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R e s u l t s l a r g e l y i n l i n e w i t h e x p e c t a t i o n…
The Q1FY12 results of Jindal SAW were broadly in line with our
expectation with sales coming in at | 1133.1 crore as against our
expectation of | 1181.0 crore. Sales volumes on a YoY comparison have
declined ~11% and QoQ by ~10%. However, the topline is supported by
higher realisations, which has improved ~12% YoY and ~9% QoQ,
respectively. EBITDA also came in line with our estimates at | 178.2 crore
(I-direct estimate: | 170.9 crore). EBITDA margins in Q1FY12 have
contracted significantly by 645 bps YoY to ~15.7% but sequentially the
margin has marginally improved by 52 bps. The net profit of the company
was higher at | 82.8 crore, which is higher than our estimate of | 72 crore.
On a YoY comparison, net profit has declined significantly ~45% YoY
due to higher depreciation cost (increased ~5% YoY) and higher tax rate
(increased from 25% in Q1FY11 to 30% in Q1FY12).
ƒ Sales impacted despite higher production
Production for the quarter stood at ~2,80,000 million tonnes (MT)
whereas sales were significantly lower at ~1,85,000 MT. This was
due to a bottleneck in the coating plant, which led to an increase in
the WIP stock (~| 399.5 crore).
ƒ Order book position
The order book of the company stood at $800 million. The order
book in tonnage terms stands at ~4,70,000 MT for large diameter
pipes, ~1,60,000 MT for ductile iron pipes and ~35,000 MT for
seamless pipes. Export orders share stands at 65% (which has
improved as compared to ~ 55% in Q4FY11) of the total order book.
V a l u a t i o n
At the current market price of | 118, the company is discounting its FY12E
and FY13E EV/EBITDA by 5.4x and 4.4x, respectively. We have valued the
company on an SOTP basis assigning 4.5 EV/EBITDA to the core business
and giving a 50% holding company discount to the investments (| 39 per
share). We have arrived at a target price of | 138. We are upgrading our
rating on the stock from HOLD to BUY.
Concall highlights
• The current order book includes export orders of ~65%. The major
exports orders are from the Middle East, Gulf region, South East
Asia, China and the Far East
• During the quarter under review, total production volumes stood at
~2,80,000 MT. Out of this, ~1,86,000 MT was LSAW and HSAW
combined, ~37,000 MT was seamless pipes while ~55,000 MT was
for ductile iron pipes
• In Q1FY12, the total sales volume stood at ~ 1,84,800 tonnes, out of
which ~77,800 tonnes was LSAW pipes, ~14,500 tonnes was
HSAW pipes, ~55,800 tonnes was ductile iron pipes (including pig
iron) and ~36,700 tonnes was seamless tubes
• In terms of geographical break-up, sales in India were 48% while
sales outside India were 52%
• The sales realisation in Q1FY12 for LSAW was ~70,000 per tonne,
for HSAW it was ~45,000 per tonne, seamless pipes were at
~75,000/tonne while for ductile iron pipes it was ~45,000 per tonne
• With regard to iron ore mines, the company has already initiated
steps to roll out the project implementation including civil work,
finalisation of engineering details and installation of the plant and
machinery. It is expected that the trails should commence and
commercial production could begin in Q4FY12
• The company is setting up a ductile iron plant with additional waste
heat recovery based power project and coke oven plant. This
expansion will provide additional 200,000 MTPA ductile pipe with a
wider range of sizes. The project, with a capital outlay of ~| 400
crore, is expected to commence operations in Q4FY12
• The greenfield ductile iron pipe facility in the United Arab Emirates,
which has an installed capacity of 300,000 MTPA is progressing well
and is expected to commence operations by Q4FY12. The
estimated cost outlay for this facility has been estimated at ~US$60
million
• The drill pipe facility in the US has already commenced trial runs
and the necessary approvals are awaited. Commercial operation is
expected to commence shortly upon receipt of approvals
• The company has given a production volume guidance of ~1-1.1
MT in FY12
Outlook and Valuation
Due to the slowdown in the global economic scenario and recent decline
in crude prices, we expect the demand for pipes to witness a weak trend
in the short-term. We believe that once the global economic recovery
gains momentum and investment in the pipes sector picks up, this will
lead to higher demand for pipes. Also, on the cost front, the pressures
that the company is witnessing currently will ease out post
commissioning of its captive iron ore mine (which we expect to happen
by the end of FY12). This will lead to an improvement in the margins,
going forward. We believe the current stock price factors in all the
negatives and it is a very attractive level to enter the stock.
At the current market price of | 118, the stock is discounting its FY12E
and FY13E EV/EBITDA by 5.4x and 4.4x, respectively. We have valued the
stock on an SOTP basis assigning 4.5 EV/EBITDA to the core business
and giving a 50% holding company discount to the investments (| 39 per
share). We have arrived at a target price of | 138. Hence, we are
upgrading our rating on the stock from HOLD to BUY.
