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Initiating Coverage - Indian Stainless Steel Industry - ICICI Direct

Posted On: 2020-12-19 21:53:46 (Time Zone: Arizona, USA)

Over the last few decades, stainless steel has emerged as a metal of choice due to its diverse applications. Stainless steel (SS) is used in architecture, building and construction (ABC segment), automobiles, railways, transport (ART segment), process industries, etc. SS, due to its distinct characteristics, has an edge over carbon steel. SS provides a good combination of strength, pliability, has a longer average product lifecycle and a relatively low/nil maintenance cost compared to carbon steel. The edge of stainless steel over carbon steel is clearly visible in terms of difference in demand growth rate of both metals. During FY13-19, domestic stainless steel demand grew at 7.2% CAGR, outpacing carbon steel CAGR growth rate of 5.0%.

India's overall SS demand in FY19 was ~3.7 million tonnes (MT). JSL group (Jindal Stainless + Jindal Stainless Hisar) has a leadership position in the Indian SS sector cumulatively accounting for ~50% share in overall SS demand. Considering healthy demand prospects from key user industries coupled with support from government (recently levied provisional CVD against subsidised imports from Indonesia), we expect good times ahead for the domestic SS sector. Hence, we initiate coverage with a BUY rating on two leading players, viz. Jindal Stainless and Jindal Stainless Hisar.

Ticking all the right boxes...

Over the last few years, the Jindal Stainless group had focused on reduce its debt and improve its balance-sheet position. During FY18-20, JSL had reduced its consolidated net debt by Rs. 1118 crore, while JSHL had reduced its consolidated debt by Rs. 773 crore during the above-mentioned period. Continuing with its debt reduction drive over the next three years, we expect JSL to reduce its consolidated debt by Rs. 950 crore, while we expect JSHL to reduce its consolidated debt by Rs. 656 crore. Furthermore, both players are focused on reorganising their product basket. JSL is planning to focus on increasing its share in low nickel-content 400 series in its overall product basket. By increasing the share of 400 series, JSL plans to relatively reduce the risk of adverse fluctuation in nickel prices and achieve a more stable operating margins. On the other hand, JSHL plans to increase the share of value added products in the overall product-mix. This is likely to aid in improvement of JSHL's overall operating margins, going forward.

Government support likely to aid domestic players...

On account of substantial injury caused to Indian stainless steel producers by Indonesian imports (through FTA routes and various subsidies offered by the Indonesian government), the Government of India has imposed provisional trade remedial measures on Indonesian imports. The Government of India has levied provisional countervailing duty (CVD) in the range of 22.31% to 24.83% on certain types of flat SS products from Indonesia for four months from October, 2020. While this step has provided interim relief to domestic SS producers, the industry awaits long-term imposition of this duty structure. Hence, going forward, conversion of provisional CVD into final CVD would be a key monitorable. If long term duty is levied, it can provide a further fillip to domestic SS majors.

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Source: Equity Bulls

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