Jindal Stainless

THE current economic downturn has taken its toll on many companies, especially those in commodities space. The drop in sales volume, volatility in raw material cost and headwind in foreign currency market are some of the factors affecting these companies negatively. Jindal Stainless is one such company that suffered badly in last few quarters. Though its latest quarter result does reflect some signs of recovery, the recent run-up in its stock prices provides little upside potential, at least in short-term. The stock has nearly tripled in last three months. At the current price level the stock looks overvalued and investors can consider exiting the stock at its current price.
Business:

Jindal Stainless is the largest integrated stainless steel manufacturer in India. It currently has two plants, one at Hisar and the other at Vizag . The Hisar plant is a fully integrated stainless-steel plant with a capacity of 0.72 mtpa (million tons per annum). The Vizag plant mainly produces ferrochrome and has an annual capacity of 40,000 tonnes. Its proposed integrated stainless steel green field project in Orissa has further been delayed and is still in its initial stage.

Growth Potential:

The company plans to set up a fully integrated stainless steel plant in Orissa. The green field project, which was earlier scheduled for completion by FY11 has been delayed further. Upon completion, the Orissa plant will produce 1.6 million tons of stainless steel capacity per annum and raise JSL combined capacity to 2.5 mtpa. To meet its captive power requirement, it is also planning to build a power plant with a capacity of 500 MW.

Financial:

The company has been badly hit by the recent economic slowdown. Sharp decline in export, higher operating expenses and rising interest cost are some of factors affecting its business negatively. The foreign exchange losses from its foreign currency asset/liabilities and forward contracts have pulled down its net profit substantially. The company has reported net losses for last three consecutive quarters. For instance, its net loss for the quarter ended Mar ’09 stand at Rs160 crore.

Valuation:

The company reported a consolidated net loss of Rs 609 crore for the financial year ended March, 2009. Even after adjusting for the exceptional items, the net loss for the year works to be around Rs 160 crore. Though March quarter was relatively better and company reported little net profit from its operations. Assuming next four quarters to be slightly better than Mar ’09 quarter, the adjusted earning per share for FY ’10 works out to be around Rs 12. At the current price level, this translates into a forward price-earning (P/E) multiple of 7-8. This appears to be on the higher side considering its historical P/E of 7-10 during boom time period of 2006-07. Short-term investors might consider exiting the stock at the current price level and book some profit.