in the Industrial pipes and tubes segment.

 * BUY rating with a target price of | 1967

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