Jindal Stainless rating: Buy; merger of JSHL to help firm attain critical mass

The boards of directors of Jindal Stainless Ltd (JSL) and Jindal Stainless (Hisar) Ltd (JSHL) have approved the merger of JSHL into JSL (likely to be completed by H2FY22) at a swap ratio of 1:1.95. In our view, the merger will result in synergies of both scale and scope, besides creating one of the largest stainless steel companies in the world. A stronger balance sheet and simplified capital structure are expected to be the additional stock drivers. We are keeping close tabs on ensuing approvals. Maintain Buy on JSL with an unchanged TP of Rs85, valuing it at 5x FY22e Ebitda.

A formidable global stainless steel player in the making: In our view, the proposed merger is expected to be value-accretive for JSL as: (i) it propels it into the top ten stainless steel players in the world; (ii) its leverage metrics will become more attractive following the cancellation of inter-company debt of Rs 9 bn; and (iii) it combines the niche portfolio of JSHL with the volume of JSL, particularly the railway products portfolio of JSL Lifestyle (JSLLL).

Stronger and robust financial metrics in the offing: We believe the merged company is likely to have FY22e revenue/Ebitda in excess of Rs 220/24 bn. Net debt/Ebitda is likely to be below 2x (Q2FY21: 3.2x) by FY22e. In our view, JSL has come full circle from unsustainable debt of FY15. While the existing high level of pledging would persist over the medium term, we derive comfort from the fact it is an additional security against debt and not a typical loan against shares.

Outlook: Just the beginning—We had identified three key value drivers for JSL: (i) CDR exit; (ii) reduction in pledging levels; and (iii) merger of stainless steel businesses of the group. Of these, two have played out. We perceive the proposed merger as the first step in JSL’s transformation as it will help it attain critical mass in terms of revenue, Ebitda and market cap. Maintain ‘BUY/SO’.