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  • Stock Recommendation: Jindal Stainless (Hisar) Ltd – BUY – TP Rs.227

    Publish date: July 23, 2018

    Hisar unit (JSHL) of Jindal stainless (JSL) has always been a profitable unit even in the turbulent times, despite being located in a landlocked area. Given JSHL's market position and 7.5% demand (improving infrastructure) CAGR for the next decade, we believe the group is well poised to capture higher market share. Besides this, the increase in contribution from VAP to 65% of the overall sales mix, will help the company to grow at 20% CAGR on earnings. We continue to remain positive on the company given its sustainable earnings, however strengthening dollar index and trade war could weigh on valuation multiples across the metal sector.

    Key Highlights

    • India continues to be the second largest consumer of stainless steel and the demand is expected to grow at 7.5% CAGR over 2017-2027E to 6.5MT, supported by the demand from Architectural, Building and Construction (ABC) and Automobile Railway and Transport (ART).
    • JSHL and JSL control about 50% of the overall stainless steel market in India, balance is unorganized players and import. In order to increase its market share in VAP, the company is increasing its CR capacity through debottlenecking, which will increase its VAP portfolio to 65% from about 50% at present.
    • The management's focus will be on improving operating efficiency, higher utilisation of the cold rolling facility and higher penetration in specialty products. The revenue growth is likely to remain modest going ahead, in our view.
    • The management expects the company to be net cash company in the next two years, supported by the strong operating performance.

    Valuation & outlook

    We believe, an increasing share of Cold Rolled (JSHL's focus) in the overall product mix, will help the EBITDA to grow at a CAGR of ~8% during the FY18-FY20E period, with margin in the range of 12-12.5%. Besides this, the subsidiary's strong performance will also be a potential growth driver. Given the higher market share and improving profitability with a change in product mix to VAP, return ratios are likely to remain strong and will be higher compared to its European peers. We believe with higher domestic demand, market leadership and superior return, the company should trade at a premium to their overseas counterparts, who are trading in the range of 5-6.5x 1yr forward EV/EBITDA. We factor in the sharp fall in Jindal Stainless (JSL) price (36.6% stake)in our price target, We now value core business at 5x (earlier 6x) FY20E EV/EBITDA and investment in JSL (36.6% stake) at 25% holding company discount, thereby arriving at a revised target price of Rs227 (earlier Rs318). At CMP, the stock is trading at 3.0x/2.3x FY19E/FY20E EV/EBITDA. There could be upside risk to the price target if JSL price appreciates in the future.

    Key risks

    Increase in raw material prices; slowdown in economy

         

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