Time’s right to enter Jindal Stainless twins | Economic Times

ET Intelligence Group: If steel is in a supercycle of its own, can the stainless variety of the alloy be far behind?So, it isn’t surprising that the biggest two in the business locally — Jindal Stainless and Jindal Stainless (Hisar) — reported robust performances in the three months to March. And the stainless performance should continue, paced by strong domestic demand, better realisations and the eventual merger of the two OP Jindal group companies.The M&A, which will likely be effective sometime in the second half of FY22, will provide the necessary cash-flow and balance-sheet strength to undergird future growth.Current stock prices offer an opportunity to buy into both as they trade at half the valuation multiples of global peers.In the March quarter, Jindal Stainless (JSL) reported an operating profit or earnings before interest, tax, depreciation and amortisation (Ebitda) of Rs 540 crore, more than double on-year and 15 per cent higher sequentially. Jindal Stainless Hisar (JSHL) reported an Ebitda of Rs 406 crore, again doubling on-year.Thus, the combined Ebitda is Rs 946 crore. The combined volume growth was 18 per cent on-year. Local demand remained strong from sectors as diverse as autos, pipes, tubes, and public transportation networks — the metros and state-run railroads. Higher realisation of Rs 1.5 lakh per tonne, up 6 per cent quarter on quarter and 13 per cent year on year, helped offset cost pressures. The company ended the year with net debt of Rs 3,487 crore — or net debt to Ebitda of 1.3 times.82781931India’s total consumption of flat stainless steel is 2.6 million tonnes. The two companies have a combined capacity of 1.9 million tonnes and produce around 1.8-1.9 million tonnes per annum (based on the Q4 run rate). The rest comes from smaller players and some imports, mainly from China and Indonesia. The recent reduction (in February 2021) in export rebates on stainless steel exports by China may not push cheap imports into India, which is positive for the domestic steel producers.Analysts expect the companies to log Rs 3,200 crore Ebitda this financial year, against Rs 2,550 crore in FY21, and an even higher operating profit in FY23 with merger synergies flowing in. For instance, JSL has raw material and port proximity and JSHL has a better domestic presentation.Furthermore, shareholders have not been very comfortable with the inter-corporate loans between the two companies that will go away with the merger. JSL also has 800 acres of developable land in Odisha, which would allow the company to expand brownfield at one-third the cost. The company intends to add 1 MT capacity post-merger. All these could help a re-rating in the two stocks.At the current prices of Rs 94 and Rs 184 apiece, shares of JSL and JSHL are trading at 3.8 times forward EV by Ebitda multiples. Their global peers such as Outokumpu, Aperam and Acerinox trade at 6-6.5 times forward multiples. The gap may narrow as the merger nears.