After a precipitous decline of 75% over 11 months through January 2019, the Jindal Stainless (JSL) stock has bounced back 55%.
After a precipitous decline of 75% over 11 months through January 2019, the Jindal Stainless (JSL) stock has bounced back 55%. In the past one year, the stock has exhibited greater volatility than both peers and LME nickel (Ni) owing to concerns around: (1) pledging of promoters’ shares; and (2) delay in exit from the CDR mechanism.
We believe that concerns around pledging are overdone and the CDR exit is around the corner. In addition, LME Ni prices have started rising owing to a foreseeable deficit over the medium term. Hence, we are raising FY20/21E LME Ni and stainless steel prices by 22% and 12%, respectively.
Consequently, our FY20E/FY21E Ebitda too has risen 14%/11%. Maintain ‘Buy’ with a revised TP of Rs 65 (versus Rs 40 earlier) on an unchanged exit multiple of 5x September 2020E Ebitda. That said, we believe about 50% upside potential is fraught with volatility until the aforesaid concerns fade away. We are raising our forecasts for LME Ni in light of persistent – although narrowing – deficit over CY19–21E. Demand from the stainless sector remains robust and the share of nickel-intensive cathode materials has been growing concomitantly.
On the supply side, despite an uptick in nickel pig iron (NPI) from Indonesia and China, we see constraints over the medium term. Hence, we are raising LME Ni price/t estimate by 22%/21% for FY20/FY21 to $13,362/13,345 (spot price: $13,171). We believe a further trigger in the stock from a possible CDR exit, for which management is making efforts such as meeting all the financial covenants. Currently, 98% of the promoters’ shares are pledged; however, we do not view it as a huge concern as these are secondary securities against the debt raised for the plant.