Macquarie Research: Jindal Saw : Deep value

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Jindal Saw Limited: Deep value
Event
 Jindal SAW has executed a lease agreement with the state government for
mining iron ore mines in Rajasthan, which was the final step in the approval
stage. We estimate these mines have a value of more than US$375m (30% of
JSAW’s current market cap). We believe the current stock price doesn’t reflect
any value for the iron ore mines, which should change now, in our view. We
reiterate our Outperform rating and our target price of Rs300/share, which
provides 54% potential upside.

Impact
 Higher than expected resource estimate. Based on the initial estimates,
mines have iron ore resources of 186m tonnes as against our earlier
expectation of 129m tonnes. The company is setting up a beneficiation plant
to produce ~6,000 tonnes of concentrate per day. JSAW plans to use iron ore
for its Ductile Iron (DI) pipe manufacturing as well as set up a 1.2mtpa
pelletization plant for external sales. The company expects production to start
in Sep 2011.
 Iron ore mines provide 30% valuation upside. Iron ore in the mines have a
Fe content of 35%. JSAW will invest US$70m in mine development and set
up of a beneficiation and pelletization plant. Based on our iron ore price
forecast, we believe these resources have a value of US$375m (using NPV
methodology). This translates to a value of US$2/tonne, which is significantly
lower than other listed iron ore mine companies.
 Cost savings will add Rs3bn to EBITDA. JSAW will use 0.7mtpa iron ore
for captive usage. Post expansion, JSAW will have the DI pipe facility of 0.5m
tonnes for which they will require iron ore at their plant in Gujarat. The
company is currently buying iron ore from Karnataka, therefore sourcing from
Rajasthan (a neighbouring state) will lead to significant savings on freight. For
a full year of production, we expect these savings to boost JSAW’s EBITDA
by 25%.
 Listing of investment arm will unlock large value. Jindal Saw’s board has
approved the demerger of its wholly owned subsidiary that holds investments
worth US$720m (at current prices). JSAW shareholders will get the shares of
the divested entity post listing, which we expect will happen in July 2011.

Earnings and target price revision
 No change.

Price catalyst
 12-month price target: Rs300.00 based on a Sum of Parts methodology.
 Catalyst: New orders and timely commissioning of new facilities.

Action and recommendation
 Jindal SAW is our preferred pick in the steel pipe sector due to multiple stock
price catalysts and attractive valuations. After adjusting for 30% discount on
investments (US$720m), the pipe business is trading at a modest 5x FY12E
and 3x FY13E PER. The company is expecting one large order in coming
weeks, which will take its order book to Rs50bn, the highest in two years.