Buy Jindal Stainless For 40% Upside Suggests Motilal Oswal

Motilal Oswal, a brokerage firm, has advised investors to buy Jindal Stainlesss stock. The brokerage has set a target price for the stock of Rs. 250, implying a 40% upside from the market price of Rs. 178. The stock was suggested by the brokerage at Rs 178 per share, but it is presently trading at Rs 187 on the NSE. The brokerage in its research report has said that Cost leadership in 400 series meets domestic demand surge, allowing strong volume visibility in the medium term. 400 series stainless steel demand continues to move up in India and has increased its volume share from ~15% to ~30% of JSL + JSHL sales in the last couple of years. JSL is also gradually vacating the 200 series market. Process industries (healthcare/chemicals/oil and gas/nuclear), auto, railways have helped 400 series demand grow at healthy double digits (in India). JSLs sales mix has seen Indian Railways expand its share from 4% to 12% over the past 2-3 years; similarly, automobile volume share has doubled in the past three years (from 5% to 10%). Utensils have dropped to 40% of JSLs product mix (from more than 80%), where imports dominate. JSL has a clear cost advantage in 400 series, which will eventually move 400 series to be the highest volume contributor progressively.According to Motilal Oswal The through cycle EBITDA has moved up to Rs18,000-20,000/te (against spot Rs27,000/te) from ~Rs13,000/te five years back. This has been driven by i) higher volumes leading to ~ Rs1,500-2,000/te of higher fixed costs absorption as well as better cost-efficiency; ii) from 60% of the volumes competing with Chinese imports two years back, as against 25% at present - JSL has gradually vacated 200 series market and increased 400 series in volumes. 400 series witnesses limited import pressures (our interpretation is less Nickel implies more cost-effective option for India).The research report has also added that The shift in product basket helps improve EBITDA by Rs3,000-3,500/te, iii) Cost efficiency measures and reduced inventory holding costs through near sourcing have added ~ Rs3,500/te to EBITDA/te. Cost efficiency measures like improved power plant PLF, improving coal GCV, work on induction furnace, rail sidings have added Rs 2,000-3,000/te to through cycle EBITDA. Also, from more than 60% of the raw material getting imported previously, JSL has been able to reduce the same to 30%. Reduced working capital along with reduced logistics costs and reduced inventory holding/valuation costs along with reduced forex volatility has also helped EBITDA margins by ~ Rs1500/te.Advertisement Motilal Oswal has claimed that Decline in Chinese stainless steel prices has compressed the converter spreads. We are not sure when exactly the spot will percolate into Jindal Stainless (JSL) or Jindal Stainless (Hissar) (JSHL) spreads, but we continue to build in ~Rs17,500/te of normalised spreads for FY23/24E (from Rs27,000/te expected in Q3FY22). With ~1mtpa volume expansion underway, we see progressive deleveraging/FCF generation, improvement in consolidated RoCEs (because of significantly lower CAPEX intensity) and improvement in valuation multiples which is a converter business model deserves. NCLT approval for the merger of JSL and JSHL is awaited. We maintain BUY on Jindal Stainless (JSL). We value it at 1.8x FY24E P/B. The P/B multiple is reflective of long-term through cycle RoE of 20%. The stock has been picked from the brokerage report of Motilal Oswal. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.