Weathering the Storm at Jindal Stainless

IT TAKES A HEART of steel to manage challenging business cycles when faced with an unprecedented pandemic, a war running into months with no let-up in sight, decimating global supply chains and raising input costs. Ratan Jindal-led Jindal Stainless weathered all these without impacting its balance sheet. The conglomerate ranked among the top 10 stainless steel companies globally, and got ratings upgrade by Crisil and India Ratings in FY22 owing to strong operating and financial performance.

The company registered a three-year CAGR of 17.3% in net sales, and 129.2% in profit after tax. The three-year average total shareholder return stood at 107.9%, while the average return on capital employed was 19.8%.

In his message to shareholders at the end of FY22, Jindal encapsulated the global scenario as riddled with “uncertainties and challenge”. Commodity prices, including those of key raw materials for stainless steel, nickel and ferrochrome rose, steadily, he pointed out. The post-Covid recovery was followed by the Russia-Ukraine conflict, which led to supply chain issues around the world. “Rallying commodity prices and surging energy cost put pressure on the global manufacturing ecosystem and India was not far from the impact of these developments,” he said. Jindal also points to the impact of revocation of countervailing duty and anti-dumping duty (ADD) on stainless steel products which allowed Chinese companies to dump cheap products in India via Indonesia.

“With imports from China and Indonesia rising three and four times YoY in FY22, the impact of suspension of CVD on stainless steel products has been damaging the domestic industry. The incessant rise in raw material prices also added to cost pressure, making the survival of MSME stainless steel producers difficult. These account for nearly 35% of the manufacturing ecosystem,” Ratan Jindal added.

CVD and ADD on stainless steel were revoked in the Union Budget FY22 in February last year. Domestic stainless steel sector has been impacted by cheap Chinese imports. During April-July FY22, a 177% surge in imported stainless steel was witnessed over the average of FY21. With the decision, China and Indonesia’s combined share in imported steel has jumped to more than 80% against 30% in FY18. Experts believe that the challenges will continue for the sector in the coming months owing to the duty structure. “In the near term there will be pressure on earnings and margins for companies in the stainless steel sector,” said Jatin Damania, vice president, fundamental research, Kotak Securities Ltd.

According to Abhyuday Jindal, MD, JSL, the steel industry faced a double whammy in Q1 FY23 via a continuous free flow of unwarranted stainless steel from China and Indonesia which resulted in the share of imports rising to nearly 50%. “On the other hand, 70-80% of our export product portfolio got impacted due to the imposition of 15% export duty by the government. During Q1 FY23, combined export stood at 22%, lower than 26% clocked in the previous quarter,” Abhyuday said in an analyst call after Q1 results.

With global markets likely to remain muted with the US recession and slowdown in Europe amid high inflation and interest rate, what strategy will the company deploy?

According to Damania, it is the product basket the company is focusing on. “In the case of Jindal Stainless, we have seen an improvement in overall profitability because they are moving into the 400 series of the stainless steel. They have also increased their basket of value-added products. They are tapping markets like the railways, rapid rail transport and buses, and these sectors are doing well for them,” he says.

In fact, JSL management is banking on domestic infrastructure creation in railways for stainless steel demand and working on capacity expansion to cater to the same via the brownfield route — a strategy aimed at saving up on high capital cost. The company reported a consolidated net profit of ₹329 crore in the June quarter, compared with ₹306 crore in the same quarter of the previous fiscal.

Brownfield expansion is underway at the company’s Jaipur manufacturing facility to double melt capacity to 2.1 MTPA from 1.1 MTPA, Ratan Jindal said in his message to shareholders. “The company has infrastructure and operations to easily scale up to a melt capacity 3.2 MTPA. Commissioning and stabilising the expanded facilities will remain a focus area for JSL in the foreseeable future,” he added. Abhyuday, meanwhile, announced a capital expenditure of ₹1,250 crore in FY23, including the ₹150 crore spill-over from the previous fiscal.

Broking firm Kotak Securities is of the view that expansion is being lined up at the opportune time and will cater to the historically growing stainless steel demand in the country. “The growth in stainless steel demand was largely supported by change in demand drivers over a period, from consumer goods to automobiles to railway and transport, architecture, building and construction and process industries... Given the strong growth in the industry, we believe the capacity expansion comes at an opportune time,” it said in a report dated September 23.

Notably, Crisil has projected stainless steel demand in the country to register a CAGR of 6.5-7.5% over FY22-25 to reach 46-48 lakh tonnes.

The company maintains government focus on infrastructure has contributed to demand for stainless steel in FY22. “Major domestic end-use segments like pipe and tubes, railways and wagons and metro rail gave thrust to stainless steel demand. However, auto lifts and elevators were more susceptible to the challenges arising in the geo-political environment. Auto segment sales especially suffered on account of the long waiting period necessitated by semiconductor shortage,” Ratan Jindal said.

But demand in the Indian infrastructure sector has boosted growth. In July, the company said it will supply 3,500 MT stainless steel for the construction of the tunnel project on the Udhampur-Srinagar-Baramula Rail Link. JSL is also providing stainless steel for foot-over-bridges to Indian Railways.

The company is also supplying stainless steel to Alstom for developing technologically advanced and state-of-the-art trainsets for regional rapid transit systems. It will provide 2,000 metric tonnes of stainless steel grade to Alstom for developing 210 trainsets under this project. The first phase of RRTS covers 383 km covering Delhi–Meerut, Delhi-Alwar and Delhi-Panipat. One section on the Delhi-Meerut route will begin commercial operations in June next year. The project offers mega procurement opportunities to steel companies.

It is also looking for merger & acquisitions (M&As) to cater to the upcoming domestic demand in the infrastructure sector. “JSL is going to acquire Jindal United Steel Ltd. as a wholly-owned subsidiary, enhancing its stainless steel manufacturing integration with all critical facilities now under one umbrella,” Abhyuday said. JSL will acquire 74% stake in JUSL for around ₹958 crore. The acquisition is likely to be complete by June next year.

“Pursuant to the acquisition, JSL will become an integrated stainless steel manufacturer which would result in improved synergies between both the companies,” ICICI Direct says in a research report.

In a significant development in April, shareholders and creditors of JSL and Jindal Stainless (Hisar) Ltd approved the merger between the two companies on April 23 2022. Next hearing on the merger petition is on October 18.

Ratan Jindal believes Covid-19 has tested the human spirit of endurance. With new synergies from M&A, focus on the domestic market and the Centre’s infrastructure push, he would be banking on them for future growth of Jindal Stainless.