Nuvama says 'Buy' JTL Industries for 53% upside; initiates coverage

Nuvama initiates coverage on JTL Industries: Brokerage firm Nuvama Institutional Equities has initiated its coverage on steel tube manufacturer JTL Industries with a Buy rating on the stock. In its report, the brokerage stated that with capacity additions underway (mainly value-added), JTL has been consolidating its position through volume and margin expansion.

Given JTL’s efficient capital utilisation, steadfast profitability, and strong balance sheet, Nuvama has valued it at 25x Q1FY27E EPS (35 per cent-plus discount to the leader) and set the target price of the company's stock at Rs 303.

"We argue that JTL is poised to clock solid earnings growth led by capacity expansion to 2mtpa by FY28E, secular demand from diversified end-user industries such as infrastructure, product mix improvement lifting EBITDA/t, a net debt-free balance sheet despite heavy capex, and solid FCF," said the brokerage in its report.

 

Here are the key rationales that the brokerage has shared in the report:

Shot in the arm: Capacity expansion to drive robust growth

With India’s structural tubes market (6 per cent of total steel) aligning with the global average (10 per cent of total steel), the uptake of structural tubes is on the rise. JTL has been efficiently utilising warrants and QIP to build up capacity, including via bolt-ons, said Nuvama in its report. With capacity projected to grow from 0.75mtpa to 1mtpa by FY25E and 2mtpa by FY28E, JTL is targeting a volume CAGR of 29 per cent over FY24–27E. This, according to the brokerage, should also help it capture incremental market share.

Reinforced prospects: Focusing on VAP to strengthen margins

JTL has a diversified network and pan-India capacities, which have helped it expand margins. The company is on track for the next leg of margin expansion, said Nuvama. Out of the incremental capacity over the next two years, 50 per cent would be equipped with Direct Forming Technology (DFT), which, as per Nuvama, will enable it to produce various sizes of hollow sections without roll change, thereby not only increasing production efficiency and utilisation but also the share of value-added products. Overall, JTL is targeting the share of value-added products to reach 55 per cent by FY26E, driving up its EBITDA/tonne.

Growth gush: Robust profitable expansion

JTL has achieved an impressive 50 per cent PAT CAGR over FY19–24, and Nuvama estimates it will clock a 38 per cent CAGR over FY24–27E on the back of capacity expansion and an improved product mix. This, according to the brokerage, will also benefit from the expansion of the distribution network, widening retail presence, and expanding SKUs, which would deepen JTL’s last-mile volumes.

Nuvama further highlighted that the management is paying close attention to working capital, which is improving OCF. Better OCF should lead to an improved debt profile and returns ratios. "The anticipated strong growth impels us to assign a target valuation of a PE of 25x (discount of 35 per cent-plus to the leader, which has superior returns) Q1FY27E, which yields a target price of Rs 303," said the brokerage in its report.

Key risks, as per Nuvama, include a slowdown in the economy or steel sector and fluctuations in steel prices.