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Jindal Saw Ltd (JSAW IN)
OW: Global expansion and mines to aid profitability
We expect tough environment to continue to impact demand
But its global expansions and commissioning of mines will
support order book and earnings growth
Target cut to INR210 from INR280 but we remain Overweight
Following management's recent analyst conference call which added more detail on
the last earnings report, we see greater cost pressures and tough competition hurting
volumes and margins. Rising coal costs and uncertainty of iron ore availability is
hurting the domestic Ductile Iron pipes business. Even in the large diameter pipes, the
global slowdown has adversely impacted capital expenditure decisions for large projects.
Line pipe manufacturers have been hurt by policy paralysis across the globe from
policymakers and private corporates which has led to delay in pipeline projects. While
political leaders have been trying to avoid tough decisions pending elections, private
companies have been waiting for financing conditions to improve and commodity prices
to settle down. These tough economic conditions have also led to nationalistic fervour
resulting in projects being awarded to companies with domestic presence.
But with global expansions and commissioning of mines JSAW is well positioned.
JSAW has expanded its Ductile Iron pipe capacity in UAE, it took over lease rights in a
European pipe mill and has recently started its trial runs for seamless pipes in the US.
These plants are likely to get the benefit of being localised and will benefit from orders
intended towards generating local employment. JSAW’s iron ore mine is also now close
to commissioning which will add to profitability and improve raw material availability.
Infrastructure business now close to break even. JSAW had entered into infrastructure
space involving water management, waste management, waterways, waste to power and
rail manufacturing. All these businesses are now close to generating profits with its rail
manufacturing unit getting its first order, waste to energy plant commissioned and its
waterways business getting a 7 year contract with NTPC. We believe these businesses will
soon start supporting profitability.
Valuation and risk: We cut our earnings by 13-38% to incorporate the impact of slower
demand. We roll forward our valuation to FY14e EPS (earlier FY13e) but maintain our
PE multiple at 8x. We now eliminate the value of the investments from our valuation as
they have been hived off to a separate company. As a result our target price falls to
INR210 (from INR280), but we maintain our Overweight rating. Key risks to our earnings
estimate and price target are a further slowdown in pipeline projects, increase in
competition and delay in commissioning of the iron ore mine.
Investment view
The stock has under-performed the market by 26% over the last 12 months on the back of the global slowdown
which has led to declining order books, and issues with some low-margin orders.
Tougher environment in global and domestic markets. We don’t expect the demand environment to
improve from current levels. We are witnessing the following trends in the pipes market.
Large projects in US are not moving forward on environmental concerns and policy paralysis.
Companies are pushing orders back in search of cheaper raw material pricing and better financing.
Due to tight financial conditions, there is a dearth of replacement demand.
Order book cycles have become shorter as companies want to avoid commodity price volatility.
There is a growing emphasis on nationalism as government tries to pacify its population with
employment prospects and income growth. This has led to domestic companies bagging higher
proportion of orders.
Infrastructure activity in domestic market has also dried up as Indian government tries to balance its
budget and deficit.
But with global expansions and commissioning of mines JSAW is well positioned. JSAW has
expanded its Ductile Iron pipe capacity in UAE, it took over lease right in an European pipe mill and has
recently started its trial runs for seamless pipes in US. These plants are likely to get the benefit of being
localised and will benefit from orders intended towards generating local employment. JSAW’s iron ore
mine is also now close to commissioning. This will reduce the cost of raw material and enable it to
complete aggressively.
Infrastructure business now coming close to break even. JSAW had entered into infrastructure space
involving water management, waste management, waterways, waste to power and rail manufacturing. All
these businesses are now close to generating profits with its rail manufacturing unit getting its first order,
waste to energy plant commissioned and its waterways business getting 7 year contract with NTPC. We
believe these businesses will no longer act as drag on earnings.
JITF expects EBITDA of Rs0.5bn during FY12 from revenue of Rs4.5bn (Rs2bn from Water business,
Rs2.25bn from waterways, Rs0.1bn from rail business and Rs0.15bn from waste business). For FY13 -
Company is guiding for EBITDA Rs2.4bn from revenue of Rs11bn (Rs4bn from water business, Rs4.2bn
from waterways, Rs2bn from rail business and Rs1bn from waste business) Company believes it can earn
10% EBITDA margin on water business, 22% on waterways, 60% on waste and 14% on rail business.
We reduce our earnings estimate to incorporate slowdown in sales volumes and reduce EBITDA margin
as company competes aggressively in the tougher environment. But we now incorporate earnings from its
mines and some profitability from its infrastructure business.
Valuation
We roll forward our valuation to FY14e EPS from FY13e and value the business on PE multiple of 8x
(based on ROE of 13% and cost of capital of 13.2%, g of 3%). We now eliminate the value the investments
as it has been hived off to other companies. We cut our target price to INR210 from INR280 earlier.
Under our research model, the Neutral rating band for non-volatile Indian stocks is 5pp above and below the
hurdle rate of 11%, or 6-16% around the current share price. Our target price of INR210 implies a potential
return of 38%, including dividend yield; thus, we are Overweight on Jindal Saw. Potential return equals the
percentage difference between the current share price and the target price, including the forecast dividend
yield when indicated.
Risk and Sensitivities
Delay in commissioning of iron ore mine. Iron ore mine is expected to commission by Jun’12. This has
already been pushed back from Sep’11. Any further delay could affect our earnings estimates and stock
price performance.
Earnings and valuation are primarily sensitive to volumes and the margins which they are able to
command. 10% increase in SAW pipes volumes will increase FY13e net profit by 6%. 10% increase in
DI pipe volumes will increase net profit by 4%. 10% increase in seamless pipe volumes will increase net
profit by 2%. 10% increase in EBITDA/tonne will increase net profit by 15%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jindal Saw Ltd (JSAW IN)
OW: Global expansion and mines to aid profitability
We expect tough environment to continue to impact demand
But its global expansions and commissioning of mines will
support order book and earnings growth
Target cut to INR210 from INR280 but we remain Overweight
Following management's recent analyst conference call which added more detail on
the last earnings report, we see greater cost pressures and tough competition hurting
volumes and margins. Rising coal costs and uncertainty of iron ore availability is
hurting the domestic Ductile Iron pipes business. Even in the large diameter pipes, the
global slowdown has adversely impacted capital expenditure decisions for large projects.
Line pipe manufacturers have been hurt by policy paralysis across the globe from
policymakers and private corporates which has led to delay in pipeline projects. While
political leaders have been trying to avoid tough decisions pending elections, private
companies have been waiting for financing conditions to improve and commodity prices
to settle down. These tough economic conditions have also led to nationalistic fervour
resulting in projects being awarded to companies with domestic presence.
But with global expansions and commissioning of mines JSAW is well positioned.
JSAW has expanded its Ductile Iron pipe capacity in UAE, it took over lease rights in a
European pipe mill and has recently started its trial runs for seamless pipes in the US.
These plants are likely to get the benefit of being localised and will benefit from orders
intended towards generating local employment. JSAW’s iron ore mine is also now close
to commissioning which will add to profitability and improve raw material availability.
Infrastructure business now close to break even. JSAW had entered into infrastructure
space involving water management, waste management, waterways, waste to power and
rail manufacturing. All these businesses are now close to generating profits with its rail
manufacturing unit getting its first order, waste to energy plant commissioned and its
waterways business getting a 7 year contract with NTPC. We believe these businesses will
soon start supporting profitability.
Valuation and risk: We cut our earnings by 13-38% to incorporate the impact of slower
demand. We roll forward our valuation to FY14e EPS (earlier FY13e) but maintain our
PE multiple at 8x. We now eliminate the value of the investments from our valuation as
they have been hived off to a separate company. As a result our target price falls to
INR210 (from INR280), but we maintain our Overweight rating. Key risks to our earnings
estimate and price target are a further slowdown in pipeline projects, increase in
competition and delay in commissioning of the iron ore mine.
Investment view
The stock has under-performed the market by 26% over the last 12 months on the back of the global slowdown
which has led to declining order books, and issues with some low-margin orders.
Tougher environment in global and domestic markets. We don’t expect the demand environment to
improve from current levels. We are witnessing the following trends in the pipes market.
Large projects in US are not moving forward on environmental concerns and policy paralysis.
Companies are pushing orders back in search of cheaper raw material pricing and better financing.
Due to tight financial conditions, there is a dearth of replacement demand.
Order book cycles have become shorter as companies want to avoid commodity price volatility.
There is a growing emphasis on nationalism as government tries to pacify its population with
employment prospects and income growth. This has led to domestic companies bagging higher
proportion of orders.
Infrastructure activity in domestic market has also dried up as Indian government tries to balance its
budget and deficit.
But with global expansions and commissioning of mines JSAW is well positioned. JSAW has
expanded its Ductile Iron pipe capacity in UAE, it took over lease right in an European pipe mill and has
recently started its trial runs for seamless pipes in US. These plants are likely to get the benefit of being
localised and will benefit from orders intended towards generating local employment. JSAW’s iron ore
mine is also now close to commissioning. This will reduce the cost of raw material and enable it to
complete aggressively.
Infrastructure business now coming close to break even. JSAW had entered into infrastructure space
involving water management, waste management, waterways, waste to power and rail manufacturing. All
these businesses are now close to generating profits with its rail manufacturing unit getting its first order,
waste to energy plant commissioned and its waterways business getting 7 year contract with NTPC. We
believe these businesses will no longer act as drag on earnings.
JITF expects EBITDA of Rs0.5bn during FY12 from revenue of Rs4.5bn (Rs2bn from Water business,
Rs2.25bn from waterways, Rs0.1bn from rail business and Rs0.15bn from waste business). For FY13 -
Company is guiding for EBITDA Rs2.4bn from revenue of Rs11bn (Rs4bn from water business, Rs4.2bn
from waterways, Rs2bn from rail business and Rs1bn from waste business) Company believes it can earn
10% EBITDA margin on water business, 22% on waterways, 60% on waste and 14% on rail business.
We reduce our earnings estimate to incorporate slowdown in sales volumes and reduce EBITDA margin
as company competes aggressively in the tougher environment. But we now incorporate earnings from its
mines and some profitability from its infrastructure business.
Valuation
We roll forward our valuation to FY14e EPS from FY13e and value the business on PE multiple of 8x
(based on ROE of 13% and cost of capital of 13.2%, g of 3%). We now eliminate the value the investments
as it has been hived off to other companies. We cut our target price to INR210 from INR280 earlier.
Under our research model, the Neutral rating band for non-volatile Indian stocks is 5pp above and below the
hurdle rate of 11%, or 6-16% around the current share price. Our target price of INR210 implies a potential
return of 38%, including dividend yield; thus, we are Overweight on Jindal Saw. Potential return equals the
percentage difference between the current share price and the target price, including the forecast dividend
yield when indicated.
Risk and Sensitivities
Delay in commissioning of iron ore mine. Iron ore mine is expected to commission by Jun’12. This has
already been pushed back from Sep’11. Any further delay could affect our earnings estimates and stock
price performance.
Earnings and valuation are primarily sensitive to volumes and the margins which they are able to
command. 10% increase in SAW pipes volumes will increase FY13e net profit by 6%. 10% increase in
DI pipe volumes will increase net profit by 4%. 10% increase in seamless pipe volumes will increase net
profit by 2%. 10% increase in EBITDA/tonne will increase net profit by 15%.
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