Jindal Saw Limited -- Order inflow disappoints:: Macquarie Research,

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Jindal Saw Limited
Order inflow disappoints
Event
 JSAW reported 1Q FY12 net sales and profit of Rs11.3bn and Rs828mn,
respectively. Results were in line with our expectation at EBITDA level,
however, 5% below our expectations on PAT due to higher tax rate. Blended
EBITDA margin was Rs9,500/t in 1Q. We believe the order inflow will be the
key driver for the stock in medium term. JSAW is trading at a modest 3x
FY12E EV/EBITDA. We re-iterate Outperform recommendation.
Impact
 Volumes came in at 184k tonnes, margin at US$215/t. During 1Q, SAW
pipes volume dropped by 23% to 92k tonnes (15k tonnes of HSAW and 78k
tonnes of LSAW) due to shipment delay in some of the orders. Ductile Iron
pipe volumes were lower than expected due to a shutdown in the plant.
Overall, JSAW sold 185k tonnes of pipes in 1Q FY12E. Blended EBITDA was
Rs9,577/tonne in 1Q, up from Rs8,212/t in 4Q.
 JSAW’s current order book is US$800mn. The company has an order book
of US$800mn, which it expects to execute by March 2012. The order book
includes SAW pipes (US$565mn), DI pipes (US$170mn) and seamless pipes
(US$65mn). 65% of the order book is from the export markets. We estimate
the average EBITDA on its current order book to be ~US$175/tonne.
 Expansion projects on track. The company’s current expansion plans for a
new DI pipe facility (US$75m, Sep’11), Mundra DI plant expansion (US$60m,
Sep’11) and a drill pipe facility in the US (trial has started) are on track. JSAW
has also entered into lease agreement with Sertubi SPA, Italy to operate their
DI manufacturing plant in Italy. The plant has a capacity to produce 0.1mn
tonne of ductile iron (DI) pipes and is currently operating at 35-40% capacity.
 Iron ore mines to start in 1Q CY12, provide 30% valuation upside. JSAW
has started the development of iron ore mine and has initiated necessary
steps such as civil work, finalization of engineering and installation of the plant
and machinery to implement projects. 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/t, which is significantly lower
than that of other listed iron ore mine companies.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs245.00 based on a Sum of Parts methodology.
 Catalyst: New order inflow and start of production at iron ore mines
Action and recommendation
 Outperform maintained. JSAW is our preferred pick in the pipe space, given
its healthy order book and multiple triggers. We believe the start of iron ore
mines in 1Q CY12 will provide a significant boost to its earnings.