Promoter Raises Stake By 12.6% In This Metal Stock In Q4: Buy?

Small-cap firm JTL Industries operates in the metal industry. JTL Industries is one of the largest producers of Electric Resistance Welded (ERW) steel pipes. The firm recently announced that a meeting of the board of directors would be conducted on Saturday, July 29, 2023, to discuss and authorise the issue of fully paid bonus equity shares to the company's members. But ahead of the bonus share declaration, Axis Securities is bullish on the stock and sees a significant upside.

On the outlook of growth plans, Axis Securities said "The Indian structural tubes market has the potential to grow from ~13MT in CY23 to 22MT by CY30, led by the government's thrust on developing infrastructure, which will result in a shift towards robust demand for structural steel. JTL is planning to expand its capacity from the current 0.586MT to 1MT by FY25 and it will be enhancing its VAP share from the current 31% in FY23 to 50% by FY25.

JTL will add an additional 0.2MT capacity each at Mangaon and Raipur by the end of FY25 and 14kt at Mandi (by Q1FY24) which will take its total capacity to 1MT by FY25. Out of the incremental 0.4MT capacity in the next two years, ~50% of the capacity will be equipped with DFT (Direct Forming Technology) which will facilitate the company to produce various sizes of hollow sections without roll change, increasing efficiency and capacity utilization. This will also add additional SKUs to the company's portfolio. In the long term, JTL plans to add another 1MT capacity post FY25 which will bring its total capacity to 2MT by FY28."

Commenting on how JTL is funding its expansion, Axis Sec said "JTL has been funding its expansion mainly through issuing share warrants rather than raising debt. The company issued ~1.28 Cr of fully convertible warrants amounting to ~Rs 384 Cr to non-promoter/Public Category on Mar'23 for its phase II 4 Lc tonne expansion. Even for previous expansion at its plants, the company has issued 5 Lc fully convertible warrants of FV of Rs 10 each in Dec'20 to non-promoter/Public Category. The issuance to the non-promoter category has led to a dilution in the promoter holding from 67.8% in FY21 to 55.3% in FY22. The merger of Chetan Industries (a promoter group company) however, has led to a reversal in the dilution trend and the promoters' share now as of FY23 stands at 56.3%."

Commenting on operating profits and returns, the research analysts of Axis Securities said "JTL's Revenue/EBITDA/PAT grew by 14%/45%/48% YoY in FY23 on the back of capacity expansion. While its ROE/ROCE moderated to 29.6%/22.1% in FY23 from 40.7%/31% in FY22, they were still at a healthy level given its expansion phase. The EBITDA/t improved by 30% to Rs 5,383/t in FY23. We forecast Revenue/EBITDA/PAT CAGR of 50%/45%/51% over FY23-25E, which will be led by higher sales volumes and VAP share on the increased capacity ahead. The company is funding the growth Capex by raising share warrants and targets a debt-free status by FY25. It raised Rs 384 Cr in Mar'23 via allotment of up to 1.28 Cr fully convertible warrants of FV of Rs 2 each, meant for the purpose of expansion of the current manufacturing capacity."

Commenting on the valuation of the stock, the brokerage said "JTL's ROE and ROCE from FY19-23 were resilient and were largely close to APL Apollo tubes which is the market leader in the ERW and structural tubes market. With the aggressive Capex ahead, the company's ROE and ROCE are expected to moderate from the FY23 level. However, We expect the company to report return ratios at 20%+ for FY24-26E. Refer to Exhibit 31 for the comparison of the return ratios for the pipe manufacturers.

APL Apollo is currently trading at 37.4x 12MF consensus P/E ratio, while JTL is trading at 21.8x our FY24 EPS estimate on the current CMP. APL Apollo although has similar return ratios, its working capital management is superior to JTL. And, being a leader with a higher operating scale, it commands a premium P/E ratio. We value JTL at 22x its FY25 EPS to arrive at our 1-year forward target price of Rs 470/share, which implies an upside of 36% from the CMP. We see 22x as a reasonable valuation for JTL given its healthy return ratios despite being in an aggressive growth Capex stage."

The shares of JTL Industries opened today on the BSE at Rs 355.25 apiece and were last seen trading at Rs 359.75 with an upside gap of 3.57% while writing this copy. The stock made a 52-week-high of Rs 372.70 on (18/01/2023) and a 52-week-low of Rs 185.70 on (16/09/2022). During Q4FY23, the company reported promoter shareholding of 56.26%, FIIs stake of 0.52%, DIIs stake of 1.41% and public stake of 41.82%. According to Trendlyne data, promoters raised their stake in the shares of JTL Industries from 43.71% in the December 2022 quarter to 56.26% in the March 2023 quarter, while FII/FPI dropped their shareholding from 1.21% to 0.52%, mutual funds stake dropped from 0.87% to 0.71%, and institutional investors plummeted their shareholding from 3.48% in Q3FY23 to 1.93% in Q4FY23.

Disclaimer

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