Buy Jindal Saw - Growth projects on track; Target Rs 300: Macquarie

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Jindal Saw Limited -Growth projects on track


Event
 JSAW reported 3Q’ FY11 with net sales and profit of Rs10.7bn and Rs1.3bn
respectively. Results were below our expectation on account of pipe shipment
delays. Blended EBITDA margin was Rs12,308/tonne in 3Q. We maintain our
Outperform recommendation.

Impact
 Volumes guidance of 1.1mn tonnes for FY12E. JSAW management has
guided pipe volumes above 225k tonnes for the next three quarters and 1.1-
1.2mn tonnes for FY12E on back of a large order book. During 3Q, SAW
pipes volume dipped 41% to 91.7k tonnes (28k tonnes of HSAW and 63.7k
tonnes of LSAW) due to shipment shifts of ~40k tonnes from 3Q to 4Q.
 Blended EBITDA remain strong. Blended EBITDA was ~US$275/tonne in
3Q, with an EBITDA margin of 20.8%. JSAW reported strong margins across
pipe categories for 3Q’FY11,with LSAW margins at US$300/t, HSAW margins
at US$125/t, DI margins at US$225/t and seamless margins at US$350/t.
 Current order book of above US$1bn. The company has an order book of
US$1bn, which it expects to execute by March 2012. The order book includes
LSAW pipes (400k tonnes), HSAW pipes (200k tonnes), DI pipes (190k
tonnes) and seamless pipes (25k tonnes). 64% of the order book is from
export markets, primarily the Middle East, Southeast Asia, China and Far
East. Average EBITDA margin of its current order book is ~US$250/tonne.
 Expansion projects on track. JSAW’s five major expansion projects like iron
ore mines (Sept, 2011), ductile iron plants in Mundra and Abu Dhabi (Sept,
2011), pelletisation plant (Sept, 2012) and drill pipe facility in US (by year end)
are on track and it plans to spend ~Rs11bn on these projects.
 Jindal ITF to contribute significantly in FY12E. According to the company,
the infrastructure business is gaining traction and is likely to add significantly
to its consolidated sales and EBITDA. While the waste-to-power plant in Delhi
will start operations by June 2011, it also expects to receive orders for 500
wagons worth Rs1.5bn from railway post inspection (15th Feb, 2011). The
company expects JITF to earn Rs10bn in sales, with an EBITDA of Rs2bn in
FY12E.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs300.00 based on a Sum of Parts methodology.
 Catalyst: New order inflows and timely commissioning of new facilities
Action and recommendation
 Outperform Maintained. Adjusting for investments (US$630m), JSAW’s pipe
business is trading at a modest 6x FY12E PER. JSAW is our preferred pick in
the pipe space, given its healthy order book and multiple triggers.