jindal strips

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JINDAL STRIPS LIMITED DVP RESEARCH 1 JINDAL STRIPS LIMITED DVP Research A division of EQUITY STRATEGIST 502,Nirmal Tower Barakhamba Road,New Delhi-110001 E-mail : [email protected] Analyst : D V Prasad (9810018028) P D Gupta (011-25269790) Industry : Stainless Steel Category : Growth Recommendation : Strong Buy Present Price : Rs.115.00 BSE Sensex : 3312.25 Reuters Code : JNST.NS/BO MARKET DATA PRICE CHART EXECUTIVE SUMMARY l Jindal Strips Ltd. (JSL) managed by Mr. Ratan Jindal is the largest integrated stainless steel manufacturer (capacity-4 lacs mtpa) in India and is ranked among the top 15 producers globally. l Capacity expansion from 4 lac. mtpa to 5 lac mtpa in FY04 by debottlenecking and financed through internal accruals to place JSL among the top 10 producers of the world. l Complete integrated facilities for manufacture of stainless steel from in house chrome ore mining gives it a high competitive advantage. l JSL has a broad range of value added products viz. currency coin blanks, razor safety blades, etc with cost efficient integrated production facilities. l Jindal Strips enjoyes market leadership in domestic market and its market share has increased from a mere 19% in FY95 to over 43% in FY02. l Increased focus on export of valued added products with establishment of marketing offices in China, Vietnam and Italy to further accelerate export sales. Order book position full till March 2003. l Stainless Steel (SS) in India has grown @ 12% as against 6% for the steel industry. l Global demand especially that of Asia for SS exceeds supply by a wide margin has China and South Korea have become the major demand driver. India enjoys locational advantage in shipping SS to China. l Likely acquisition of Salem Steel Plant will further consolidate JSL’s leadership position on account of premium brand of Salem steel products. l Low equity base, high entry barrier, low operating cost, versatile manufacturing facilities and high value added products makes Jindal Strips a good growth stock. l Jindal Strips at Rs. 115 (discount FY03 and FY04 earn- ings by just 2.93 and 2.41 times respectively) is an ex- cellent investment opportunity in stainless steel indus- try which merits higher discounting due to its high value added products. Current Equity : Rs. 18.91 cr. Face Value : Rs. 10 Book Value : Rs. Market Cap. : Rs. 283.65 cr Free Float : 56% 12 Months High/Low : Rs. 143/45 Listing : BSE / NSE - MARKET OUTPERFORMER - SHAREHOLDING PATTERN (%) FINANCIAL HIGHLIGHTS Promoter’s & Associates : 44% FII’s / OCB’s / NRI’s : 2% Inst. / Banks / Mutuals Funds : 2% Resident Companies : 20% Public : 32% Particulars FY01 FY02 FY03P FY04P Sales 1458.29 1493.68 1926.50 2058.50 Op. Profit 222.02 244.51 310.90 329.40 OPM (%) 15.35 16.48 16.14 16.00 Net Profit 53.24 31.66 76.20 92.30 Equity 18.91 18.91 18.91 18.91 E.P.S. 27.27 16.00 39.19 47.70 Dividend (%) 40 40 50 60 Rs. in crores 17th December, 2002

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Page 1: Jindal Strips

JINDAL STRIPS LIMITED DVP RESEARCH1

JINDAL STRIPSLIMITED

DVP ResearchA division of

EQUITY STRATEGIST502,Nirmal Tower

Barakhamba Road,New Delhi-110001E-mail : [email protected]

Analyst : D V Prasad (9810018028) P D Gupta (011-25269790)

Industry : Stainless SteelCategory : GrowthRecommendation : Strong Buy

Present Price : Rs.115.00BSE Sensex : 3312.25Reuters Code : JNST.NS/BO

MARKET DATA

PRICE CHART

EXECUTIVE SUMMARYl Jindal Strips Ltd. (JSL) managed by Mr. Ratan Jindal is

the largest integrated stainless steel manufacturer(capacity-4 lacs mtpa) in India and is ranked among thetop 15 producers globally.

l Capacity expansion from 4 lac. mtpa to 5 lac mtpa inFY04 by debottlenecking and financed through internalaccruals to place JSL among the top 10 producers ofthe world.

l Complete integrated facilities for manufacture of stainlesssteel from in house chrome ore mining gives it a highcompetitive advantage.

l JSL has a broad range of value added products viz.currency coin blanks, razor safety blades, etc with costefficient integrated production facilities.

l Jindal Strips enjoyes market leadership in domesticmarket and its market share has increased from a mere19% in FY95 to over 43% in FY02.

l Increased focus on export of valued added products withestablishment of marketing offices in China, Vietnamand Italy to further accelerate export sales. Order bookposition full till March 2003.

l Stainless Steel (SS) in India has grown @ 12% as against6% for the steel industry.

l Global demand especially that of Asia for SS exceedssupply by a wide margin has China and South Koreahave become the major demand driver. India enjoyslocational advantage in shipping SS to China.

l Likely acquisition of Salem Steel Plant will furtherconsolidate JSL’s leadership position on account ofpremium brand of Salem steel products.

l Low equity base, high entry barrier, low operating cost,versatile manufacturing facilities and high value addedproducts makes Jindal Strips a good growth stock.

l Jindal Strips at Rs. 115 (discount FY03 and FY04 earn-ings by just 2.93 and 2.41 times respectively) is an ex-cellent investment opportunity in stainless steel indus-try which merits higher discounting due to its high valueadded products.

Current Equity : Rs. 18.91 cr.Face Value : Rs. 10Book Value : Rs.Market Cap. : Rs. 283.65 crFree Float : 56%12 Months High/Low : Rs. 143/45Listing : BSE / NSE

- MARKET OUTPERFORMER -

SHAREHOLDING PATTERN (%)

FINANCIAL HIGHLIGHTS

Promoter’s & Associates : 44%FII’s / OCB’s / NRI’s : 2%Inst. / Banks / Mutuals Funds : 2%Resident Companies : 20%Public : 32%

Particulars FY01 FY02 FY03P FY04PSales 1458.29 1493.68 1926.50 2058.50Op. Profit 222.02 244.51 310.90 329.40OPM (%) 15.35 16.48 16.14 16.00Net Profit 53.24 31.66 76.20 92.30Equity 18.91 18.91 18.91 18.91E.P.S. 27.27 16.00 39.19 47.70Dividend (%) 40 40 50 60

Rs. in crores

17th December, 2002

Page 2: Jindal Strips

JINDAL STRIPS LIMITED DVP RESEARCH2

COMPANY PROFILE

BACKGROUND AND MANAGEMENT

Jindal Strips Limited, ISO 9902 and ISO 14001 certified is the flagship company

of the Jindal Organization. The company has come a long way from a single

factory establishment started in 1970. It is the largest integrated manufacturer of

quality Stainless Steel in India and caters to 40% of the total demand for stainless

steel in the country. Products ranging from Stainless Steel Slabs & Blooms,

Flats, Paltes, Hot Rolled/ Cold Rolled Coils, Precision strips are produced

as per international specifications .

Jindal Strips Limited (JSL) attained its current shape after demerging the Raigarh

unit (engaged in the manufacture of sponge iron which is currently a division of

Jindal Steel & Power Ltd. ) in line with scheme of arrangement on 2nd April,1998.

The cold rolling division at Vasind, Maharashtra was transferred to Jindal steel

& Alloys Ltd, a 100 % subsidiary of JSL . After the de-merger, JSL has become

a focused stainless steel company as depicted below :

JINDAL STRIPSLIMITED

Stainless SteelDivisionHisar &

Visakapatnam

Cold RollingDivisionVasind

Sponge IronDivisionRaigarh

JINDAL STRIPSLIMITED

Focused Stainless SteelCompany

Transferred toJindal Steel &

Alloys Ltd

100% subsidiary

RESTRUCTURING OF JINDAL STRIPS LTD IN 1998

$ 1.5 billiongroup headedby Mr. O.P.Jindal – a greatvisionary ofsteel industry

JSL now afocusedstainless steelcompany

Hived off asJINDAL STEEL &

POWERLIMITED

Page 3: Jindal Strips

JINDAL STRIPS LIMITED DVP RESEARCH3

The company enjoys the benefit of having in house production facilities forHigh Carbon Ferro Chrome, a key ingredient for making stainless steel andalso possesses in house mining rights for Chrome ore. The turnover of JSLhas gone up to Rs. 1350 cr in FY02 from a Rs. 800 cr in FY99 post demergerof other divisions as above( a compounded growth rate of 18 %). Its stainlesssteel melting production has also gone up from 2.25 Lac MTPA in 1998-99 to3.26 lac MTPA in FY02. thereby making it the largest integrated stainlesssteel manufacturer in India and among the top 15 in the world. During thisperiod, Cold Rolling capacity witnessed a phenomenal 3 fold growth from30,000 MTPA to 90,000 MTPA. The total melting capacity has increasedfrom 2,50,000 to 4,00,000 MTPA. All these has been achieved under thedynamic leadership of Mr. Ratan Jindal (Vice Chairman & Managing Director)added by a team of experienced professionals like Mr. R.G. Garg, Mr. ArvindParekh, Mr. N.C. Mathur and a host of other technocracts who have depthknowledge of steel industry.

The $ 1.5 billion Jindal group is headed by Mr. O.P. Jindal with primary interestsin Steel and Power Sector. It is to the credit of Jindals that they are rankedsixth amongst the top Indian Business Houses in terms of their huge assets.

The Jindal group’s well known companies include, Jindal Strips, Jindal Steel& Power, Jindal Vijaynagar, Jindal Iron & Steel , Saw Pipes etc. All thesecompanies are independent entities and are managed professionally. Afterthe demerger of Jindal Strips in 1998, JSL is exclusively looked after by Mr.Ratan Jindal.

The graphic picture of group companies is illustrated below :

GROUP PROFILE

Regularcapacityadditon tomeet growingdemand

O.P. JINDALGROUP

RATAN JINDAL

NAVEEN JINDAL

SAJJAN JINDAL

P. R. JINDAL

JINDAL STRIPS

JINDAL STEEL &POWER

JISCOJVSL

SAW PIPES

Stainless SteelHR / CR Coils

High Carbon FerroChrome

Sponge Iron, PowerRUBM, MS slabs

HR/ CR Sheets,Integrated Steel Plant

Submerged ArcWelded Pipes

Page 4: Jindal Strips

JINDAL STRIPS LIMITED DVP RESEARCH4

SHAREHOLDING PATTERN

As on 30.09.2002 - Equity Capital : Rs. 18.91 crore

Promoter's & Associates

44%

Public32%

Institutions/ Banks/ Mutual

Funds 2%

Resident Companies

20%

FIIs/OCB/NRIs2%

Further, JSL has allotted 5.75% Euro Convertible Bonds for a total of $ 30 million to foreign investors on17th December,1999. These bonds are convertible into equity shares at a predetermined price of Rs.124per share, if not redeemed or converted before 17th December, 2004. The total outstanding amount isRs. 146.49 cr. as on 31st March, 2002. Assuming that all the bond holders exercise their right to converttheir bonds, than the total no. of equity shares to be allotted on conversion would be 118,13,710. Thiswill result in the enhancement of equity capital from Rs. 18.91 cr. to Rs. 30.73 cr.

As on 01. 01. 2005 - Equity Capital : Rs. 30.73 crore

FIIs/OCB/NRIs41%

Public20%

Companies12%

Promoter's & Associates

26%

Institutions/ Banks/ Mutual

Funds 1%

In order to maintain the promoter stake, it is expected that bonds would be redeemed before theholders opt for conversion as company is expected to generate sufficient cash that too foreign exchangedue to its booming export sales. This will also help in the reduction of the anticipated dilution of equity.

Page 5: Jindal Strips

JINDAL STRIPS LIMITED DVP RESEARCH5

DIVISIONS

JSL currently has the following three divisions at two locations i.e. Hissar &Visakhapatnam in India.

HOT ROLLING UNIT

The hot rolling unit comprising of steel melting shops, hot rolling mills (steckelmill, strip mill), finishing units, power plants and oxygen plants etc is situated atHisar, the major manufacturing location of the company. It has an electric arcfurnace of 2.50 lac MT capacity which operated at more than 130 % capacityto produce 3.26 lac MT of Stainless Steel in FY02. In order to meet growingdemand locally as well as for exports, the capacity of this melting facility hasbeen stepped upto 4.0 lac MT in FY03 and is even expected to go further upto5.0 Lac MT in FY04. This significant increase in capacity would take JSL in top10 stainless steel producers in the world. The tandem mill has a capacity of 1.5lac MT . Its capacity utilisation was to the extent of 92 % in FY02 as against 147% in the corresponding previous year. The reduced utilisation of tandem millwas on account of large exports of stainless steel slabs to USA , approx. 55,000 MT, in FY02. However, the capacity utilization at Plate and Steckel mill hasalso gone up from 47 % in FY01 to 73 % in FY02. This mill has an installedcapacity of 1.5 lac MTPA.

COLD ROLLING UNIT

The cold rolling unit comprises of cold rolling, annealing & pickling lines andfinishing facilities are also a part of the existing facilities at Hissar. The installedcapacity of the plant has been increased from 30000 MTPA in FY01 to 90000MTPA in in Oct’01. The cold rolling plant provides the maximum valueaddition to the stainless steel.

HIGH CARBON FERRO CHROME

Ferro chrome, a key component in the production of stainless and special steels,is manufactured at Visakhapatnam . The unit which has an installed capacityof 40000 MT produced 11210 MT of High Carbon Ferro Chrome in FY02 asagainst 29238 MT in FY01. The reduction in output was on account of labourtrouble in the plant. The situation has improved now and the production hasbeen restarted in November, 2002. Further, to meet the growing demand, JSLis planning to increase the ferro capacity by acquiring small ferro chrome unitsin the States of Orissa and Andhra Pradesh. These acquisitions are expectedto be financed through internal resources.

Chromite Mines

In order to enhance competitiveness, JSL has taken over 89 hectare in Orissato source chromite ore for captive use. The present production capacity is about15000 MT per month inclusive of all grades i.e. high, low and medium chromiteore.

Integratedfacilities andlow cost ofproductiongives JSL ahighcompetitiveedge.

C apacityexpansion ina valueaddedsegm ent

Costadvantagedue to inhousefacilities w ithcaptivem ines

Page 6: Jindal Strips

JINDAL STRIPS LIMITED DVP RESEARCH6

SUBSIDIARY COMPANIES

JSL has 4 subsidiary companies as on 31st March, 2002

Jindal Holding Ltd. - JSL has 87 % stake in the company which is primarily

engaged in investment business. It has major investment in other Jindal group

companies like Jindal Vijaynagar Steel Ltd. ( Rs. 55 cr.) This investment has

depreciated considerably for which no provision has been made. Further, it

has made an investment of about Rs. 23 cr. in unlisted outfits. The company

reported a loss of Rs 2.16 crore in FY02 with total accumulated losses

standing at Rs. 12. 41 cr.

Jindal Steel & Alloys Limited - A 100 % subsidiary of company formed

pursuant to demerger in 1998. This company is engaged in cold rolling in strips/

sheets. It produced 1.37 lac MT of CR coils / sheets in FY02. and posted a

profit Rs. 1.1 cr. in FY02. The company has made an investment in Jindal

Vijaynagar Steel Ltd. of Rs. 22.5 crore acquired at @ Rs. 6.30 per share.

Further, it has made an investment of about Rs. 18.6 crore in an unlisted outfit.

Jindal Stainless (Mauritius) Limited - A 100 % subsidiary of company

incorporated in January, 2000 to acquire controlling interest in Massillon

Stainless Inc., .USA.

Massillon Stainless Inc., USA - In order to expand in the overseas market

particularly US, JSL acquired 61 % stake in the company through wholly owned

subsidiary Jindal Stainless (Mauritius) Limited, in 2000. This company is

engaged in the manufacture of cold rolled stainless steel products. It has cold

rolling capacity of 40,000 MT per annum It posted a turnover of Rs. 74.9 crore

and a loss of Rs. 16.77 cr. in FY02 in its first full year of operations after

takeover by JSL. Total accumulated losses of the company stand at Rs. 22.52

cr. The company has incurred losses mainly due to depressed market conditions

in US and steep rise in cost of inputs . JSL is planning to divest its stake in the

company most likely to a strategic investor or otherwise.

Concernaboutinvestmentsin JVSL

Currently adrag oncompany

May bedivested innear future

Page 7: Jindal Strips

JINDAL STRIPS LIMITED DVP RESEARCH7

PRODUCT PROFILE

The various products produced by the company are continuous castproducts, hot / cold rolled products, blade steel, coin blanks etc. besidesmaking various customised products.

CONTINUOUS CAST PRODUCTS

The slabs and blooms are produced to meet the captive requirement for HotRolled and Cold rolled divisions. These are also sold to other manufacturersof hot rolled and cold rolled coils and sheets in domestic as well as internationalmarkets. The cast and blooms are produced in steel melt shops, the capacityof these has been increased from 2.5 lac MTPA to 4.0 lac MTPA in September,2002. The realizations from these products range from Rs. 45,000 – 60,000per MT. The capacity of these units is expected to go upto 5.0 Lac MTPA inFY04.

HOT ROLLED AND COLD ROLLED PRODUCTS

The hot / cold rolled products including coils, plates, flat bars, precision strips,etc. are produced using in house slabs and blooms from steel melt shop. Thehot rolled products command a good value addition over slabs and blooms witha realization range from Rs. 60,000 – 80,000 per MT. These products are mainlysold to rerollers and find usage in utensils/ white goods and industrial &construction sector.

PRECISION STRIPS

These are high vaue added product range from JSL. The precision strips arerolled upto 0.10 mm thickness in width upto 350 mm. The company has a uniquedistinction of developing the special martenesic stainless steel strips for use inmanufacturer of razor / surgical blades for the first time in India. It still reminsthe exclusive producer of razor / surgical blade steel in the country.These products command very high premium in market and fetch highrealization of more than Rs 1.10 lac per MT.

CURRENCY COIN BLANKS

It is another high value added product from JSL. JSL developed 430 gradeferritic stainless steel for making currency coins in 2001. Coin blanks fetchedrealizations of Rs 1.17 lac per MT in FY02.

JSL has also developed special stainless steel for critical components in nuclearapplications, turbines and other engine components which fetch good returns.

Company also has a state of art design centre at New Delhi fordevelopemnts of new designs for applications of stainless steel in valueadded segments i.e. household, industrial, office, etc. in domestic market.

Capacity torise from 4.0to 5.0 lac MTin FY04 tomeet thegrowingdemand

Value additionthroughinhouse hot/cold rollingmills

High valueaddedproductsdeveloped foruse in razorblade

Anotherspecialisedproduct

Page 8: Jindal Strips

JINDAL STRIPS LIMITED DVP RESEARCH8

The stainless steel is finding a wide range application all over the world due toits unique properties w.r.t. corrosion resistance, high strength, excellent greencredentials, non-reactive properties etc. The world’s stainless steel productionwas approximately. 19.0 Million MT out of a total of about 800 Million MT ofsteel produced in FY02. The stainless steel industry has grown at a compoundedrate of 6 % in last 50 years i.e. from 1950 to 2001. Further, the industry isexpected to grow at the rate of 5 % in next 10 years, the demand is expected togo up to 30 Million MT by 2010 (Steel & Metal Market Research-Austria). Thesurge in demand is coming mainly from increased usage in white goods,construction sector etc. The growth in demand of stainless steel is as below :

INDUSTRY PROFILE

The growth in stainless steel world wide is outstripping the growth of other primary materials like crudesteel, aluminium with the exception of plastics as below: .

GROWTH IN PRODUCTION OF PRIMARY MATERIAL

0

5 0

1 0 0

1 5 0

2 0 0

2 5 0

3 0 0

3 5 0

4 0 0

4 5 0

5 0 0

1 9 7 0 1 9 7 5 1 9 8 0 1 9 8 5 1 9 9 0 1 9 9 5 2 0 0 0

P l a s t ic S t a i n l e s s S t e e l A l u m i n i u m C r u d e S t e e l

138 MMT

19 MMT

30 MMT

787 MMT%

GR

OW

TH

Page 9: Jindal Strips

JINDAL STRIPS LIMITED DVP RESEARCH9

3023

15 13.8 11.48.4

1.85 0.750

510

15

2025

30

Kg

per

an

nu

m

Tai

wan

Italy

Ger

man

y

Japa

n

Sou

th K

orea

US

A

Chi

na

Indi

a

Country

Consumption of Stainless Steel per capita

As it can be seen from above, per capita consumption of stainless steel inIndia is only 0.75 kg as against world average of about 3.5 kg. With arise inliving standards, the demand of stainless steel is expected to grow at a fastrate in the country which is expected to grow @ 7-8 % annually. Further, due toincreased application of stainless steel in new areas like transport, construction,processing plants etc. in the world market, similar usage pattern in domesticmarket will spur growth for the stainless steel manufacturers. The stainlesssteel consumption pattern for world and domestic markets is as below :

World India

In Asia, stainless steel demand is growing at a fast pace at the rate of 18 % inthe last decade due to increased usage in China, South Korea, Taiwan, Japanetc.. The growth in stainless production in America, Western Europe and Asiawere 2.1 %, 5.6 % and a whopping 18.63 % in the last 10 years respectively.China is expected to become a major importer of stainless steel to meet itshuge demand . JSL enjoys the strategic location advantage to meet the surgingChinese demand.

Utenc ils /

White

G o o ds

75%

O thers

8%Welded

tubes

3%

P ro c e s s

12%

C o ns truc ti

o ns

1%

T rans p o rt

1%

U t en c i l s /

W h i t e

G o o d s

3 7 %

C o ns t r u c t i

o ns

1 1 %

T r a n s p o r t

1 5 %

W eld e d

t ub e s

1 9 %

O t h e r s

6 %

P ro c e s s

1 2 %

Tremendousscope forfuture growthdue to lowconsumptionin India

Locationaladvantage tomeet surgingchinese de-mand

The stainless steel realizations are 3-4 times of other steel products The majorproducers in the world are Arcelor, KTS, Avesta Polarit, Acerinox withcapacities of about 2.0 million MT each. etc. JSL with its melting capacity of0.4 million MT is among the top 15 producers of stainless steel in the world.With proposed capacity expansion by another 1.0 lac MT in FY04, it willleap frog to top 10 producers in the world.

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JINDAL STRIPS LIMITED DVP RESEARCH10

PROCESS FLOW CHART

Page 11: Jindal Strips

JINDAL STRIPS LIMITED DVP RESEARCH11

HIGH VALUEADDED SEGMENT

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JINDAL STRIPS LIMITED DVP RESEARCH12

ACQUISITION OF SALEM PLANT OF SAIL

SALEM STEEL plant of SAIL is the second largest unit engaged in theproduction of stainless steel products in the country with a market share of 7 %in FY02. It is the largest producer of SS products - primarily sheets used formaking utensils in South India. Salem steel enjoyes the distinction of a verystrong brand image in SS market, thereby branding it like a FMCGcompany. The market share of various players in domestic market is as under:

As part of its restructuring of SAIL, it was decided by Govt. of India in 2000 todivest its Salem unit enagaged in the production of SS products. Initially manybidders were interested which included TISCO alongwith a foreign partner,and Jindal Strips etc. Now, TISCO has decided to withdraw from the processwhile other bidders had already withdrawn at the initial stage. JSL is now thesole bidder left for this acquisition. The book value of the unit is about Rs. 800cr. as of March, 2002. JSL has started due diligence process and has appointedM/s Ernst & Young as its consultants.

It is anticipated that Salem plant would be sold in the range of Rs 400 - 500 cr.In order to restrict further leveraging of its highly geared balance sheet , JSLis expected to form a new Joint venture company to acquire Salem plant. Theequity holding is likely to be 74 % with JSL and its associates and the balanceremaining with SAIL. JSL will make the initial equity investment primarily throughinternal accruals.

With acquistion of Salem, JSL will command 50 % share of domestic marketand enjoy immense benefits on account of synergy, logistics, brand and marketaccess.

JSL43%

Unorganised sector

16%

SALEM7%

Others34%

Salem’sstrong brandto benefitJSL

Acquisitionof salem toprovidebenefits onaccount ofsynergy,logisticsand marketaccess

Page 13: Jindal Strips

JINDAL STRIPS LIMITED DVP RESEARCH13

STRATEGIC COMPETITIVE ADVANTAGES

BACKWARD INTEGRATION

CHROME ORE

To meet its requirement for production of High Carbon ferro chrome, JSL hastaken over 89 hectare in Orissa to source chromite ore in 2001. The presentproduction capacity is about 15000 MTPA inclusive of all grades i.e. high, lowand medium type of chromite ore. This inhouse mining of chrome ore will reducethe cost of production of high carbon ferro chrome. Incidentally, this ferro chromeis supplied to another Jindal company - Jindal Steel & Power Ltd. formanufacture of high carbon ferro chrome for onward supplies to JSL.

HIGH CARBON FERRO CHROME

Ferro chrome, a key component in the production of stainless and special steel,is manufactured at Visakhapatnam Division of the company with an an installedcapacity of 40000 MTPA. This plant besides meeting the captive requirementsalso exports ferro chrome to various developed countries. This plant is equippedwith a state of the art testing laboratory to meet stringent quality standards forinternational markets.

FORWARD INTEGRATION

COLD ROLLING

To shift the product-mix towards value added products, JSL has increased thecapacity of cold rolling mill to 90,000 MT from 30,000 MT per annum in FY02.The cold rolling facilities produces high value added products with realizationgoing up to Rs. 75,000 – 85,000 per Ton. These products are primarily used inutensils, white goods etc. Further , cold rolled products are also developed foruse in railway coaches initially for Metro Rail which may also find use inconventional coaches. Further, additional facilities i.e. slab heating furnaceetc. are being installed to produce 15 MT coils as against 6-8 MT producedpresently. This will improve operational efficiencies / product yield at cold rollingunits.

Captivemines

Produced forCaptiveUse

Shift towardshigh valueaddedproducts

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JINDAL STRIPS LIMITED DVP RESEARCH14

PRECISION STRIPS

In order to enhance the value addition, JSL has put up Bell annealing furnaces, shot blasting equipment, 4 Hi and 20 Hi Mills, continuous bright annealingfurnace and slitting machines to produce precision strips. JSL’s capability toproduce specialized steel strips for use in razor blades etc. fetches anattractive realization of more than Rs 1.10 lac per MT. It has a capacity of10000 MT per annum for precision strips.

COIN BLANKING LINE

Continuing with its efforts to develop value added products, a coin blankingline of 3000 Mt per annum capacity was installed in 2001. This is beingincreased to 5000 Mt per annum. The special steel is supplied to Indian mintsfor making coins with a very high realization of Rs 1.17 lac per MT.

The backward and forward integration of facilities is depicted as below:

Razor steel -high techproduct line

Anothervalue addedproduct

SS SCRAP, NICKEL,FERRO MANGANESE,ETC., (OUTSOURCED)

SS MELTINGCAPABILITY

4,00,OOO MTPA

HIGH CARBON FERROCHROME 40,000 MTPA

( IN HOUSEPRODUCTION)

CHROME ORE( IN HOUSE MINING)

HOT ROLLINGCAPABILITY

COLD ROLLING90,000 MTPA

PRECISION STRIPS10,000 MTPA

COIN BLANKING LINE3,000 MTPA BEING

ENHANCED TO5,000 MTPA

BACKWARD AND FORWARD INTEGRATION OF FACILITIES

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JINDAL STRIPS LIMITED DVP RESEARCH15

TECHNICAL EDGE

JSL has a distinction of developing products using technology with a thrust onuse of strong inhouse Research & Developments facilities. JSL has developedcold rolled stainless steel strips for razor/ surgical blades, stainless steel forrailway coaches, special steel for coins etc with its own R&D efforts. It hasalso developed low cost alternate 200 series with low Nickel whichreceived huge success in domestic market and is being launchedselectively in overseas market. Its Research & Development Division is notonly developing products but also putting in lot of efforts to enhance plant processand technical capabilities which result in quality improvement and costreduction.

ENTRY BARRIERS

The stainless steel manufacturing facilities are highly capital intensive whichact as a deterrent to new entrants. The cost of setting up of similar integratedfacilities has a minimum gestation period of two years. A similar new projectat current prices will cost Rs.1,800 - 2,000 cr. Assuming a liberal debt : equityratio of 2 : 1, the equity of such a project would be Rs. 600 crore( this beingmore than 30 times of current equity of JSL i.e. Rs. 18.91 crore). Such a hugecapacity on a low equity base ensures sustained profits for JSL.

Stronginhouse R&D

Higher costand longergestation timefor newentrants

18.91

946600

1200

0

500

1000

1500

2000

JSL New Entrant

Loan

Equity

JSL ‘sAdvantage

Page 16: Jindal Strips

JINDAL STRIPS LIMITED DVP RESEARCH16

EXPORTS

The exports for stainless steel are expected to grow at a fast pace keeping inview the growth in demand from China. The consumption of Stainless steel hasgrown @ 17 % in China in the last few years as against the world average ofabout 6 %. In order to tap this huge demand in China, South East Asian countriesand Europe, JSL is opening marketing offices in China, Vietnam & Italy. JSL’scapability to serve this market is reflected from growth in its export which hasgone up from approx. Rs 10 cr. in FY99 to Rs. 417 cr. in FY02. In FY02, JSLexported more than 83, 000 MT of stainless steel to USA, China, etc. The trendof exports and country wise exports of JSL are shown below :

Positiveoutlook forthe steelindustry

TREND OF EXPORTS

USA69%

Europe1%

Japan1%

China/ HK27%

Others2%

In FYO2 ( Rs. 417 crore) In Ist Half FY03 ( Rs. 317 cr.)

China/ HK

89%

Italy4%

Others7%

It may be noted from the graph that in first of FY03, the exports have surged primarily in China, andexports to China/ Hong Kong now accounts for almost 90 % of JSL exports . In FY02, JSL received amajor order of 55000 MT from US which accounted for almost 70 % of its exports.

EXPORTS

2.31

25.99 32.3

85.8

128

0

20

40

60

80

100

120

140

US

$ (

in M

illio

n)

1998-99 1999-00 2001-02 2001-02 2003P

Year

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Significantjump totake placein netprofits fromcurrent year

0

10

20

30

40

50

60

70

80

JSL TISCO SAIL

TremendousAdvantageover Peers

INTERFIRM COMPARISON

(Rs. in crores)

PARTICULARS JSL TISCO SAIL

Equity 18.9 368.2 4130.4

Net Sales 1367.7 6707.9 14064.5

OPM (%) 18.0 20.2 3.7

PBDT (%) 10.6 14.2 -7.4

NPM (%) 18.24 5.2 5.5

E.P.S. (Rs.) 16.7 9.4 - 5.3

P/E ratio (x) 7.37 14.57 -

Market Cap/Sales(x) 0.17 0.75 0.26

Sales/ Equity Ratio 72.3 18. 2 3.40

(All figures as of March, 2002)

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FINANCIAL HIGHLIGHTS

Particulars FY01 FY02 Sept, 02 FY03P FY04P6 m

Net Sales 1446.84 1484 870.01 1920 2050Other Income 11.45 9.68 1.66 6.5 8.5Total Income 1458.29 1493.68 871.67 1926.5 2058.5Total Expenditure 1400.45 1444.34 714.49 1615.6 1808.87Operating Profit 222.02 244.51 157.18 310.9 329.4Interest 91.61 101.19 52.8 92.5 85.2Gross Profit 130.41 143.32 104.38 218.4 244.2Depreciation 72.57 93.98 48.77 101.5 105.2PBT 57.84 49.34 55.61 116.9 139Tax 4.6 2.98 2.48 8.2 12.2Extraordinary Items 4.97 9.94Deffered Tax 0 14.7 15.09 32.5 34.5Net Profit 53.24 31.66 33.07 76.2 92.3

Equity 18.91 18.91 18.91 18.91 18.91Preference Capital 15 10 20 20 20Reserves 532.48 446.40 511.05 589.90Loan Funds 946.44 946.09 897 855Total Funds Employed 1512.83 1421.40 1446.96 1483.81Debt : equity ratio 1.72 2.03 1.69 1.40

FY01 FY02 HFY03 FY03P FY04PEPS 27.27 16.00 17.09 39.19 47.70CPS 65.65 65.70 42.88 92.86 103.33Dividend % 40 40 50 60

Key Ratios

OPM % 15.35 16.48 18.03 16.14 16.00PBDT % 8.94 9.60 11.97 11.34 11.86NPM % 3.65 2.12 3.79 3.96 4.48

(Rs. in crores)

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GRAPHICAL PRESENTATION OF FIGURES

0.00

20.00

40.00

60.00

80.00

100.00

120.00

FY01 FY02 FY03P FY04P

Year

In R

up

ees

0

5 0 0

1 0 0 0

1 5 0 0

2 0 0 0

2 5 0 0

Sal

es (

in c

rore

)

F Y 0 1 F Y 0 2 F Y 0 3 P F Y 0 4 P

Y e a r

EPS CPS Dividend %

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The financial performance in the current year is expected to improveconsiderably due to booming export demand and also steady increase indomestic demand. This exports has gone up from Rs. 64 cr. to Rs. 317 cr. inHY03. The sales in domestic market has also up from Rs. 550 cr. to Rs. 630 cr.The increased in sales is mainly on account higher domestic demand. Theoperating margins are also improving due to increase in selling prices as wellas cost cutting measures undertaken by JSL.

We expect JSL to post a turn over of Rs. 1920 cr. in FY03 an increase of 29% on previous year due to increase in exports from Rs. 417 cr. to Rs. 630 cr.and domestic sales. The turn over is further expected to go up to Rs. 2050 cr.in FY04 due to commissioning of melting capacity of 1.0 MT during that year.

The operating margins have gone up from 15.35 % in 2000-01 to 18 % inHY03 is on account on larger share of value added products and also generalimprovement in stainless steel market. The operating margins may come downin coming years due to increased competition in export market and alsoincreased export sales at competitive rates. In spite of overall lower operatingmargins, JSL is expected to post an operating profit of Rs. 310 cr. and Rs.330 cr. in FY03 and FY04 respectively an increase of 27 % in 6.5 % overprevious years.

With reduction in interest out go due to restructuring / part payment of loans,JSL is expected to post a profit (PAT) of Rs. 76.2 cr. and Rs. 92.3 cr. in FY03and FY04 an impressive increase of 140 % and 21 % respectively. TheEarning per share (EPS) is expected to increase from Rs. 16 to Rs 39 andRs 47 in FY03 and FY04. The cash earning per share (CPS) is also expectedto go up from Rs. 65.70 to Rs 93 and Rs 103 in FY03 and FY04. The cashgeneration of more than Rs 200 cr. in these years would enable the companyto fund its capacity addition in melting shop and also equity investment inproposed JV for acquisition of Salem steel plant.

FINANCIAL PERFORMANCE

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STRENGTHS WEAKNESSES

SWOT ANALYSIS

• Largest Integrated StainlessSteel manufacturer in Indiaand ranked amongst top 15in the world.

• Backward and forwardintegration of facilities

• Developed high-value addedproducts

• Excellent sales-equity ratio

• Highly leveraged

• Unproductive investments insubsidiaries

• Booming export demand

• Proposed acquisition ofSalem steel plant

• Wide scope due to low percapita consumption ofstainless steel in India

• Capability to developproducts for specializeduse

• Highly sensitive to pricefluctuations in global marketsin respect of nickel andstainless steel.

• Probable dumping .

OPPORTUNITIES THREATS

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E

G

A

T

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E

S

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TECHNICAL OVERVIEW

OBSERVATIONS

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JINDAL STRIPS LIMITED DVP RESEARCH23

INVESTMENT STRATEGY

Low equity base, credible and professional management, adequate experience in timely projectimplementation, high entry barrier, versatile manufacturing facilities, low operating cost, high value-added products, complete backward integration, stratetic forward integration, high operating margins,healthy book-value and strong financials make JSL a good growth stock.

Jindal Strips at Rs. 115 (discount FY03 and FY04 earnings by just 2.93 and 2.41 times respectively) isan excellent investment opportunity in stainless steel industry which merits higher discounting due toits high value added products.

Disclaimer : The recommendation made herein do not constitute an offer to sell or a solicitation to buy anyof the securities mentioned. Readers using the information contained herein are solely responsible for theiractions. The inforamtion and views contained herein are believed to be reliable but no responsibility orliability is accepted for errors of act or opinion. Editors may or may not have trading or investment positionsin the securities mentioned herein.

Page 24: Jindal Strips

JINDAL STRIPS LIMITED DVP RESEARCH24

THE PRODUCT - A daily newsletter ( sent through e-mail) with a balanced approach.

THE TEAM – D.V.PRASAD, F.C.A. and JATINDER SHARMA, M.B.A. (Finance).

EXPERIENCE - Dedicated and highly experienced for over a decade, hardcore equity analysts totallydevoted to stock market and doing research both on fundamentals and technical basis

THE FEATURES - A techno- funda newsletter that caters to the needs of all market participants throughits various columns:

• STOCK WATCH- A must for position traders, carries stocks which promise returns of 10-15 %over 2-5 weeks.

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• INTRADAY TRADES- Bible for day traders, carries support and resistance levels for all activelytraded stocks with clear trading strategies.

• FUNDAMENTAL PICK- For long term investors who look at more than 30% returns over 6 monthsto 1 year horizon.

• MARKET COMMENTARY – For all participants who want a detailed outlook on the market – itscurrent trend, future outlook ( short as well as long-term) and strategy to deal with it.

• SMS TIPS - Real time information and buy and sell advices during trading hours

All this plus and a lot more like articles on domestic and global economy, primary market, marketgossip, and educational material on psychology of traders, trading rules, system trading, moneymanagement, secrets of successful traders etc,.

APPROACH - A refreshing approach with features that put it in a different league, away and muchahead of other me-too newsletters;

• A straightforward approach- clear buy or sell strategies with logical targets and stop-losses. Nobeating about the bush;

• Two-way communication channel encouraged with the subscribers for better and clearunderstanding to build long-term fruitful relationships;

• Strictly independent analysis and views without bias since we are not associated with any brokeragehouse, company, market player or have any other vested interests.

EQUITY STRATEGIST

For further information and subscription enquires kindly contact;

EQUITY STRATEGIST502, Nirmal Tower, Barakhamba Road, New Delhi-110001

DV PRASAD - 9810018028, JATINDER SHARMA - 9810265625Email- [email protected]

OUR EARLIER RECOMMENDATIONS

Scrip Recommended in Rec. Rec. Highest AppreciationDate Price Price

since rec.

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