Jindal Stainless' Q2FY20 results (Outperformer) - On path of deleveraging

Q2FY20 result – Volume led EBITDA growth

• Jindal Stainless (JSL) reported consolidated EBITDA of R3,185m, up 6.2% qoq, primarily due to volume growth.
• Reported Standalone EBITDA of Rs3,171m, up 1% qoq (up 37% yoy) on the back of 5% qoq growth in volumes to 0.233mt (up 13% yoy) offsetting the effects of lower realisation (Rs135,874/t, down 2% qoq). Realisations were lower due to lower share of 300-series in mix (50% vs 51% in Q1FY20). However, increase in power cost led to a 4% decline in EBITDA/t to Rs13,590 (though up 21% yoy). Power cost increased due to higher coal cost and purchase of power from grid as captive plant was shut-down for maintenance.
• JSL sold ~186,700t in domestic market (up 10% yoy, 5% qoq) and ~46,600t in export market (up 25% yoy, 5% qoq).
• Subsidiaries reported EBITDA of Rs14m vs EBITDA loss of Rs139m in Q1FY20.
• Standalone net debt reduced by Rs2.34bn qoq to Rs38.3bn.
• During H1FY20, company has generated operating cashflows of Rs6.6bn and has repaid Rs2.9bn of debt in standalone operations. Capex during H1FY20 stood at ~Rs0.8bn. Recognition of lease asset as right-to-use asset led to increase in asset by Rs0.8bn, correspondingly lease liabilities stood increased by the same amount.

Key Positives: Higher volumes

Key Negatives: increase in power cost

Valuation & view- Reiterate OP with TP of Rs63

Amid rising imports, JSL delivered 10% yoy volume growth (5% qoq) in domestic market, implying that demand for stainless steel remained firm unlike carbon steel in Q2FY20. Similarly, 25% yoy growth in export volumes suggests that with finalisation of EU tariff quota, JSL has regained its market share in Europe. We expect JSL to achieve 9% volume CAGR over FY19-21E to 1.0mt to drive 7% EBITDA CAGR to Rs13.4bn. This will help JSL to continue deleveraging its balance sheet. We expect net debt reduction of Rs10.2bn (Rs23/sh) over FY19-21E to Rs33.2bn through internal cashflows. Refinancing of OCRPS would remove the overhang of equity dilution. Moreover, imposition of ADD on imports from Indonesia and other FTA countries (investigations going on) would be beneficial for JSL as it would reduce the threat of cheap imports. We value JSL at 5.0x FY21E EV/EBITDA to arrive at our target price of Rs63/sh. Reiterate outperformer.