The Hindu Business Line : Jindal Stainless: Buy

While a broadening product mix is likely to result in higher realisations, the backward integration would enable the company reduce its input costs. Robust demand from domestic user industries and overseas acquisitions augur well for the company.

FRESH exposure can be considered in the Jindal Stainless stock. A rich product mix, gains from the proposed backward integration, an improved financial profile and a positive demand outlook all suggest scope for appreciation in the medium term.

At the current price of about Rs 122, the stock trades at 6.5 times its likely FY-06 per-share earnings (assuming full conversion of FCCBs or foreign currency convertible bonds). Though this appears a tad expensive vis-à-vis its peers, we believe the premium is justified considering its product profile and growth potential.

Rich product mix

Jindal Stainless makes and sells a broad range of specialty flat products such as slabs, blooms, flat bars, hot-rolled and cold-rolled coils, plates and sheets and special products such as precision strips and coin blanks.

It is also increasing its focus on lifestyle and architectural products that are gaining wider popularity. An increasing share of value-added products is likely to result in higher realisations and better margins.

Improved financial profile

Over the last three years, the company's financial profile has improved considerably. The 2003 restructuring exercise, which separated the stainless steel operations of Jindal Strips from the non-core operations and investments, has paid off.

Post-restructuring, the company has been able to halve its weighted average cost of debt to 5 per cent.

The return on shareholders' funds has been sound at 32 per cent. It has been able to reduce the debt level from 90 per cent to about 55 per cent, thereby freeing cash for other uses.

Over the last three years, the revenues have been growing at a CAGR of about 30 per cent while the earnings have grown at about 55 per cent. Average realisations in FY-05 rose by over 15 per cent on account of higher steel prices, wider product mix and the ability to pass on the increase in raw material costs.

Wider reach

While the company caters to about 40 per cent of the domestic demand, it also exports to China, Vietnam and other South-East Asian countries.

The acquisition of a cold rolling mill in Indonesia in November 2004 should enable the company tap new markets in the South-East Asian region where the demand for stainless steel is projected to grow at 8-10 per cent annually.

This would also enable Jindal Stainless reduce its dependence on China, which now accounts for about 75 per cent of its exports (in volume terms).

Gains from backward integration

The company is to set up a greenfield stainless steel project at Duburi in Orissa, which would ensure supply of raw materials such as ferro chrome, ferro manganese and silico manganese. The project is likely to fully go on stream by FY-07, and lead to lower input costs. Imports of nickel are likely to continue.

However, as it does not form a substantial part of the raw material costs, it is unlikely to be a matter of concern. Jindal Stainless is also undertaking an expansion-cum-upgradation of its existing facilities in Hissar, which is expected to be completed in another two years. The augmented capacities are expected to bolster volume growth.

Positive demand outlook

The company's products find wide application in the automotive, white goods, architecture and construction sectors as also by the Railways.

Of late, stainless steel has found wider application among builders of shopping malls, and furniture manufacturers as also for aesthetic and decorative finishing. The potential in the domestic market along with widening opportunities abroad offer good business prospects.

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