Jindal Saw-Attractive valuations, multiple triggers : Macquarie

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Jindal Saw Limited
Attractive valuations, multiple triggers
Event
 The Jindal Saw board has approved the demerger of its wholly owned
subsidiary that holds investments worth US$730m (at current market prices).
JSAW shareholders will receive the shares of the divested entity. We believe
the demerger will unlock significant value for Jindal Saw shareholders.
 JSAW reported lower-than-expected sales and PAT for 2Q FY11. Results were
impacted by lower sales volumes, but margins remained firm at US$305/t.



Impact
 Lower volumes in 2Q, FY11 guidance of 0.9mt maintained. Sales volumes
declined 20% YoY and 35% QoQ to 135kt. HSAW volume was only 3.0kt in
2Q FY11 (~60kt in 1Q FY11), as the company did not have orders for HSAW
pipes. JSAW has received new orders to supply 110kt of HSAW pipes to
GAIL that will be executed between November 2010 and April 2011. LSAW
sales were hit, as a 20kt shipment to Cairn was deferred due to water
accumulation at Cairn’s site.

 Blended margins improved due to favourable product mix. JSAW earned
a blended EBITDA of US$305/t in 2Q FY11, which was better than the
US$259/t in 1Q FY11. The key reason for improvement in blended margins
was the absence of HSAW pipe sales that fetch a lower margin.
 JSAW added US$300m in orders. The company has an order book of
US$780m, which it expects to execute until June 2011. The order book is
skewed toward LSAW pipes (50%) and DI pipes (28%). Forty percent of the
order book is from export markets, primarily the Middle East and Southeast
Asia. In terms of volumes, JSAW has orders of 400kt of SAW, 200kt of DI and
25kt of Seamless pipes.
 Iron ore mines approval expected soon. The proposal is with the Rajasthan
state government for legal documentation and final approval. We expect the
final award of the project to the company by end-November 2010, post which
JSAW will need an additional 12 months to develop the mines.

 Jindal ITF – growing profitably. The water management and water transport
business have turned EBITDA positive. Water management has an
outstanding order book of US$220m. The waste-to-power plant in Delhi will
start operations by June 2011. The railway wagon fabrication facility will be
commissioned in December 2010. The company expects JITF to earn Rs10bn
in sales and a 10% PAT margin in FY12E.
Earnings and target price revision
 We are upgrading our EPS forecasts by 10% and 12% in FY11E and FY12E,
respectively.

Price catalyst
 12-month price target: Rs300.00 based on a Sum of Parts methodology.
 Catalyst: 1) New order inflows, and 2) timely commissioning of new facilities.

Action and recommendation
 Adjusting for investments (US$730m), JSAW’s pipe business is trading at a
modest 5x FY12E PER. We reiterate our OP rating and revise our TP to
Rs300 from Rs262.