The board of Jindal Stainless (JSL) has convened a meeting on December 29 to consider and review recommendations pertaining to consolidation of the group’s stainless steel businesses. In our view, this will address the Street’s concern of having two listed companies under the same promoter group, and is the final frontier in the company’s transformation journey. While we await details, potential consolidation will result in economies of scale and scope in the short term and in the long term, create the largest stainless steel company in the world (ex-China). Maintain ‘buy’ with target price of Rs 85 (5.0x FY22E ebitda).
In our view, the consolidation of stainless steel businesses-JSL and Jindal Stainless (Hisar)-is positive. Key points, JSL will have access to specialised products such as blade steel and coin blanks. Inter-corporate debt of Rs 9 billion to JSL will be extinguished. Cross-holding in JSL will be eliminated. Synergy benefits primarily due to rationalisation of administrative costs. While JSL is located in the vicinity of raw materials and port infrastructure for logistics, JSL-Hisar has a complete client ecosystem. Besides, JSL provides an option to expand volumes and JSL-Hisar has slightly higher margins owing to specialised stainless steel products.
We are upbeat on the potential long-term benefits of consolidation. JSL has enough land available to expand up to 3.2mtpa through bolt-on (low capex) modules.
Hence, the combined entity (50% market share on Day 1) can rapidly scale up depending on the demand situation. At potential long-term capacity of 4mtpa, the combined entity will be larger than Outokumpu-world leader in stainless steel market, ex-China. In our view, this will result in significant re-rating of the stock as the market cap as well as capacity will be significantly enhanced.
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