Key Rating Drivers & Detailed Description

Strengths:

Superior market position coupled with adaptability in manufacturing process

The group — through its manufacturing plants in Hisar, Haryana (0.8 MTPA); and Jajpur, Odisha, (1.1 MTPA) — is the largest manufacturer of SS flat products in India. Capabilities to manufacture a wide variety of grades across all series of SS (mainly 200, 300 and 400 series — classified based on exact content of nickel and other alloys) — helps the group cater to a diversified end-user base comprising which includes consumer goods (durables and kitchenware), process industries (pharmaceuticals, dairy, etc), other equipment manufacturers, automobile-railway-transportation (ART) and architecture-building-construction (ABC). Further, the group can switch manufacturing between various grades of SS in around 45 days based on the demand scenario. During the first nine months of fiscal 2023, while export sales (typically of 300 series) were impacted due to the imposition of export duty, group was able to switch its manufacturing process and cater to the strong domestic demand (for 200 series), thereby reporting volume growth of ~5% on-year basis. Exports sales are however, expected to normalise going forward with withdrawal of the export duty.

Both the plants have well-defined target geographies (the Haryana plant focusses on the northern and western markets while the Odisha plant focusses on the southern and eastern markets) and product segments (the Hisar plant focusses on valued-added products such as precision strips, SS blades used in razors and coin banks for national and foreign mints, while the Odisha plant is focused on mass products).

Strong domestic demand outlook leading to significant capex

Domestic demand outlook for SS is expected to be healthy going forward as it is finding increasing acceptance across multiple industries – consumer goods, process industries, ABC and ART. Further, given the low corrosion nature and low lifecycle cost, SS has become the preferred material to be used in railways for manufacturing of coaches and foot-over bridges.

To meet the growing demand, the group is undertaking a capex and increasing SS melt capacity by 1 MTPA in the Odisha plant, which will result in total installed capacity of 2.9 MTPA at the group level. It is also adding downstream capacities in both plants, along with capex to improve cost efficiency. The plant is expected to commission in the first quarter of fiscal 2024. JUSL is also expanding its hot strip mill (HSM) capacity to 3.6 MTPA, at a cost of Rs 400-500 crore. On-time commissioning and ramp-up of increased capacities will be key monitorables. Further, acquisition of shareholding of JUSL should yield synergistic benefits from integrated operations (JUSL generated Ebitda of Rs 592 crore in fiscal 2022).

Sustainable improvement in Ebitda per tonne led by operating efficiency

During the first nine months of fiscal 2023, combined volume rose ~5% on-year, led by healthy domestic demand for SS, despite fall in export sales on account of levy of export duty. While profitability levels moderated, they sustained at healthy levels with Ebitda per tonne of ~Rs 18,500.

While realisations are largely dependent on the prices of inputs (nickel and chrome ore) and the product mix (200, 300, 400 series), the group has undertaken several measures that have improved its operating performance. The JSL plant has installed a railway siding and inland container depot to transport raw materials and finished goods, leading to savings on logistics costs, and has substituted high-cost propane with cheaper coke oven gas. Furthermore, the JSL plant is in Odisha, which has 93% of India’s chromite ore reserves (apart from nickel, chrome is a key input in making SS) and is supported by a captive 264 megawatt (MW) power plant which meets the bulk of its electricity requirement. Further, with acquisition of a stake in NPI smelter facility, the group is looking to secure its raw material requirement going forward. The group also has flexibility to shift production to SS series with lower nickel content (such as 400 and 200 series) depending on market conditions, which enhances sustainability of operations.

Going forward, with healthy domestic demand and expected pick-up in export, CRISIL Ratings expects the group to generate Ebitda per tonne of more than Rs 18,000-20,000 on a sustained basis.

Financial risk profile to remain healthy despite capacity addition

Despite the ongoing capex, JSL group (including JSHL) reduced consolidated external net debt to Rs 3,355 crore as on December 31, 2022, from Rs 3,683 core as on March 31, 2022, aided by healthy operating performance. Net debt to EBITDA stood at 0.7 time in fiscal 2022, compared to 1.3 times in fiscal 2021. In fiscal 2024 leverage levels are expected to increase due to addition of ~Rs 2,000 crore of JUSL debt, expected to result in net debt to EBITDA of 1.8-2.0 times. JUSL’s debt however does not have any significant debt repayment obligations till fiscal 2028, which will support liquidity and cash flow. The increase in leverage, however, is likely to be limited to the next fiscal as, expected improvement in operating profile resulting in healthy cash flows, should lead to moderation in leverage levels. Net debt/Ebitda to correct below 1.5 times over the medium term. Any significant debt funded capex/acquisition, resulting in deviation from this understanding, will be a key monitorable.

Weaknesses:

Threat from imports

While the Jindal Stainless group is the largest SS player in India, it faces competition from imports mainly from Indonesia, which is a low-cost producer of SS as it has nickel deposits (main input for 300 series SS), and China. Sharp rise in imports from Indonesia in fiscal 2020 put pressure on the margins and volumes of domestic players. Imports are likely to be largely limited to the 200 series having application in consumer goods (mainly kitchenware), whereas the group’s focus remains on sectors such as auto, railways and construction, which require 300 and 400 series thereby mitigating the risk to an extent. However, any significant rise in imports that can adversely impact realisation and volume of domestic players remains a key monitorable.

Susceptibility to risks relating to input cost, realisations and cyclicality in the SS industry

Prices of key raw materials such as SS scrap and finished SS products are largely linked to nickel prices, which tend to be highly volatile. This has led to unfavourable price cycles for the sector in the past. Moreover, as a certain amount of nickel is always maintained as inventory, price fluctuations led to inventory gains or losses in the past and thus, remain a key monitorable. The group is in the process of entering into a joint venture to develop an NPI plant in Indonesia; this will secure raw material linkages and provide stability to margins. Further, the group has taken several steps to gain the ability to pass on input price increases, including tie-ups with original equipment manufacturers in the automotive, lifts and other industrial segments, with pass-through clauses in contracts. It has also entered into volume-based tie-ups with distributors where pricing is set on a periodic basis. However, the ability to pass on the full impact of price hikes will also depend on the underlying demand scenario. Resultantly, the increase in nickel prices over the past few quarters may impact volume of SS grades with high nickel content as their prices move in tandem. While the group has the ability to shift between various grades of SS, impact of the elevated nickel prices on volume will be a key monitorable in the near term.

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