JSL Jindal Stainless Steel (JSL), post-merger, would rank amongst the top 10 global stainless steel mills, offering a simplified structure and high liquidity, according to the Initial Coverage Report by Investec.
According to the Anglo-South African international banking and wealth management group, JSL is a ‘convertor’ (rather than a commodity play), due to a structural improvement in its operational parameters.
"Implementing the theory of constraints, the latest technology on distribution and production has helped JSL score at par with global peers on operating metrics and WC, though it currently lags on ESG. A favourable growth macro and expansions at competitive Capex intensity will aid profitable growth and better return ratios. Initiate at BUY, TP of Rs314/sh," the report said.
JSL increasing capacities with Capex intensity at a third of greenfield expansion and structural improvements in spreads is well placed to report higher return ratios hereon, the report stressed.
"We value JSL (pro-forma) at 5x EV/EBITDA on an FY24 basis, arriving at a TP of Rs314/sh. Even on conservative forecasts, JSL offers a 10 percent average. FCF yield over FY23-24E. Incremental events such as a stated merger, pay-out policy and potential trade measures are event-based triggers for the stock. A surge in imports and delays in the merger are risks," the report noted.
Lower standard deviation on indexed historical operating spreads vs local steel mills indicates JSL isn’t a commodity play, but rather, a convertor.
"We bake in conservative spreads and argue for the sustainability of these spreads factoring in structural improvements such as value addition (product mix, pricing contracts, de-risking strategy), gains from technology, and productivity improvements," the report read.
India's stainless steel consumption has clocked 8-9 percent CAGR and the per capita consumption is still at 50 percent of the global avg., implying a long runway for growth, a JSL is a market leader (>50%), and with expansions, it is best placed to tap into the profitable growth opportunity, the report underscored.
JSL's focus on quality, technology, distribution, and niche applications, along with the government's thrust on modernization of railways/ metros and increasing focus on safety/ total cost of ownership (FOB/bridges) positions JSL in a sweet spot, it added.
"JSL stacks up well vs global peers on WC, and operating metrics. Mgmt.’s methodical efforts to reach those benchmarks are noteworthy - implementing Theory of Constraints (TOC) or technology for business (BW/4HANA) or production improvements (Level-2 AOD converter), with the benefit visible on the sharp improvement in WC and op. metrics," the report stated.
JSL increasing capacities with Capex intensity at a third of greenfield expansion and structural improvements in spreads is well placed to report higher return ratios hereon, the report read.
"We value JSL (pro-forma) at 5x EV/EBITDA on an FY24 basis, arriving at a TP of Rs314/sh. Even on conservative forecasts, JSL offers a 10 percent average FCF yield over FY23-24E. Incremental events such as a stated merger, pay-out policy and potential trade measures are event-based triggers for the stock. A surge in imports and delays in the merger are risks," the report noted.
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