Jindal Saw - execution of iron ore mine; upgrade to Buy:: Edelweiss

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Jindal Saw (JSAW IN, INR 195, upgrade to Buy)

n  INR 5,600/mt benefit likely for DI from mining lease agreement

Jindal Saw (JSL) has inked a 30 years iron ore mining lease agreement with the Rajasthan Government. The mines are estimated to have reserves of 180 MT and are expected to boost the EBITDA margins of the company’s ductile iron (DI) pipes by INR 5,600/mt (INR 3,500/mt for iron ore) via backward integration. The company is in the process of setting up a beneficiation plant at a capex of INR 1.6 bn to improve the mine’s average iron ore content from 45% to 66%. The plant will have an annual capacity of 6,000 tonnes/day or 2.2 mmtpa and is likely to be commissioned by September 2011. Of the same, the DI plant will utilise 0.6 mmtpa by FY13, which will enhance JSL’s EBITDA run rate by
INR 3.0 bn by FY12E end. JSL is also considering setting up of a pelletisation plant at a capex of INR 1.5 bn (decision likely in 4-6 weeks).

n  Jindal ITF to boost consolidated earnings from FY12

Management has indicated that Jindal ITF is likely to contribute ~INR 12 bn (INR 7.5-8.0 bn from waterways & waste management, INR 3.0 bn from shipping, and INR 2.0 bn from railways segment) to JSL’s top line in FY12E. The company has also guided for an overall EBITDA margin of 22% (25% shipping, 18% railways, and 20% waterways & waste management segments). Jindal ITF’s waterways segment bagged orders worth INR 4.5 bn in Q3FY11.

n  Outlook and valuations: Multiple triggers ahead; upgrade to ‘BUY’

Although JSL’s pipes order execution has been lower than expected recently, we remain fundamentally positive on the pipes industry owing to higher crude prices, attractive natural gas/crude price ratio, and recent pick up in rig markets. We are marginally revising down our earnings estimates for JSL for FY12 to incorporate lower pipe volumes (from 1.07 mmt to 1.01 mmt). The company is likely to benefit from multiple triggers going ahead including: (1) increase in global pipeline capex; (2) backward integration of the iron ore mine; (3) increased contribution to earnings from Jindal ITF; and (4) demerger of JSL’s investment undertaking expected by July 2011. 

At CMP of INR 195, the stock is trading at 9.1x EPS and EV/EBITDA of 5.2x for FY12E. We are introducing March 2012 fair value at INR 291/share after netting-off the forex losses (@6.5x 1-yr forward EV-EBITDA) leaving a 50% upside from here. Hence, we are upgrading our recommendation/rating on the stock to ‘BUY/Sector Outperformer’ from ‘HOLD/Sector Performer’.