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Jindal Saw
Earnings decline continues
„Q3FY11 PAT below estimate and down 27% y-o-y
Jindal Saw’s Q3FY11 PAT came in 7% below our estimate and declined 27% y-oy, to Rs1.25bn. The company was impacted by a 29% y-o-y volume decline,
partly on account of (1) a demand slowdown, and (2) the deferral of 40,000t pipe
dispatch in the domestic market, owing to a capex delay at the customer end.
Cost pressures could offset benefit of rising order inflow
Jindal Saw reported a 28% rise in order backlog in Q3FY11, which is significantly
better compared to the flat order backlog for over eight quarters. The increase in
order inflow could help to reach 26% volume growth in FY12e, compared to a
12% decline in FY11e. However, lower margin due to increased competition and
cost push could reduce the benefit of the volume growth.
Capex surge could restrain volume growth benefit in FY12e
Jindal Saw is planning capex of Rs15bn in FY12e, compared to Rs5bn in FY11e.
While the investment in the iron ore mine and DI plant are a net positive for the
company, they are still likely to be of long gestation and, hence, hurt FY12e profit.
Maintain underperform on declining earnings till H1FY12e
We expect Jindal Saw’s earnings to continue to decline on a y-o-y basis until at
least H1FY12e. The stock, trading at 10x FY12e, is expensive given the muted
earnings.
Price objective basis & risk
Jindal Saw (SWPFF)
Our PO of Rs160 for Jindal Saw is based on 8.5x FY11E EPS, which is the
normalised PE for the stock. Jindal Saw, though, has traded in a broad PE band
of 5-15x, but has mostly traded at around 8.5x. The company has around
Rs64/sh unrealised gain in lieu of its 4.3% stake in Jindal Steel and Power, a
sister concern. Adjusted for this unrealised gain, Jindal Saw's PO implies a PE of
5.5x FY11E. We believe that Jindal Saw will trade at 5.5x PE once it sells off its
stake in Jindal Steel and Power. At a 5.5x PE, Jindal Saw's valuation will be
comparable to PSL and Maharashtra Electrosteel, which is a fair comparison, as
both these companies have similar product profile and are going to have similar
ROE. Key upside risk is the increase in earnings visibility of investment in mining
and infrastructure business
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Jindal Saw
Earnings decline continues
„Q3FY11 PAT below estimate and down 27% y-o-y
Jindal Saw’s Q3FY11 PAT came in 7% below our estimate and declined 27% y-oy, to Rs1.25bn. The company was impacted by a 29% y-o-y volume decline,
partly on account of (1) a demand slowdown, and (2) the deferral of 40,000t pipe
dispatch in the domestic market, owing to a capex delay at the customer end.
Cost pressures could offset benefit of rising order inflow
Jindal Saw reported a 28% rise in order backlog in Q3FY11, which is significantly
better compared to the flat order backlog for over eight quarters. The increase in
order inflow could help to reach 26% volume growth in FY12e, compared to a
12% decline in FY11e. However, lower margin due to increased competition and
cost push could reduce the benefit of the volume growth.
Capex surge could restrain volume growth benefit in FY12e
Jindal Saw is planning capex of Rs15bn in FY12e, compared to Rs5bn in FY11e.
While the investment in the iron ore mine and DI plant are a net positive for the
company, they are still likely to be of long gestation and, hence, hurt FY12e profit.
Maintain underperform on declining earnings till H1FY12e
We expect Jindal Saw’s earnings to continue to decline on a y-o-y basis until at
least H1FY12e. The stock, trading at 10x FY12e, is expensive given the muted
earnings.
Price objective basis & risk
Jindal Saw (SWPFF)
Our PO of Rs160 for Jindal Saw is based on 8.5x FY11E EPS, which is the
normalised PE for the stock. Jindal Saw, though, has traded in a broad PE band
of 5-15x, but has mostly traded at around 8.5x. The company has around
Rs64/sh unrealised gain in lieu of its 4.3% stake in Jindal Steel and Power, a
sister concern. Adjusted for this unrealised gain, Jindal Saw's PO implies a PE of
5.5x FY11E. We believe that Jindal Saw will trade at 5.5x PE once it sells off its
stake in Jindal Steel and Power. At a 5.5x PE, Jindal Saw's valuation will be
comparable to PSL and Maharashtra Electrosteel, which is a fair comparison, as
both these companies have similar product profile and are going to have similar
ROE. Key upside risk is the increase in earnings visibility of investment in mining
and infrastructure business
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