JINDAL SAW Lower SAW pipe sales dent numbers: Edelweiss

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􀂃 Results disappoint; Major dip in pipes sales volume at 135,000 MT
Jindal Saw (JSL) reported net revenues of INR 8 bn, 41.6% lower Y-o-Y and
29.4% lower Q-o-Q due to lower pipe sales. Total pipe sales in Q2FY11, at
135,000 MT, dipped 28.9% Y-o-Y and 39.1% Q-o-Q on lower SAW pipe volumes
at 43,000 MT (down 64% Q-o-Q). Delay in dispatch of orders due to heavy rains
in North India also contributed to the lower sales volume. This has resulted in an
inventory pile up of INR 2.5 bn. DI pipe sales were also lower than estimate at
63,000 MT (70,000 MT). Blended realisations improved 10.3% Q-o-Q to USD
1,325/MT due to lower HSAW sales. Conversion expenses in Q2FY11 jumped
30.9% Q-o-Q to USD 294/MT. Overall, the company reported an EBITDA of INR
1.85 bn, down 26.9% Y-o-Y and 26.6% Q-o-Q. JSL’s Q2FY11 net profit dipped
30.2% Y-o-Y and 32.4% Q-o-Q to INR 1.02 bn (our estimate INR 1.59 bn).


􀂃 Blended pipes EBITDA higher than estimate at USD 306/MT
JSL’s Q2FY11 numbers benefitted from blended EBITDA margin of USD 306/MT
(up 14.6% Q-o-Q, down 1.7% Y-o-Y), higher than our estimate of USD 268/MT.
This was largely on account of non execution of HSAW (lower margin) orders
during the quarter as orders were received in September 2010. Production for
these orders will begin in Q3FY11. Going forward, management expects to
sustain the EBITDA margins for LSAW, seamless and DI sales. We believe that
lower margins from HSAW sales may normalize the blended margin to ~USD
260/MT.

􀂃 Outlook and valuations: Better times ahead; maintain ‘HOLD’
JSL’s Q2FY11 results were lower than estimated on lower sales volume. Over the
medium term, the company expects a highly competitive environment in the
domestic pipes space. Further, it also expects margins to normalise (in line with
our expectation). Management has guided to volumes of 900 KT for FY11. We
continue to broadly maintain our earnings estimates for FY11 but have upgraded
our earnings estimates for FY12 to account for higher margins from DI on
backward integration of its iron ore mine. Over the long term, JSL is likely to
benefit from the reviving industry, iron ore mine benefits, new capacity in DI,
and presence in the high growth Middle East market. At CMP of INR 228, on
consolidated basis, JSL is trading at 11.9x and 9.8x EPS and EV/EBITDA of 6.3x
and 5.1x for FY11E and FY12E, respectively. We maintain our ‘HOLD’
recommendation on the stock. On relative return basis, we rate it ‘Sector
Performer’