Buy This Metal Stock, Trading At A Discount Of 52% From Highs, For 87% Gain

ICICI Securities has given buy rating to the stock of Jindal Stainless Limited for gains up 87% for a target price of Rs 200 apiece. Jindal Stainless (JSL) management believes that exports can be maintained at 16,000tpm (down from peak run-rate of 30,000tpm) despite the export duty of 15%, mainly on account of higher margins in the US.

1. Jindal Stainless Stock Outlook

The current market price of the stock is Rs 107.20 apiece. Its 52-week high is Rs 224 apiece and 52-week low is Rs 95.05 apiece, respectively. The stock has given multibagger returns of 158% in 5 years. ICICI Securities has given buy rating to the stock for a target price of Rs 200 apiece with a potential gain of 87%.

2. Optimizing on capital allocation

Options are being reconsidered for the blast furnace capex, which was earlier considered in JUSL (associated entity). Management was clear on the cost competitiveness of the pig iron route for 400 series production along with liquid ferrochrome. However, management was also cognisant of balance sheet stress the investment would create, and the associated related-party investments/transactions and roadblocks to potential future merger. Management wants to minimise related-party transactions, hence is also looking at likely options for JSL to acquire JUSL (26% is currently held by JSL) and thereby maintain the favourable tenure of term loans present in JSL books.

3. Removal of export duty will boost the business model

It would be disappointing to see partial rollback of the export duty on steel products and not in stainless steel. Imposition of the duty itself was difficult to put in a framework given the larger demand market, i.e. aluminium was exempted, but stainless steel was included. However, JSL is most leveraged to the export market among Indian metal peers (with ~25% of combined JSL+JSHL volumes being exported), hence is the most impacted by the export duty. We are surprised at the management guidance of maintaining 50% of peak export run-rate despite the duty, while trying to push the rest of the volumes in the domestic market. These measures expose volumes and margins to downside risks in our view.

4. Upgrade To Buy

According to ICICI Securities, "We reduce volumes and profitability for FY23E/FY24E and maintain our through-cycle EBITDA for FY24E. With 50% of JSL+JSHL volumes from the 300 series, there is a clear risk of increased Indonesian imports (antidumping duty was revoked in Feb'22), thereby taking away JSL's share of Indian volumes. It is absolutely clear that JSL cannot compete with the Indonesian cost structure given its captive/merchant lateritic nickel ore. The foregoing explains the company's efforts to expand capacity, increase volumes in the 400 series (chromium-heavy, no-nickel) and move away from the 200/300 series as quickly as possible. In its journey, the export duty imposition came perhaps at a bad time with import trade barriers already removed and imports constituting 40% of the Indian market. JSL has worked carefully to stay out of these import-heavy segments, but will have to enter the same if the export duty remains in place.

5. Valuation

According to the brokerage, "We upgrade JSL to BUY with a target price of Rs200/share. We value it at 1.4x FY24E P/B, with an implied EV/EBITDA multiple of 5x (earlier: 0.8x FY24E P/B). We expect a through-cycle RoE of 15-16% notwithstanding risk of imports."

6. About Jindal Stainless

Founded by Shri O.P Jindal in 1970, Jindal Stainless is one of the largest stainless steel conglomerates in India and ranks amongst the top 10 stainless steel conglomerates in the world. It's not only the magnitude of our operations that determines our credibility and name, but we remain inspired by our vision for innovation and enriching lives. Jindal Stainless Group has an annual crude steel capacity of 1.9 MTPA and the group has an annual turnover of USD 4.20 billion (as of March'22). The market capitalization is Rs 5,633 crore.

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.