Jindal Stainless Ltd - Research Report

Private Client Research

Rating

Buy

Sector

Steel & Iron Products

Company

Jindal Stainless Ltd

Steel & Iron Products


July 13, 2017

Sensex: 32037.38


CNX Nifty: 9891.70

NSE: JSL


BSE: 532508

Reco Price
Rs. 79.50
Price Target (1.5 - 2 Years)
Rs. 160.00
Upside
101.26%

Date

July 13, 2017

Sensex

32037.38

CNX Nifty

9891.70

Exchange

Code

NSE

JSL

BSE

532508

Stock Data

CMP (Rs)
80.60
Face value (Rs)
2
52 Week Range (Rs)
83.40 - 15.80
Market cap (Rs Crores)
3701.02
Price To Book Value (x)
2.02
P/E Ratio (x)
68.33
EV/EBIDTA (x)
12.32

One Year indexed Stock Performance

Jindal Stainless Ltd Sensex
Jindal Stainless Ltd
Return (%)
1m
3m
12m
36m
Absolute
7.27
107.08
389.06
64.02
Sensex
3.00
17.62
15.18
28.11

Shareholders

(in %)
30-June
Promoter
65.13
Public
34.87
Others
0.0
Total
100

+91 22 6639 3000

research@stockaxis.com

Uptrend in steel cycle, restructuring and capacity utilisation ramp up will benefit the company

Odisha Plant has shown early signs of revival and capacity utilisation ramp-up:
The company’s Odisha plant has started showing capacity ramp-up on account of operational stability. The plant that operated at a low capacity utilization of 44.9% in FY15, has now achieved a utilization of ~60% in March 2017; this has led to a significant jump in the overall EBITDA margins (8% in FY16 to 12.6% in FY17). Further, the company (JSL) has already achieved a turnaround in profitability at the PAT level over the last year and going forward, increase in utilization levels along with repayment of debt will give further boost to growth in profitability.

Development of transport systems will improve profitability:
In the past, JSL had to rely on public transport to move its imported raw material from the port to its Odisha plant. The company has now laid its own railways siding which will cater to its Odisha plant; this will result in cost savings, uninterrupted supplies of key raw material, and eventually, higher profitability, going forward.

Scheme of demerger has led to removal of 3% penal interest:
JSL underwent a corporate debt restructuring scheme (CDR scheme) exercise after it suffered financial losses. Under this scheme, it was charged 3% additional interest on its outstanding debt as penalty. After restructuring, all the resulting entities are out of the purview of penal interest. The average interest cost has declined from ~14% to ~11% on an average. This as well as the repayment of debt going forward will lead to further decline in interest cost for the company.

Decrease in overall debt post de-merger:
According to the scheme of de-merger, there has been a transfer of debt of ~Rs. 4,000 crores in FY17 from JSL to two unlisted entities - Jindal United Steel Ltd and Jindal Coke Limited. This has led to savings on interest costs leading to higher profitability for the company.

 

Revival of steel sector

A number of positive developments are taking place in the steel sector, which, in turn, will warrant a re-rating of Indian steel stocks. Levy of anti-dumping duties, lack of new capacities, and additional demand as a result of the government’s affordable housing initiative, focus on infrastructure development and growth in the automobiles sector will not only limit a further price fall, but will result in steel prices heading north.

Levy of anti-dumping duties extended by 4 years
The government has announced continuing levy of anti-dumping duties on steel (hot rolled coil and cold rolled coil steel) imports for 4 years more (till August 2021). There is also an expectation of extending levy of anti-dumping duties on colour coated and wire rods. Levy of these duties will result in making steel imports expensive thereby benefitting Indian steel manufacturers who will see a pickup in demand and margins. The benefits of this duty levy are already evident in the performance of Indian steel companies, which have recorded an improvement in their finances. Considering the significant outstanding debt of Indian steel makers, the government is expected to continue with the duty levy.

Higher demand; static capacity will result in boosting steel prices
No new capacities have been added in the Indian steel industry over the last 3 years. With an expectation of higher domestic demand along with static supply, existing capacity utilization will become optimal and domestic steel prices will move northward going forward. Any new capacity that may be set up will carry a gestation period of 3-4 years before production and hence, will not have any impact on controlling the rise in steel prices.

Rising steel demand
While steel demand had slowed in the past, with the government’s affordable housing initiative and focus on infrastructure development, economic growth resulting in increase in demand in the automobile sector, higher oil & gas capacities, etc., there is an expectation of steel demand picking up significantly, going forward. Additionally, with the government’s ‘Make in India’ initiative, there is an expectation of steel being sourced from domestic producers for public sector infrastructure projects. For instance, GAIL (Gas Authority of India Ltd), a PSU company, has indicated that it will source steel from domestic producers for its forthcoming projects worth Rs. 3,000 crores.

Over the next decade, steel production is expected to increase from the present 124.77 million tonnes (MT) to 300 MT in order to meet rising demand 1 .

India’s competitive advantage in steel
India is presently the 2 nd largest crude steel producer globally. India has the advantage of low cost manpower, availability of abundant iron ore reserves. India’s steel exports rose 102% in 2016-17 to 8.24 million tonnes (MT) over the previous year (4.08 MT).

Positives for Indian steel stocks
A combination of anti-dumping duties on imports, static steel supply and rising steel demand will see turnaround in financials of Indian steel businesses.

Company description

Jindal Stainless (JSL), belongs to the OP Jindal / Savitri Jindal group and is lead/managed by Mr. Rattan Jindal. It is the largest integrated manufacturer in India and is also a ‘global player’ in the sector, having world class facilities and capacities at par with top ten manufacturers across the world. The group has a whole has a Hot Rolling capacity of 2.5 million MT and Steel melting capacity of 1.78 million MT as in FY17.

Owing to pressures from imports and new expansion in Odisha, the Company had significant losses over the past few years. After large losses for the past few years, the company demerged different business units under JSL, so that each business unit is operationally stable and not a drag on each other and more importantly has a manageable/viable capital structure. The scheme of arrangement post demerging is as follows:

1. Hisar unit (listed as Jindal Stainless Hisar Ltd – JSHL with Steel meting facility of 780,000 MT as well as Ferro Chrome factory and the Chromite Ore mine).
2. Odisha Unit - Smelting Plant (10 lakh MT capacity) and 264 MW power plant, holds 26% stake in JCL and JUSL each. This is the existing listed Company (JSL).
3. Coke unit (Jindal Coke Ltd or JCL).
4. Hot Rolling Units at Vizag (Jindal United Steel Ltd or JUSL).

The de-merger was approved in November 2015.

Profit & Loss Statement:- (Consolidated)

(Rs Crores)

Particulars Mar-14 Mar-15 Mar-16 Mar-17 Mar-18E Mar-19E
Net Sales 12,875.2 6,935.1 7,143.6 9,278.7 9,788.6 10,512.7
Other op incomee - 12.8 - - - -
Total revenue 12,875.2 6,948.0 7,143.6 9,278.7 9,788.6 10,512.7
Growth (%) -46.0% 2.8% 29.9% 5.5% 7.4%
Total Expenditure 11859.0 6579.6 6570.9 8113.1 8486.7 9030.4
EBITDA 1016.2 368.4 572.7 1165.6 1301.9 1482.3
% Margin 7.9 5.3 8.0 12.6 13.3 14.1
Other Income 39.1 54.2 26.2 25.7 24.0 25.0
Operating Profit 1055.3 422.6 598.9 1191.3 1325.9 1507.3
Interest 1295.1 942.5 1029.0 787.9 625.0 575.0
PBDT -239.9 -519.9 -430.1 403.4 700.9 932.3
Depreciation 728.4 411.1 316.2 325.2 327.0 330.0
Profit Before Taxation & Exceptional Items -968.2 -931.0 -746.3 78.2 373.9 602.3
Exceptional Income / Expenses -418.7 1184.2 -40.4 25.8 0.0 0.0
Tax -20.7 0.0 -231.5 32.5 123.5 197.5
Profit After Tax -1366.3 253.1 -555.1 71.5 250.4 404.8
Share of Associates -1.9 -0.3 -0.7 10.0 0.0 0.0
Report consol PAT -1368.2 252.8 -555.8 81.6 250.4 404.8
Adjusted PAT -947.6 -931.0 -514.8 45.7 250.4 404.8
Adjusted EPS -20.6 -20.2 -11.2 1.0 5.4 8.8
Source: Stockaxis Research, Company Data

Valuation

Post the de-merger, the debt profile of the company has improved significantly with debt-equity coming down from 5.7x in FY16 to 3.0x in FY17. Going forward, increase in capacity utilization at its plant on account of de-bottlenecking and increase in demand, development of railway sliding, impose of anti-dumping duty will lead to improvement in EBITDA margins of the company. The company will also look to start repaying debt incrementally over the years leading to further improvement in credit profile of the company. We expect revenues/PAT to grow at 6.4%/ 122.8% CAGR over the next 2 years (FY17-19E). We value Jindal Stainless Industries at 8.2x FY19E consolidated EV/EBITDA and recommend a ‘Buy’ with a target price of Rs. 160 giving an upside of 101%.