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UBS Investment Research
Jindal Saw
JPY appreciation slight negative
Jindal Saw derivative MTM could rise to cUS$150m from US$135m
Jindal Saw (JSL) has foreign currency derivative contracts such as swaps and options,
which have a long-dated tenor (till 2012). Management indicated 90% is denominated
in US$/JPY. These were taken in 2007/08 for hedging business risk. The company has
not taken any new contracts post this. As at end-Q3 FY11, mark to market (MTM) on
this was US$135m. US$/JPY appreciation to 77-79, could inflate MTM to cUS$150m,
in our view.
Slight negative impact; we already assume US$125m cost in estimates
We already assume US$125m total losses through FY11-14E. Actual losses could be
much lower than MTM depending on currency movement. However, assuming
US$150m losses, it could negatively impact EPS by Rs2.0/share in FY12-14E (5-10%
impact). We await response on JPY appreciation. IFRS/AS-30 adoption may result in a
direct net worth adjustment of MTM, whenever the same is implemented. This
adoption will not impact the income statement, except for changes or movement in
MTM every quarter. Q4 FY11 booked losses could be slightly higher.
Positive fundamental trajectory intact; upside from DI capacity, mine
JSL’s business is evolving favourably with 1.1-1.2m tonnes of sales expected in FY12,
start of mine operations by June 2011, additional monetisation of ore through pellet
plant, and drill bit unit and new domestic and Middle-East DI capacity.
Valuation: maintain Buy and PT of Rs305
We reiterate our Buy rating and maintain our price target of Rs305, based on a DCF
value of Rs252/share on the core business and Rs53/share of investment value. Key
risks are MTM of US$135-150m and potential net worth reduction after IFRS adoption,
in our view.
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.
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
JPY appreciation slight negative
Jindal Saw derivative MTM could rise to cUS$150m from US$135m
Jindal Saw (JSL) has foreign currency derivative contracts such as swaps and options,
which have a long-dated tenor (till 2012). Management indicated 90% is denominated
in US$/JPY. These were taken in 2007/08 for hedging business risk. The company has
not taken any new contracts post this. As at end-Q3 FY11, mark to market (MTM) on
this was US$135m. US$/JPY appreciation to 77-79, could inflate MTM to cUS$150m,
in our view.
Slight negative impact; we already assume US$125m cost in estimates
We already assume US$125m total losses through FY11-14E. Actual losses could be
much lower than MTM depending on currency movement. However, assuming
US$150m losses, it could negatively impact EPS by Rs2.0/share in FY12-14E (5-10%
impact). We await response on JPY appreciation. IFRS/AS-30 adoption may result in a
direct net worth adjustment of MTM, whenever the same is implemented. This
adoption will not impact the income statement, except for changes or movement in
MTM every quarter. Q4 FY11 booked losses could be slightly higher.
Positive fundamental trajectory intact; upside from DI capacity, mine
JSL’s business is evolving favourably with 1.1-1.2m tonnes of sales expected in FY12,
start of mine operations by June 2011, additional monetisation of ore through pellet
plant, and drill bit unit and new domestic and Middle-East DI capacity.
Valuation: maintain Buy and PT of Rs305
We reiterate our Buy rating and maintain our price target of Rs305, based on a DCF
value of Rs252/share on the core business and Rs53/share of investment value. Key
risks are MTM of US$135-150m and potential net worth reduction after IFRS adoption,
in our view.
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.
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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