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UBS Investment Research
Jindal Saw
Tepid results; favourable outlook
„ Sales improves QoQ; PAT declines YoY on lower volumes, beats estimates
Pipes sales were 178,100 tonnes, which eased 29.0% Y-o-Y and increased 31.9%
QoQ. Realisations were US$1,331/tonnes in Q3 FY11. Revenues eased 22.4%
YoY to Rs10.6bn. Conversion costs at US$257/tonnes was up +42.8% YoY.
EBITDA margin increased 10.1% YoY to US$274/tonnes in Q3. PAT decline of
26.5% YoY to Rs 1.25bn on lower volumes, ahead of our estimate of Rs1.0bn.
„ Highest order accretion of US$457m in 14 quarters; order book at US$1bn
At Q3 FY11 end, order book improves to US$1bn, from US$780 mn at end Q2
FY11, indicating a highest order accretion of US$457m in last 14 quarters. This is
equivalent to 815k (thousand) tonnes, and is executable by March 2012.
„ Positive trajectory intact; upsides from DI capacity, mine
While management downgraded FY11 sales guidance to ~750k tonnes from earlier
800-900k tonnes, positive long term trajectory is intact of 1.1-1.2 mn tonnes of
sales in FY12. Management expects mine to start from June 2011, adding upsides
on DI margins. DI may see cost pressures on high coal prices. Other upsides are
expected from start of drill bit unit, new order accretion and pellet plant start by
March 2012.
„ Valuation: Diversified business; maintain Buy and PT of Rs 305/share
JSL business is evolving favourably (that explains premium valuations to peers).
We re-iterate Buy rating and maintain PT of Rs 305/share, based on a DCF value
of Rs 252/share on the core business and Rs53/share of investment value. Key risks
are MTM of US$ 135 mn and potential net worth reduction after IFRS adoption.
Operational highlights
Q Production run rate to improve, outlook on margins mixed: JSL
management highlighted a sales run rate of 1 mn tones over the next 3
quarters, till the start of new DI Abu Dhabi and domestic capacity. Post this
production run rate is targeted to increase to 1.2-1.4 mn tonnes of yearly
pipes sales. In Q3 FY11, margins for SAW, DI and Seamless were
Rs12,300/tonne, Rs10,7000/tonne and Rs16,400/tonne, respectively. Going
forward, DI pipe margins are expected to be under pressure, given the rising
coal prices. Seamless margins are expected to partly benefit from drill pipe
unit start in US. Also, SAW pipe international margins continue to stay
favorable.
Q Capacity expansion and status on iron ore mine: 200,000 tonnes domestic
DI capacity is planned to start in FY12, at a capex of Rs3.5bn, expanding
JSL’s product offering. Abu Dhabi DI capacity (joint venture) of 300,000
tonnes operation is expected to commence in FY12 at a cost of US$60m.
Management reiterated the Rs3.5k/tonne benefit of margins for DI pipes
production, which is likely from H2 FY11 onwards as the mine operations
start. Pellet plant is to be constructed in 2 phases and 1.2 mn tones capacity is
expected to start by March 2012.
Q MTM of USD 135 mn as at end Q3 FY11, on foreign currency
derivative/forward contracts, etc. Forex losses booked were Rs. 180 mn.
Q Status of demerger of the investment undertaking: Stock exchange
clearance has been received for same and company is awaiting the approval
from the Allahabad High Court. Management expects to complete
transaction by June 2011.
Q Jindal Saw
Jindal Saw is a leading pipe manufacturing company in India. It is a part of
US$12bn OP Jindal group. The company started operations in 1984. It
manufactures large diameter submerged arc welded (SAW) pipes, spiral pipes,
seamless tubes of stainless steel, ball bearings, and it also installs and operates
pipelines. The company, through its 100% subsidiary Jindal ITF, has presence in
the infrastructure sector in water, waste water management, logistics and
transport equipment fabrication. It has three strategic business units: SAW,
seamless, and ductile iron pipes.
Q Statement of Risk
FX fluctuations, sharp steel price volatility (70% of the cost of pipe
manufacturing), unrelated diversification, higher competition and a slow down
in global pipeline capex are the main risks to pipe companies and our estimates.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Jindal Saw
Tepid results; favourable outlook
„ Sales improves QoQ; PAT declines YoY on lower volumes, beats estimates
Pipes sales were 178,100 tonnes, which eased 29.0% Y-o-Y and increased 31.9%
QoQ. Realisations were US$1,331/tonnes in Q3 FY11. Revenues eased 22.4%
YoY to Rs10.6bn. Conversion costs at US$257/tonnes was up +42.8% YoY.
EBITDA margin increased 10.1% YoY to US$274/tonnes in Q3. PAT decline of
26.5% YoY to Rs 1.25bn on lower volumes, ahead of our estimate of Rs1.0bn.
„ Highest order accretion of US$457m in 14 quarters; order book at US$1bn
At Q3 FY11 end, order book improves to US$1bn, from US$780 mn at end Q2
FY11, indicating a highest order accretion of US$457m in last 14 quarters. This is
equivalent to 815k (thousand) tonnes, and is executable by March 2012.
„ Positive trajectory intact; upsides from DI capacity, mine
While management downgraded FY11 sales guidance to ~750k tonnes from earlier
800-900k tonnes, positive long term trajectory is intact of 1.1-1.2 mn tonnes of
sales in FY12. Management expects mine to start from June 2011, adding upsides
on DI margins. DI may see cost pressures on high coal prices. Other upsides are
expected from start of drill bit unit, new order accretion and pellet plant start by
March 2012.
„ Valuation: Diversified business; maintain Buy and PT of Rs 305/share
JSL business is evolving favourably (that explains premium valuations to peers).
We re-iterate Buy rating and maintain PT of Rs 305/share, based on a DCF value
of Rs 252/share on the core business and Rs53/share of investment value. Key risks
are MTM of US$ 135 mn and potential net worth reduction after IFRS adoption.
Operational highlights
Q Production run rate to improve, outlook on margins mixed: JSL
management highlighted a sales run rate of 1 mn tones over the next 3
quarters, till the start of new DI Abu Dhabi and domestic capacity. Post this
production run rate is targeted to increase to 1.2-1.4 mn tonnes of yearly
pipes sales. In Q3 FY11, margins for SAW, DI and Seamless were
Rs12,300/tonne, Rs10,7000/tonne and Rs16,400/tonne, respectively. Going
forward, DI pipe margins are expected to be under pressure, given the rising
coal prices. Seamless margins are expected to partly benefit from drill pipe
unit start in US. Also, SAW pipe international margins continue to stay
favorable.
Q Capacity expansion and status on iron ore mine: 200,000 tonnes domestic
DI capacity is planned to start in FY12, at a capex of Rs3.5bn, expanding
JSL’s product offering. Abu Dhabi DI capacity (joint venture) of 300,000
tonnes operation is expected to commence in FY12 at a cost of US$60m.
Management reiterated the Rs3.5k/tonne benefit of margins for DI pipes
production, which is likely from H2 FY11 onwards as the mine operations
start. Pellet plant is to be constructed in 2 phases and 1.2 mn tones capacity is
expected to start by March 2012.
Q MTM of USD 135 mn as at end Q3 FY11, on foreign currency
derivative/forward contracts, etc. Forex losses booked were Rs. 180 mn.
Q Status of demerger of the investment undertaking: Stock exchange
clearance has been received for same and company is awaiting the approval
from the Allahabad High Court. Management expects to complete
transaction by June 2011.
Q Jindal Saw
Jindal Saw is a leading pipe manufacturing company in India. It is a part of
US$12bn OP Jindal group. The company started operations in 1984. It
manufactures large diameter submerged arc welded (SAW) pipes, spiral pipes,
seamless tubes of stainless steel, ball bearings, and it also installs and operates
pipelines. The company, through its 100% subsidiary Jindal ITF, has presence in
the infrastructure sector in water, waste water management, logistics and
transport equipment fabrication. It has three strategic business units: SAW,
seamless, and ductile iron pipes.
Q Statement of Risk
FX fluctuations, sharp steel price volatility (70% of the cost of pipe
manufacturing), unrelated diversification, higher competition and a slow down
in global pipeline capex are the main risks to pipe companies and our estimates.
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