Visit note: Jindal Stainless (Unrated) - Volume led growth

Jindal Stainless Ltd. (JSL) is India’s largest producer of stainless steel with installed capacity of 0.8mtpa at Jajpur, Odisha. We present key takeaways of our visit to JSL’s plant to understand the company’s operating environment, possibility of volume growth, capex plans etc.

Stainless steel volumes to post 12-15% CAGR over FY18-20: Management expects increase in stainless steel (SS) slab capacity from 0.8mtpa to 1.1mtpa by FY19-end by reconfiguring the transformer of one of the company’s Electric Arc Furnace (EAF’s)-from 50MVA to 120MVA and improving operating efficiency. Our visit to the plant instils confidence in management’s guidance. The capacity growth is on the back of a nominal capex of ~Rs500m. The improved capacity should help enhance sales volume at 12-15% CAGR over FY18-20 to ~1.0mt, as per management.

Plans to raise slab capacity to 1.6mtpa within the same complex: Though the management has not firmed up any plans but after ramp up of ~100% capacity utilisation in slabs, they may think of enhancing slab capacity further from 1.1mtpa to 1.6mtpa within the same complex. For the same, JSL will need to put one Argon Oxygen decarburization (AOD) furnace and other ancillary units, which will not be capital intensive. The company has a long-term plan of increasing the total capacity to 3.2mtpa, for which it has ~800acres of land, which is sufficient for expansion.

Management confident of deleveraging: JSL has total debt of Rs50.1bn at FY18-end with net debt/EBITDA of 4.0x. The company has repayment obligations of ~Rs9.0bn until FY20, as per management. During FY18, JSL recorded EBITDA of Rs13.1bn with EBITDA/t of Rs16,074. Management expects EBITDA/t to sustain at Rs15000-17000/t. Management is confident of deleveraging its balance sheet significantly, given the limited capex and volume growth.

Outlook

Management expects earnings growth to continue on its estimate of 12-15% volume CAGR over FY18-20E, amid strong demand environment (domestic demand of SS posted 7% CAGR over FY13-18 to3.4mt). Amid improving operating cash flows, the company is set to deleverage its balance sheet over the next two years. The company expect to come out of CDR soon, which it believes will provide flexibility for further growth. Any positive step from the government, which restricts/reduces imports from FTA countries, would help improve stainless steel’s profitability.