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Jindal Saw
Earnings cut on weaker margin
„Cutting EPS on margin pressure - Maintain Underperform
Jindal Saw’s Q3FY11 PAT came in 42% below our estimate and declined by 55%
owing to sharper than expect rise in cost of coal and decline in pricing power. We
have cut EPS for FY12e and FY13e by 24% and 21% respectively as the margin
pressure will continue. We have maintained our PO based on sum of part of
(1) core business at PE of 5.5x FY13e EPS of Rs18.5 and (2) Rs58/sh as value of
4.3% stake in Jindal Steel & Power (JSP IN) discounted by 30%.
Rising competition and cost pressure hurting margin
Q4FY11 EBITDA margin at 15.1% declined sharply from 26.5% in Q4FY10 and
20.8% in Q3FY11. EBITDA per tonne of pipe declined by 35% y-o-y and
33% q-o-q to Rs8,212. Key reason for decline in margin are (1) change in product
mix in favour of less profitable domestic market, and (2) rise in cost of coal amidst
inability to pass on the cost pressure owing to rise in competition. All these factors
are likely to persist going forward.
Jump debt in debt to add to cost pressure in FY12e
Net debt of Jindal Saw jumped from Rs1.6bn at end of FY10 to Rs11bn at end of
FY11. The company has over Rs16bn capex planned for next two years. Rise in
debt and interest rate likely to hurt earnings too.
Too early to factor in benefit of backward integration
Jindal Saw is expecting to save Rs3bn per annum from own iron mines from
Jan2012 onwards and earn Rs7bn EBITDA from sales of iron ore pellet from
FY13. However, cost savings from own mine could get neutralized by a jump in
costs of imported coal and as such it is too early to value given that the mine is in
Rajasthan which is new to iron ore mining
Price objective basis & risk
Jindal Saw (SWPFF)
Our PO of Rs160 for Jindal Saw is based on the sum of (1) cosr business valued
at 5.5x FY13e EPS of Rs18.5 and in line with peersa (2) Rs58 as the value of its
4.3% stake in Jindal Steel and Power, a sister concern discounted by 30%. Key
risk is the increase in cost pressure from rise in imported coal price and further
increase in competition owing to excess supply
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jindal Saw
Earnings cut on weaker margin
„Cutting EPS on margin pressure - Maintain Underperform
Jindal Saw’s Q3FY11 PAT came in 42% below our estimate and declined by 55%
owing to sharper than expect rise in cost of coal and decline in pricing power. We
have cut EPS for FY12e and FY13e by 24% and 21% respectively as the margin
pressure will continue. We have maintained our PO based on sum of part of
(1) core business at PE of 5.5x FY13e EPS of Rs18.5 and (2) Rs58/sh as value of
4.3% stake in Jindal Steel & Power (JSP IN) discounted by 30%.
Rising competition and cost pressure hurting margin
Q4FY11 EBITDA margin at 15.1% declined sharply from 26.5% in Q4FY10 and
20.8% in Q3FY11. EBITDA per tonne of pipe declined by 35% y-o-y and
33% q-o-q to Rs8,212. Key reason for decline in margin are (1) change in product
mix in favour of less profitable domestic market, and (2) rise in cost of coal amidst
inability to pass on the cost pressure owing to rise in competition. All these factors
are likely to persist going forward.
Jump debt in debt to add to cost pressure in FY12e
Net debt of Jindal Saw jumped from Rs1.6bn at end of FY10 to Rs11bn at end of
FY11. The company has over Rs16bn capex planned for next two years. Rise in
debt and interest rate likely to hurt earnings too.
Too early to factor in benefit of backward integration
Jindal Saw is expecting to save Rs3bn per annum from own iron mines from
Jan2012 onwards and earn Rs7bn EBITDA from sales of iron ore pellet from
FY13. However, cost savings from own mine could get neutralized by a jump in
costs of imported coal and as such it is too early to value given that the mine is in
Rajasthan which is new to iron ore mining
Price objective basis & risk
Jindal Saw (SWPFF)
Our PO of Rs160 for Jindal Saw is based on the sum of (1) cosr business valued
at 5.5x FY13e EPS of Rs18.5 and in line with peersa (2) Rs58 as the value of its
4.3% stake in Jindal Steel and Power, a sister concern discounted by 30%. Key
risk is the increase in cost pressure from rise in imported coal price and further
increase in competition owing to excess supply
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