Jindal Stainless (Hisar) (JSHL), an entity carved out of the erstwhile Jindal Stainless (JSL), is a leading player in the domestic stainless steel market. With 0.8mt
capacity, the company has cornered 40% market share along with group company JSL(0.8mt). Governments sharpening focus on metro railway, airports,
modernisation of Railways along with burgenong usage of cookware and consumer durables are envisaged to spur the next leg of stainless steel markets
growth at 8% CAGR between FY17-FY23E. We expect JSHLs volumes to clock 11% CAGR over FY17-19E riding incremental market share gains as demand
shifts to organised players triggered by GST and imposition of 18% CVD on Chinese imports. We are valuing the stock at par with European listed
counterparts at 7x EV/EBIDTA, yeilding value of INR289/share and investments in JSL at INR41/share to arrive at target price of INR329. We recommend
BUY with an upside of 61% from current level.
Burgeoning government infra spending and rising consumerism to sustain buoyant stainless steel demand
Domestic stainless steel (SS) consumption clocked 7.6% CAGR over 2005-16 to 3.3mtpa while per capita consumption stands at a paltry 1.9kg compared
to the 6kg global avg. However, we expect India to follow in Chinas footstepsper capita consumption catapulted from mere 1.5kg in early 2000 to 9kg
in 2016spurred by govts enhanced investments in infrastructure and burgeoning per capita GDP. While SS continues to remain an alternative to plastic
in cookware, its under penetration in medical, industrial and infra applications is bound to sustain the strong underlying demand momentum.
Market leadership in value additive products
JSHL, along with JSL, effectively controls 60% of the value added products market and 40% of the overall SS market in India. Balance is controlled by
unorganised players and imports (~5 lakh tons), which have been disrupted due to onslaught of GST and imposition of 18% CVD on Chinese imports (~2.8
lakh tons), respectively, throwing opportunity for JSHL to grab incremental market share. We believe the companys leadership in specialised products
like razor blades, mint coins, Series 300/400,and process industries will boost EBIDTA/ton to INR15,300 by FY19E comparable to global standards.
Outlook and valuations: Attractive, underlying momentum to sustain; maintain BUY
We expect JSHLs net sales/EBIDTA/PAT to grow at a CAGR of 15%/19%/46% respectively between FY17-19E We believe, higher RoCE of JSHL (22%) (even
on WACC adjusted basis)compared to European players(8-10%), burnished demand prospects and market leadership should lead to at par/premium
valuation for the company with respect to European players. We are valuing the stock at par with European listed counterparts at 7x EV/EBIDTA, yielding
value of INR289/share. Additionally, we value the companys investments in JSL (36.5% stake) at INR41/share to arrive at target price of INR 329. We
recommend BUY with an upside of 61% from current level.
Bloomberg: JSHL:IN
Year to March FY15 FY16 FY17 FY18E FY19E
Revenues (INR Cr) 8,196 7,235 7,774 9,036 10,339 52-week range (INR): 211/74
Rev growth (%) NA (11.7) 7.5 16.2 14.4 Share in issue (cr): 23.6
EBITDA (INR Cr) 741 862 980 1,131 1,383
M cap (INR cr): 4,842
Net Profit (INR Cr) -22.6 125.4 290 408 621
P/E (x) NA NA 16.7 11.9 7.8 Avg. Daily Vol. BSE/NSE
460
EV/EBITDA (x) 7.8 7.6 7.9 6.8 5.6 :(000)
RoACE (%) NA 26.3 20.0 18.6 22.0 Promoter Holding (%) 57.67
RoAE (%) NA 6.4 38.6 37.2 38.5
Market leadership in domestic stainless steel market with portfolio tilted towards value added products, JSHL is set to benefit out of governments
focus on building infrastructure and overall increasing consumerism. We expect JSHLs net sales, EBIDTA, and PAT to increase at a CAGR of 15%,
19%, and 46% respectively over FY17-19E. We are valuing the stock at FY19E EV/EBIDTA of 7x to arrive at fair value of INR 289 and valuing equity
investment in JSL at INR41. We recommend Trading BUY on JSHL with a target price of INR 329, upside of 61% from CMP
EBIDTA CAGR of
19% over FY17-
Entry = INR 205 FY19E to lead to exit
multiple of 7x FY19E
EV/EBIDTA
Total
Return of
61%
We value the stock at a 2 year forward EV/EBIDTA multiple of 7x at par with global players. We
Price Target INR 329 recommend BUY with a TP of INR 329
Bull We believe significant value accretion can happen if demand runs more than supply in India through
INR 388
2 year forward EV/EBIDTA new infrastructure projects. Strong performance can result into a bull case multiple of 8x and price
multiple of 8x on FY19E target of INR 388, an upside of 89% from CMP
Base
INR 329 We value the stock at a 2 year forward EV/EBIDTA multiple of 7x at par with global players. We
2 year forward EV/EBIDTA
recommend BUY with a TP of INR 329
multiple of 7x on FY19E
Bear Keeping the financial projections constant and valuing the stock on a 2 year forward EV/EBIDTA
INR 212
2 year forward EV/EBIDTA multiple of 5x, the most bearish multiple for the commodity company gives target price of INR 212,
multiple of 5x on FY19E upside of just 3.5% from CMP
Average Daily Turnover (INR cr) Stock Price (absolute) Relative to Sensex, absolute (%)
Since Since
3 months 6 months 1 year 1 year 5 years 10 years 1 year 5 years 10 years
28/01/16 28/01/16
3.35 2.3 2.24 137% 437% NA NA 118% 404% NA NA
Stainless steel is a specialised products industry having diverse applications; ranging from widely used cookware to high grade critical
Nature of Industry
application in process industries
Global market is worth $75bn while Indian market size is worth $5-5.5bn. Global market is growing at a CAGR of ~5% while Indian market
Opportunity Size
is expected to grow at 8% for the next decade
Under composite scheme of arrangement, long term debt of INR2600cr was transferred to JSHL. Moreover, JSHL has INR900cr of short
Capital Allocation
term debt.
High predictability as stainless steel market has grown at ~8% CAGR during the past decade despite up and down cycle in the
Business Value Drivers
Predictability economy. Govts focus on creating world class infra projects like metro railway, airports, and investments in process industries, lends
high predictability to the demand.
Sustainability Volume growth is sustainable due to demand from diverse industries. Pricing and profitability will follow commodity cycles
Demand of stainless steel in India can go disproportionately in the near term if govt increases investments in underlying applications by
Disproportionate Future
a large factor. Moreover, increase in CVD or anti dumping duty on Chinese goods can open up large opportunity for Indian players
Business Strategy & JSHL is focusing on steady volume growth of 11-12% with focus on value added products. Margin preservation and balance sheet de-
Planned Initiatives leveraging will also be followed
Very high near term visibility as underlying demand is very strong from infra segments. CVD on Chinese products and impact of GST on
Near Term Visibility
small players, has given JSHL a big opportunity to grab market share
If India follows path of China by creating world class infrastructure assets in the next decade then the market for stainless steel will have
Long Term Visibility
good long term visibility
30 16.9%
(Kg/Capital)
Per Capita SS Consumption 80% 11.8%
20,000 20
57%
15 Germany 14.8
37.8%
10,000
China 9.0 Japan 14.1
10
1998 2015 2023
0 USA 6.4 Others/Misc.
Turkey 5.3
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
5
ART
India 1.9 Indonesia 0.8 Electro-Mechanical Industry
Africa EU 0 Engineering
(10,000) 10,000 20,000 30,000 40,000 50,000 60,000 70,000
Americas China Process Industry & Power
-5.0 ABC
India Asia - Ex China Ex India
10,339
10.00%
3 60%
4.8L 80%
8,000
9,036
9.00% 6,00,000 50%
8,196
2.5 4.5L tons 60%
(INR Cr)
7,774
8.00%
7,235
3L
4,00,000 6,000 40%
2 7.00% 40%
3L 30%
Million Tonnes
4,000
6.00%
2,00,000 20%
1.5 20%
2,000
5.00% - 0% 10%
1
FY15 FY16 FY17 FY18EFY19E
4.00% - 0%
0.5 Production FY15 FY16 FY17 FY18E FY19E
3.00%
Installed Capacity Net revenues
0 2.00% Capacity Utilisation (RHS)
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 RM cost as % of sales
% share of Indian market (RHS)
EBITDA margin (%)
Other
35,000 1%
Asia Europe
30,000 ex- , CIS &
China Africa
25,000 22% 3%
15,000
10,000 China added large capacity of stainless steel to cater to its burgeoning
5,000 demand from infrastructure, automotive and consumer products.
0
Between 2005 and 2016, it added 30mt capacity to account for ~50% of
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 global stainless steel production and consumption in 2016. Over 2005-16,
while worldwide stainless steel consumption posted 5.8% CAGR, the
Africa EU Americas China India Asia - Ex China Ex India Other Europe consumption in China grew at a 20.9% CAGR.
High supplier concentration: Leading to bargaining power Top 10 players JSL groups position
Installed Capacity in
Players
Concentration in the Stainless Steel Industry mn tons
1 Tsingshan, China 7.4
2 TISCO, China 4.5
3 Outokumpu, Finland 3.1
4 POSCO, South Korea 2.9
Rest 5 Acerinox, Spain 2.9
42% Top 10
Producers 6 Baosteel, China 2.7
58% 7 Aperam, Luxembourg 2.1
8 LISCO, China 2.0
9 JISCO, China 2.0
10 Beihei Chengde, China 2.0
JSL group JSL & JSHL combined has installed capacity of 1.6mn tons
Rest making it the 13th largest player in the world.
75%
The stainless steel industry is far more concentrated in a few players compared
to the carbon steel industry. Top 10 players control almost 58% supply compared
to just 25% in the carbon steel market. Being a niche specialised products
industry, the number of operational plants is also less than 500 compared to
thousands of carbon steel plants across the world.
35
Taiwan 31.8
30
Per Capita SS Consumption
S.Korea 26.4
25
(Kg/Capital)
15 Germany 14.8
USA 6.4
5 Turkey 5.3
-5.0
Source: Edelweiss Investment Research
Stainless steel consumption depends upon the stage of an economys development as higher usage happens through use of stainless steel for infrastructure and
for aesthetic purpose by end consumers. While per capita consumption in most developed countries is more than 10kg, Chinas stands at 9kg (up from 4kg in 2005).
India woefully lags developed countries and large developing countries as well with per capita consumption at mere 1.9kg. Notably, it grown to current level from
even lower level of 1.1kg in 2005.
Stainless Steel - Global consumption pattern Indian consumption pattern to trend towards global
2016
100%
Industrial & 5.7% 7.3%
Heavy Industry, Others, 3.00% 90% 20% 10.6%
12.8%
8.00% 0.9%
80% 1.6%
70% 16.9%
ABC &
Infrastructure, 60% 6.7% 25.4%
15.00%
Consumer 50%
Goods & 11.8%
Automotive & Medical, 40% 80%
heavy Industry, 48.00% 30% 57%
10.00%
20% 37.8%
Chemical,
Petrochemical & 10%
energy, 16.00% 0%
1998 2015 2023
Source: Company, Edelweiss Investment Research
Cookware & Durables ABC
Process Industry & Power Engineering
Consumption of stainless steel through cookware, consumer goods and medical Electro-Mechanical Industry ART
instruments accounted for 48% of total global consumption in 2016. Demand Others/Misc.
centres which have higher usage are primarily related to aesthetic usage in Source: Company, Edelweiss Investment Research
Incrasing use of SS for aesthetic purpose in residential, commercial buildings like offices,
Architecture, Building & Construction (ABC)
hotels. Infra projects like metro railways, airports, bus stops driving demand for SS
Exhaust outlet of automobiles are made up of SS along with other critical parts
Bodies of metro railway and buses. Higher usage of SS in new bogies /wagons of Indian
Auto, Railway & Transportation (ART)
Railways
III. High correlation between raw material and stainless steel prices:
Stainless steel is an iron alloy with a minimum of 10.5% chromium. Other alloying elements such as nickel, molybdenum, titanium and copper are added to enhance
their structure and properties of formability, strength and cryogenic toughness. Non-metals such as nitrogen and carbon are also added to enhance the same
properties. Stainless steel prices are highly dependent on raw material, especially nickel, as it is one of the most expensive metals on per ton basis.
Raw material prices, especially of nickel and ferrochrome (FeCr), are added onto the base price of stainless steel as a surcharge which is passed on to customers.
% content 8% 16%
25000 3000
20000 2000
15000
1000
10000
0
5000
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
Feb-13
Feb-14
Feb-15
Feb-16
Feb-17
Jun-08
Oct-08
Jun-09
Oct-09
Jun-10
Oct-10
Jun-11
Oct-11
Jun-12
Oct-12
Jun-13
Oct-13
Jun-14
Oct-14
Jun-15
Oct-15
Jun-16
Oct-16
Jun-17
0
Aug-08
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
A. Slide in nickel prices has led to higher usage of stainless in past 7-8 years
Post touching peak in 2009, nickel prices have dipped over the past 6-7 years, primarily due to mass production on nickel pig iron (NPI) in China. NPI is a low grade
ferronickel invented in China as a cheaper alternative to pure nickel for the production of stainless steel. The NPI production process utilises laterite nickel ores
containing just 4-10% nickel content instead of pure nickel.
During the commodity prices bull run over 2005-09, world stainless steel production clocked CAGR of ve 1% while post 2009, it posted CAGR of 9.1%. On the other
hand, stainless steel production in China grew at a CAGR of 29% between 2005-09 and 16% CAGR between 2009-16.
Production process of NPI is highly polluting in nature as it releases high amount of carbon dioxide. The China governments recent policies of curbing polluting
industries has resulted in lower imports of ferronickel from Indonesia/Philippines and increasing imports of refined nickel.
We believe, balanced production of stainless steel in China through refined nickel and NPI is the key to stable prices of nickel in the near future, which should be
conducive for healthy growth of global stainless steel production.
450
400
350
300
(in kt)
250
200
150
100
50
0
2013 2014 2015 2016 H1'17
Source: Aperam
At the combined level, the JSL Group is the market leader in domestic stainless steel production with a consistent ~40% share over the past 15 years. Of Indias
total 3.3mt capacity, the JSL Group accounts for 1.6mt, i.e., ~50% of installed capacity.
Considering India is a net exporter of only 4 lakh tons, we are considering installed capacity in India to be same as actual consumption.
1.55 Longs,
JSL Group 29%
1.6 1.73 Unorganised
Salem Flats,
71%
.18
Currently, while flat products account for 71% of overall stainless steel consumption, long products account for balance 29%. The same ratio in case of the JSL
Group stands at 90:10. Amongst flat stainless steel producers, the JSL Group is the leading player with 60% market share. The group has limited competition in
production of flats as the only other large player is SAILs Salem plant with 280,000 tpa capacity. SAIL has not been able to use this capacity effectively; the plant
has been incurring huge losses for the past several years. Rest of the competition is from unorganised single location players which are highly inefficient and face
the risk of closing of operations post demonetisation and GST.
A. Journey of JSL group Dominating the market, building incremental market share despite rising imports
Size of Indian market consumption Total Jindal Production India GDP Growth Rate Imports
3.5 11.00%
10.00%
3
4.8L
9.00%
2.5 4.5L
8.00%
3L
2 7.00%
3L
Million Tonnes
1.5 6.00%
5.00%
1
4.00%
0.5
3.00%
0 2.00%
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Despite up-down cycles in the underlying economy during the past decade, stainless steel demand has remained strong throughout. While stainless steel
production in India posted 7.49% CAGR between FY06 and FY17, the JSL Groups production increased at 8.84% during the same period. Thus, the company
captured incremental market share. Organised large peers which added capacities are Viraj Profiles (6 lakh tons of long products) and SAILs Salem plant 1 lakh
ton (to reach 2.8 lakh ton of flat products).
To address this issue, in September 2017, the Government of India imposed CVD of 18% on most dumped stainless steel products from China. This is expected to
benefit market leader JSL Group substantially.
1.6
100%
1.4
1.2 80%
Million Tonnes
1.0
60%
0.8
0.6 40%
0.4
20%
0.2
0.0 0%
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Total Jindal Production Total Jindal Capacity Capacity Utilization % of Market Share Attributable to Jindal
Source: *-JSL+JSHL,
Over the previous decade, the JSL Group has expanded capacity substantially via greenfield route in Jajpur, Odisha by adding 0.8mt (expandable up to 1mt).
Post commissioning of the Odisha plant in FY12, the groups capacity utilisation catapulted from 50% to ~85% in FY17, indicating higher market share. The Groups
share in the total domestic market has remained closer to 40% over the past decade.
Stainless Steel
Description Composition Typical Applications
Family
400 Series
Carbon: 0.11% Bolts, nuts, screws, cutlery, scissors, surgical
Martensitic Group Capable of being heat treated to a wide range
Chromium: 12% equipment
of hardness and strength level
400 series
Vehicle mufflers, containers, vehicle trim, kitchen trim
Used for corrosion resistance and resistance to Carbon: 0.05%
Ferritic Group and equipment, drums and tubs for washing
sealing at high temperature. Chromium: 16.5%
machine, heat exchangers, oil burner parts
Always magnetic
200 and 300 series
Have excellent formability and corrosion Architectural trim, vehicle wheel cover, railroad car
Carbon: 0.04%
resistance bodies, food processing, hospital equipment, dairy
Austenitic Group Chromium: 18.2%
Non-hardenable by heat treating, non magnetic equipment, beverage equipment, pharmaceutical
Nickel: 8.7%
in normal condition and composition. equipment
Becomes slightly magnetic when cold rolled
Carbon: 0.02%
Austentic-ferritic stainless steel
Chromium: 22% Pipe and tube applications, petro-chemical
based on 2205 alloy, have a mixture of austentic
Duplex Alloys Group Nickel: 5.5% equipment, pulp and paper processing machinery
and ferritic in their structure, nitrogen added to
Molybdenum: 3% and equipment
improve corrosion resistance and strength
Nitrogen: 0.14%
Stainless steel is graded depending upon the chemical composition of chromium, nickel, molybdenum, nitrogen, etc. Due to its inherent properties of formability
and corrosion resistance, Series 300 is the most widely used grade globally, accounting for almost 54% of total usage. Applications of Series 300 vary from cookware,
medical equipment, food processing equipment to car/bus bodies, and other infrastructure applications.
Price of nickel plays a major role in determining alloy surcharge over base price of stainless steel. Nickel, even though used anywhere between 8% and16% in 300
series, has accounted for minimum 40% to maximum 80% of stainless steel prices in the past decade as the metals prices fluctuated between USD8000 and
USD50,000/ton.
D. Stainless steel output by grade Higher the value addition, better control over margins
70%
57%
400 Series
300 Series
(Ferretic &
(Austenitic)
Martensitic)
54% FY08 FY16
27%
Source: Industry
Volatility and consistently high prices of Nickel have led to the development of Series 200, especially in developing countries China and India. Nickel helps maintain
stainless steels austenitic structure, which can also be managed by adding manganese and nitrogen to very low content of nickel (<4%) to the alloy. Thus, Series
200 can be developed at a much lower cost for applications where corrosion resistance is not the essential criteria, in a way limiting its applications.
Series 200 accounted for as much as 70% of total consumption in India in FY08, which dipped to 57% in FY16 as usage of stainless steel grew faster and wider in the
past decade. Rising per capita incomes and development of infra/process industries/food processing units in the past decade has led to higher usage of higher
quality Series of 300 and 400.
JSL Hisar - Break up by series (volumes) Even though JSHL is the pioneer in developing Series 200 in India, Series 300 constitutes almost
half of its production. According to our estimate, the company, along with group company
JSL, dominates the domestic Series 300 market, accounting for as much 70% share (combined
production of 7 lakh tons of total 9 lakh tons market) in FY17. Also, JSHL has been a leading
400
20%
200 player in indigenous production of duplex stainless steel in India, which was entirely imported
30%
a decade ago. The companys duplex stainless steel is extensively used in welded pipes in
refineries, thermal power plants and other process industries.
300 &
Duplex/all
oys
We believe, current dominant market share in Series 300 will help JSHL sustain higher than
50%
industry EBIDTA/ton of ~INR15,300/ton in FY19E.
Source: JSHL
V. Financial Analysis
Sales per ton comparison:
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
JSL 1436 1370 2164 2220 2334 1951 2245 2166 1819 1863 2157 1663 1897
Acerinox 2304 3066 4280 3681 2904 3649 3974 3494 2367 2503 2020 1774
Aperam 4682 4269 2927 3219 2903 2489 2529 2048 2073 1867
Outokumpu 4052 4259 6680 5659 3536 4264 5012 4083 3465 2974 2965 2575
EUR/USD 1.202 1.256 1.371 1.471 1.395 1.326 1.392 1.285 1.328 1.328 1.110 1.106
INR/USD 43.92 45.24 41.48 43.78 48.36 45.65 45.45 53.42 58.51 61 64.12 67.17 65.25
Nickel is used in lithium ion batteries, which should lead to higher optimism on stronger prices in the near future. Due to high correlation between nickel and stainless
steel prices, historical cycles of stocking and de-stocking of stainless steel have followed nickel prices. We believe, consensus on nickel price remaining stable to
higher from current USD12,000/ton over the next 3-5 years will result in strong upcycle in stainless steel production.
JSL 188 134 323 275 -122 345 360 1403 286 234 128 141 247
Acerinox 202 539 406 124 -185 309 291 154 136 257 137 147
Aperam 598 475 156 235 228 129 169 232 239 218
Outokumpu 16 543 771 -139 -642 173 169 109 -45 114 91 140
Source: Company, Edelweiss Investment Research
Operating margins which are measured in terms of EBIDTA/ton have also been impacted by currency exchange rate. Post the 2008-09 financial crisis, margins have
improved from the lowest point in 2009 to a respectable USD200-250/ton for most players (except Outokumpu in FY16. In FY17, margins corrected due to
unfavourable exchange rates). We estimate operating margins of JSL and JSHL, which are predominantly domestic sector focused with high market shares &
portfolio of value additive products, to trend towards USD250-300/ton over the next 3 years.
Operating costs of Indian players are lower than European players in terms of labour and most importantly due to backward integration/assured domestic supply
of FeCr in India. We believe, further strengthening of backward integration by JSL, like acquisition of chrome ore mines in India, will led to margin expansion in the
near future.
Capacity utilizations to remain closer to 100% Strong revenue growth with improving gross margins
9,00,000 120% 12,000 80%
67.8% 66.4% 63.5%
8,00,000 64.3% 64.0% 70%
100% 10,000
7,00,000
60%
9,036 10,339
6,00,000 80% 8,000
8,196 50%
(INR Cr)
tons
7,774
5,00,000 7,235
60% 6,000 40%
4,00,000
30%
3,00,000 40% 4,000
20%
2,00,000
20% 2,000
1,00,000 10%
11.9% 12.6% 12.5% 13.4%
9.0%
- 0% - 0%
FY15 FY16 FY17 FY18E FY19E FY15 FY16 FY17 FY18E FY19E
Production Installed Capacity
Net revenues RM cost as % of sales EBITDA margin (%)
Capacity Utilisation (RHS) % share of Indian market (RHS)
We expect JSHLs volume to grow at a CAGR of 11% over FY17-19E, utilizing 100% of the capacity. The management believes the volume growth run rate of 10-15%
can be maintained with capex of INR 100-150cr in additional balancing equipments. Also, the company can always explore options of outsourcing part of the
production process either melting or rolling to others in case demand outstrips supply in the short term. Considering focus on value added products, buoyancy in
underlying commodities like nickel and chromium, and brighter demand outlook, we are incorporating 5% price hike for both FY18E and FY19E.
Thus, we expect companys consolidated (including subsidiaries) net sales to grow at a CAGR of 15% over FY17-19E while EBIDTA margins are expected to improve
to 13.4% in FY19E compared to 12.6% in FY17. Increasing proportion of value added products is expected to led to improvements in gross margins in a sustainable
manner.
Bargaining power through market leadership has resulted in lower working capital:
250 90
200 80
150
70
100
60
50
50
Days
Days
-
FY15 FY16 FY17 FY18e FY19e 40
(50)
30
(100)
20
(150)
(200) 10
(250) -
JSHL continues to maintain healthy net working capital days of ~60. Higher market share in India and widespread distribution network through the subsidiary (Jindal
Steelway) have imparted bargaining power to the JSL Group, which we expect to sustain in the foreseeable future. The Groups receivable days too have always
remained under control at around 30 days, while creditor days have been higher than 60 days throughout, going even beyond 100 days in few years.
Inventory days have remained higher than 100 as the company has to stock expensive raw material nickel for at least 2 months and finished goods for a month.
We believe, managements cautious view in maintaining buffer of 2 months of nickel bodes well for production planning and insulating against volatile price
movement and supply deficits.
Improving profitability and efficient asset turnover to boost return ratios Dupont Analysis
Improving profitability and lower equity base are estimated to propel JSHLs RoE from mere 14% in FY16 to 35% in FY19. RoCE is estimated to remain above 20% for
FY18-19 as all the underlying determinants, especially margins and asset turnover, are expected to improve from FY17 levels. JSHLs RoCE stands much higher than
European counterparts, but adjusted for cost of capital (WACC), the premium reduces to only a few percentage points.
We believe, higher RoCE (even on WACC adjusted basis), burnished demand prospects and market leadership should lead to at par/premium valuation for JSHL
with respect to European players.
9,000 250
8,000
200
7,000
6,000
150
5,000
INR cr
INR cr
4,000
100
3,000
2,000 50
1,000
0 0
FY15 FY16 FY17 FY15 FY16 FY17
Standalone Gross revnues Subsidiaries gross revenues Standalone profits (excl extraord and share of associate) Subsidiaries
Source: Company
Jindal Stainless Steelway is the service arm of Jindal Stainless and offers just-
Jindal Stainless Steelway Ltd. in-time service. The company is in the business of processing and distribution INR 1395 Cr INR 14.2 Cr
of stainless steel.
JSL Lifestyle Ltd. JSL Lifestyle covers the manufacturing of modular kitchen equipments. INR 205 Cr INR 1.0 Cr
Source: Company
-4000
-2000
10000
12000
14000
0
2000
4000
6000
8000
39356
24
-5000
10000
15000
20000
0
5000
39569 Mar-03
39783 Jun-03
4x
10x
39995 Sep-03
40210 Dec-03
40422 Mar-04
40634 Jun-04
40848 Sep-04
6x
12x
41061 Dec-04
41275 Mar-05
41487 Jun-05
OUTOKUMPU
41699 Sep-05
41913 Dec-05
8x
Jindal Stainless Ltd (Hisar)
42125 Mar-06
42339 Jun-06
OUTO EV
42552 Sep-06
42767 Dec-06
Mar-07
Jun-07
Sep-07
Millions
Dec-07
4x
Mar-08
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
VI. Valuations: 2 year forward EV/EBIDTA charts
Jun-08
39356
Sep-08
39569
Dec-08
6x
39783
Mar-09
39995
4x
Jun-09
10x
40210
Sep-09
40422
8x
Dec-09
40634 Mar-10
40848 Jun-10
6x
41061 Sep-10
12x
10x
41275 Dec-10
ACERINOX
European Players
41487 Mar-11
41699 Jun-11
Jindal Stainless Ltd(JSL)*
41913 Sep-11
12x
8x
42125 Dec-11
42339 Mar-12
ACER EV
42552 Jun-12
Sep-12
42767
Dec-12
JSL EV
Mar-13
Jun-13
Millions Sep-13
Dec-13
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
Mar-14
40544 Jun-14
40695 Sep-14
40848
4x
Dec-14
10x
41000 Mar-15
41153 Jun-15
41306 Sep-15
41456 Dec-15
6x
41609 Mar-16
12x
41760 Jun-16
41913
APERAM
Sep-16
42064
Dec-16
42217
Mar-17
8x
42370
Jun-17
42522
APER EV
42675
42826
GWM/Edelweiss Investment Research
Source: Bloomberg, Edelweiss Investment Research
*- JSHL not considered as it has history of only 3 years
Jindal Stainless Ltd (Hisar)
FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E
JSL 94.7 29.2 18.8 2.4 2.5 2.2 8 8.4 7.6 8.9% 11.7% 13.1%
JSHL 14.2 10.1 6.6 4.6 3.2 2.1 7.9 6.8 5.6 22.2% 20.2% 23.5%
Acerinox 46.01 15.38 14.28 1.72 1.5 1.43 7.98 7.91 7.58 5.6% 3.6% 5.9%
Aperam 16.75 14.03 12.67 1.47 1.59 1.49 7.09 7.54 7.25 10.6% 10.3% 11.1%
Outokumpu 14.48 9.90 11.21 1.39 1.3 1.18 6.16 5.97 6.69 1.57% 6.2% 7.4%
Average of
European 25.7 13.1 12.7 1.5 1.5 1.4 7.1 7.1 7.2 5.9% 6.7% 8.1%
players
Source: Bloomberg, Edelweiss Investment Research
Valuations:
Consol Value per
Company Multiple FY19e basis EBIDTA EV Net Debt Market Cap share of % upside
FY19e JSHL (INR)
Jindal Stainless (HISAR) EV/EBIDTA 7 1383 9683 2869 6814 289 45%
Holding
company Holding
Market Value of Attributable
Investment in associates discount to Stake company
Capital JSHL's stake Value
market discount
capital
JUSL paid INR 24bn (Slump JCL paid INR 4.9bn (Slump sale)
sale) JSL receive 26% stake JSL receive 26% stake
(Associate) (Associate)
JUSL JCL
Capacity Debt Capacity Debt
Coke oven
Hot Strip Mill battery of LT INR 4.9bn
LT INR 24bn
16 lakh tpa 4.3 lakh tpa
Source: Company, Edelweiss Investment Research
Jindal Stainless Ltd 201703 168,284,309 366 16/10/2017 114 1,919 Non-Current 2
# - we have considered non current loan of INR 485cr as investments by JSHL as it recoverable in definite time frame
Key Management
Name Age Experience Designation Qualification Other Directorship
Source: Company
In the past 3 years, there have been 2 major inductions in the top management.
a) Mr Abhyuday Jindal, joined the family business as Vice Chairman of JSL and JSHL
b) Mr Ashok Kumar Gupta, who is also Managing Director of APL Apollo Tubes Ltd, has joined the company as wholetime director. Mr Gupta has been
instrumental in making APL the market leader in ERW tubes within the space of 5 years with capacity and volume additions of more than 30% CAGR. Currently,
Mr Gupta is involved in APL only on the strategic level.
Business Overview
Company Brief
Jindal Stainless (Hisar) Ltd, is part of Jindal Stainless group having 0.8mtpa capacity in Hisar, Haryana. JSHL manufactures variety of products with 50%
contribution from value added products. JSHLs products are widely used in applications starting from cookware to industrial applications.
Business Model The company manufactures stainless steel from its facility in Hisar. JSHL has melting capacity of 0.8mtpa and ferrochrome facility of 40,000tpa.
JSHL along with group company has been a market leader in India for past 30 years with long term relationships with customers and pre-
Strategic Positioning qualifications most of the leading applications in India. JSL group has been driving force behind development of stainless steel industry in
India, giving it unparallel advantage over other players.
JSHL has 30 years of experience in the field with bouquet of products in the value added range. JSHL derives 50-70% of its revenues from high
Competitive Edge value added range controlling 60-70% market share in the space. The companys long term relationships with the customers and suppliers
gives company edge over smaller competitors
JSHL has undertaken long term debt of INR 2600cr as part of composite scheme of arrangement, making debt to equity at 3.8x. Adjusted for
Financial Structure loans given to JSL, net debt to equity stands at 3.2x. Given the strong profitability profile and operating cash flow generation in next 2-3 years,
debt repayments should not pose a challenge
No large competitor in flats products except for the risk of imports from China. Long products which is just 10% of companys volumes faces
Key Competitors competition from Viraj and Mukand
Increasing penetration of cookware and consumer durables. Investments in infrastructure like metro rail, bus transport, airports, railway
Industry Revenue Drivers
coaches, process industries, etc
We believe volume of 11% CAGR in FY17-19E would be accompanied by margin expansion to 13.4% in FY19E from 12.6% in FY17. We are
Shareholder Value
valuing the stock at EV/EBIDTA of 7x at par with European players due to its market leadership status in India coupled with strong growth of
Proposition
market. We are valuing the investment in JSL at INR 41, to arrive at a fair value of INR 329, an upside of 66% from the current levels.
Financials
Income statement (Consolidated) (INR cr) Balance sheet (INR Cr) Ratios 0
Year to March FY15 FY16 FY17 FY18E FY19E As on 31st March FY15 FY16 FY17 FY18E FY19E Year to March FY15 FY16 FY17 FY18E FY19E
Income from operations 8196 7235 7774 9036 10339 Equity share capital 46.2 46.2 47.2 47.2 47.2 ROAE (%) 6.4 38.6 37.2 38.5
Direct costs 6396 5426 5635 6607 7506 Reserv es & surplus 501 563 846 1,254 1,875 ROACE (%) 26.3 20.0 18.6 22.0
Employee costs 181 176 176 210 219 Shareholders funds 547 609 893 1,301 1,922 ROACE (%) (ex -cash) 38.5 24.8 23.0 28.0
Other expenses 1059 947 1159 1297 1450 Long term borrowings 48 1,212 2,435 2,245 2,050 Debtors (days) 85 40 51 50 50
Total operating expenses 7455 6373 6794 7905 8956 Short term borrowings 988 781 932 980 1,132 Current ratio 0.6 0.8 1.4 1.6 2.0
EBITDA 741 862 980 1131 1383 Total Borrowings 1,036 1,993 3,367 3,225 3,182 Debt/Equity 1.9 3.3 3.8 2.5 1.7
Depreciation and amortisation 313 305 285 300 311 Deferred Tax Liabilities 23 23 67 67 67 Inventory (days) 190 86 128 120 120
EBIT 428 557 695 831 1072 Sources of funds 1,607 2,625 4,327 4,593 5,171 Payable (days) 202 76 122 100 90
Interest expenses 475 493 431 355 350 Gross block 3,085 3,118 3,268 3,410 3,510 Cash conversion cycle (days) 74 49 57 70 80
Profit before tax -1 89 328 528 804 Depreciation 385 669 929 1,230 1,541 Debt/EBITDA 1.4 2.3 3.4 2.9 2.3
Prov ision for tax 5 7 117 185 281 Net block 2,700 2,449 2,339 2,180 1,969 Adjusted debt/Equity 1.9 3.2 3.8 2.4 1.4
Core profit -6 82 211 343 523 Capital work in progress 29 61 42 0 0
Extraordinary items 17 -44 28 0 0 Total fixed assets 2,730 2,509 2,381 2,180 1,969 Valuation parameters
Profit after tax -23 127 240 343 523 Other non current assets 65 227 544 544 544 Year to March FY15 FY16 FY17 FY18E FY19E
Share from associates 0 -1 50 65 98 Inv estments 370 369 418 418 418 Diluted EPS (INR) 0.5 1.6 12.3 17.3 26.3
Net profits (incl share of associates) -23 125 290 408 621 Inv entories 1,449 1,221 1,716 1,784 2,052 Y-o-Y growth (%) 244.7 667.3 40.7 52.2
Sundry debtors 954 837 1,050 1,151 1,327 CEPS (INR) 13 17 23 30 40
Equity shares outstanding (mn) 23.1 23.1 23.6 23.6 23.6
Cash and equiv alents 14 23 14 83 414 Diluted P/E (x) 441.3 128.0 16.7 11.9 7.8
EPS (INR) basic 0.5 1.6 12.3 17.3 26.3
Loans and adv ances 90 103 81 92 106 Price/BV(x) 8.7 7.8 5.4 3.7 2.5
Diluted shares (Cr) 23.1 23.1 23.6 23.6 23.6
Other current assets 529 248 485 485 485 EV/Sales (x) 0.9 1.1 1.0 0.9 0.7
EPS (INR) fully diluted 0.5 1.6 12.3 17.3 26.3
Total current assets 3,406 2,801 3,763 4,014 4,802 EV/EBITDA (x) 7.8 7.6 7.9 6.8 5.6
Div idend per share 0.0 0.0 0.0 0.0 0.0
Sundry creditors and others 4,580 2,897 2,307 2,088 2,080 Diluted shares O/S 23.1 23.1 23.6 23.6 23.6
Div idend payout (%) 0.0 0.0 0.0 0.0 0.0
Prov isions 14 15 54 57 64 Basic EPS 0.5 1.6 12.3 17.3 26.3
Total CL & prov isions 4,594 2,913 2,361 2,145 2,144 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
Common size metrics- as % of net revenues
Net current assets -1,188 -112 1,403 1,869 2,658
Year to March FY15 FY16 FY17 FY18E FY19E
Operating expenses 91.0 88.1 87.4 87.5 86.6 Uses of funds 1,607 2,625 4,327 4,593 5,171
Book v alue per share (INR) 24 26 38 55 81
Depreciation 3.8 4.2 3.7 3.3 3.0
Interest expenditure 5.8 6.8 5.5 3.9 3.4
EBITDA margins 9.0 11.9 12.6 12.5 13.4 Cash flow statement
Net profit margins (0.3) 1.7 3.7 4.5 6.0 Year to March FY15 FY16 FY17 FY18E FY19E
Net profit -23 125 290 408 621
Add: Depreciation 313 305 285 300 311
Growth metrics (%)
Add: Misc expenses written off 0 6 8 0 0
Year to March FY15 FY16 FY17 FY18E FY19E Add: Deferred tax 23 -0 44 0 0
Rev enues (11.7) 7.5 16.2 14.4
Gross cash flow 313 436 626 708 932
EBITDA 16.3 13.7 15.4 22.3
Less: Changes in W . C. -111 67 397 459
PBT (6,268.3) 267.2 60.8 52.2
Operating cash flow 547 559 312 473
Net profit 57.3 156.6 62.4 52.2
Less: Capex 84 157 100 100
EPS (1,484.2) 667.3 40.7 52.2
Free cash flow 463 402 212 373
Edelweiss Broking Limited, 1st Floor, Tower 3, Wing B, Kohinoor City Mall, Kohinoor City, Kirol Road, Kurla(W)
Board: (91-22) 4272 2200
Vinay Khattar
Head Research
vinay.khattar@edelweissfin.com
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