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UBS Investment Research
Jindal Saw
I ron ore mine ramp-up a key catalyst
Event: muted Q1FY12 results; in line with our estimates
Jindal Saw’s (JSL) Q1FY12 PAT at Rs828m was down 45.2% YoY and up 3.3%
QoQ in line with our estimates due to execution of the low-margin GAIL order,
competitive pressure in the DI segment (read limited pricing power), higher raw
material costs (coking coal), lower other income (down 61% YoY), and a slightly
higher tax rate. Blended EBITDA at US$209/MT improved 15.1% QoQ. Sales at
184,800 MT (down 10.7% YoY) were limited on pending dispatches/coating work.
Impact: FY12E to be weaker; lower estimates; mine start a big positive
We lower our FY12/FY13 PAT estimates by 15.7%/13.7% on weaker margins in
H1FY12E and lower order book visibility. However, we remain positive on the
ramp-up of the iron ore mine from end-FY12E (re-rating potential), the Middle
East DI capacity, and the drill bit unit which should sharply expand earnings in
FY13E/FY14E. This is based on the assumption of steady state SAW pipes sales
with no major growth. Any sustained order book decline could cause us to revisit
our assumptions.
Action: retain long-term positive outlook; Buy rating
Assuming a reasonable SAW pipes business, mid-cycle seamless profitability, and
sharp earnings growth in FY13/FY14E, we retain our positive outlook on the stock
and expect it to re-rate from the current low valuations (FY13E PE at 5.3x) from
H2FY12E. We believe the key risk is significant delays in the start of the iron
mine/pellet plant.
Valuation: maintain Buy rating and lower price target to Rs205
We reiterate our Buy rating and lower our price target from Rs283 to Rs205. Our
SOTP-based price target includes a DCF-based valuation of Rs172 for the core
business and Rs33 for investments.
Q1FY results, concall highlights
Reason for muted results: JSL’s Q1FY12 PAT at Rs828m was down
45.2% YoY and up 3.3% QoQ, in line with our estimates and lower than
consensus due to execution of the low-margin GAIL order, competitive
pressures in the DI segment (read limited pricing power and higher costs for
raw materials such as coking coal), lower other income (down 61% YoY),
and an expected higher tax rate. Sales volume at 184,800 MT (down 10.7%
YoY and 9.6% QoQ) was limited on pending dispatches.
Production was much higher at 280kMT (SAW at 186k MT, 36kMT
seamless, and 55kMT of DI).
EBITDA margin: At US$209/MT, EBITDA margin was down 21.7% YoY
and up 15.1% QoQ, better than our expectations. Seamless and LSAW
EBITDA margins were at Rs16,000/MT and Rs10,000/MT, respectively.
HSAW and DI profitability were weaker at Rs2,500/MT and Rs7,190/MT,
respectively.
Conversion expenses at US$294/MT were up 30.6% YoY and 3.2% QoQ.
Blended realisation at US$1,348/MT was up 12.0% YoY and 8.0% QoQ.
Order book eased to US$800m at end Q1FY12 and is to be executed by
March 2012, indicating a weak order accretion of US$66m. In tonnage terms,
it receded by 176,000 MT QoQ to 620,000 MT by end-Q1FY12; 65% of
their order book is exports from the Middle East, the Gulf region, and South
East Asia, China and the Far East. Management indicated it is working on
many tenders.
In Q1FY12, stock increased by Rs3.99m as some of the bare pipes were to
be converted to coated pipes and some pending dispatches.
Net standalone debt was ~Rs18bn, which also included the buyer’s credit
facility utilisation of US$215m. JSL also raised US$73.5m worth ECB, to be
repaid within six years from July 2011. We expect JSL to raise long-term
funds of ~Rs3.5bn. Management expects peak debt at ~Rs22bn. We forecast
higher debt.
JSL has adopted AS30 in the quarter for its options, currency swaps, and
forward contracts and adjusted its net worth by US$148m. It is expected to
report the balance-sheet by end Q2FY12.
Demerger of the investment undertaking called Hexa-Tradex Limited has
been filed in the Allahabad High Court, after shareholders, secured creditors,
and unsecured creditors approved the same; the company expects listing
(post court approval) by October 2012.
Capex: Both the India (Rs4bn capex) and Abu Dhabi (US$60m capex) DI
capacities are expected to start ~three months late in March/April 2012; the
mine should start by end FY12, and the drill pipe unit in the US has already
commenced. FY12 capex guidance is Rs10bn equally split between the
pipes/mines business and Jindal ITF. The pellet plant is expected to be
commissioned by December 2012.
JSL also announced the audited FY11 income statement and balance-sheet.
Working capital has increased in the form of inventory (plate and coil
inventory to reflect orders; should normalise), and higher payables. In FY11,
Jindal ITF likely reported a net loss of Rs300m. Management sales guidance
for FY12 was 1.0-1.1m MT.
JSL has leased European DI capacity of 100,000 MT at an annual rental of
Euro1.25m for five years and extendable over the same period. The rationale
for same is to build visibility in the Middle Eastern and European markets.
Lowering estimates and price target; maintain
Buy
Over the short to medium term, we expect weaker margins in DI, HSAW pipes
which we have reflected in our forecasts. Also, in line with lower order book
visibility, we have slightly tapered our volume assumptions. Further, we now
assume a higher capex for FY12, partly on account of Jindal ITF. In line with
this and slightly lower order book visibility, we lower our FY12/13 PAT
estimates by 15.7%/13.7% respectively.
We also lower our SOTP-based price target for the stock from Rs283 to
Rs205—a much larger proportion compared to the estimates downgrade. This is
because given expectations of a slight earnings decline in FY12, lower order
book visibility and some margin pressure, the core pipes + ITF business is
unlikely to command higher valuations, in our view. In line with this, we lower
our UBS-VCAM based valuation for the core pipes business to Rs172 from
Rs235. We now value the investment book (Hexa Tradex Limited) at a 60%
holding company discount (compared to 50% earlier) at Rs33. The market value
of its investment book has eased, as the stock prices of the key holding
companies have eased.
Jindal Saw’s stock has sharply corrected over the past few months
(underperformed Nifty by c20% through April-July 2011) on weaker results and
guidance for a muted Q1/Q2FY12. Post the sharp correction, the stock is trading
at a valuation of 5.3x FY13E PE, compared to a global sector median of 7.5x
and a historical median of 9.2x. While on FY12E, the stock is priced at +1
standard deviation on PE and EV/EBITDA, the stock reflects almost a
historically low range of valuations on FY13E. Based on our core pipes + mine
business valuation of Rs172, the implied PE for the stock on FY13E is c7.7x
(much lower than historical valuations).
We maintain our Buy rating on the stock based on our positive outlook for the
iron ore mine start by end FY12E and Middle East DI capacity, which has the
potential to sharply expand earnings for FY13E/FY14E. This is based on the
assumption that SAW pipe sales are likely to be flat for the next few years. The
Iron ore mine should support the improvement in DI margins and the seamless
drill pipe unit add to segment earnings, 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
Key risks for this stock are limited visibility on Saw pipes order book for FY13,
any unexpected sharp slowdown in the pipes sector, delay in the start and rampup
of iron ore mine and new DI capacity, and higher cost structure and weaker
margins in mining.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Jindal Saw
I ron ore mine ramp-up a key catalyst
Event: muted Q1FY12 results; in line with our estimates
Jindal Saw’s (JSL) Q1FY12 PAT at Rs828m was down 45.2% YoY and up 3.3%
QoQ in line with our estimates due to execution of the low-margin GAIL order,
competitive pressure in the DI segment (read limited pricing power), higher raw
material costs (coking coal), lower other income (down 61% YoY), and a slightly
higher tax rate. Blended EBITDA at US$209/MT improved 15.1% QoQ. Sales at
184,800 MT (down 10.7% YoY) were limited on pending dispatches/coating work.
Impact: FY12E to be weaker; lower estimates; mine start a big positive
We lower our FY12/FY13 PAT estimates by 15.7%/13.7% on weaker margins in
H1FY12E and lower order book visibility. However, we remain positive on the
ramp-up of the iron ore mine from end-FY12E (re-rating potential), the Middle
East DI capacity, and the drill bit unit which should sharply expand earnings in
FY13E/FY14E. This is based on the assumption of steady state SAW pipes sales
with no major growth. Any sustained order book decline could cause us to revisit
our assumptions.
Action: retain long-term positive outlook; Buy rating
Assuming a reasonable SAW pipes business, mid-cycle seamless profitability, and
sharp earnings growth in FY13/FY14E, we retain our positive outlook on the stock
and expect it to re-rate from the current low valuations (FY13E PE at 5.3x) from
H2FY12E. We believe the key risk is significant delays in the start of the iron
mine/pellet plant.
Valuation: maintain Buy rating and lower price target to Rs205
We reiterate our Buy rating and lower our price target from Rs283 to Rs205. Our
SOTP-based price target includes a DCF-based valuation of Rs172 for the core
business and Rs33 for investments.
Q1FY results, concall highlights
Reason for muted results: JSL’s Q1FY12 PAT at Rs828m was down
45.2% YoY and up 3.3% QoQ, in line with our estimates and lower than
consensus due to execution of the low-margin GAIL order, competitive
pressures in the DI segment (read limited pricing power and higher costs for
raw materials such as coking coal), lower other income (down 61% YoY),
and an expected higher tax rate. Sales volume at 184,800 MT (down 10.7%
YoY and 9.6% QoQ) was limited on pending dispatches.
Production was much higher at 280kMT (SAW at 186k MT, 36kMT
seamless, and 55kMT of DI).
EBITDA margin: At US$209/MT, EBITDA margin was down 21.7% YoY
and up 15.1% QoQ, better than our expectations. Seamless and LSAW
EBITDA margins were at Rs16,000/MT and Rs10,000/MT, respectively.
HSAW and DI profitability were weaker at Rs2,500/MT and Rs7,190/MT,
respectively.
Conversion expenses at US$294/MT were up 30.6% YoY and 3.2% QoQ.
Blended realisation at US$1,348/MT was up 12.0% YoY and 8.0% QoQ.
Order book eased to US$800m at end Q1FY12 and is to be executed by
March 2012, indicating a weak order accretion of US$66m. In tonnage terms,
it receded by 176,000 MT QoQ to 620,000 MT by end-Q1FY12; 65% of
their order book is exports from the Middle East, the Gulf region, and South
East Asia, China and the Far East. Management indicated it is working on
many tenders.
In Q1FY12, stock increased by Rs3.99m as some of the bare pipes were to
be converted to coated pipes and some pending dispatches.
Net standalone debt was ~Rs18bn, which also included the buyer’s credit
facility utilisation of US$215m. JSL also raised US$73.5m worth ECB, to be
repaid within six years from July 2011. We expect JSL to raise long-term
funds of ~Rs3.5bn. Management expects peak debt at ~Rs22bn. We forecast
higher debt.
JSL has adopted AS30 in the quarter for its options, currency swaps, and
forward contracts and adjusted its net worth by US$148m. It is expected to
report the balance-sheet by end Q2FY12.
Demerger of the investment undertaking called Hexa-Tradex Limited has
been filed in the Allahabad High Court, after shareholders, secured creditors,
and unsecured creditors approved the same; the company expects listing
(post court approval) by October 2012.
Capex: Both the India (Rs4bn capex) and Abu Dhabi (US$60m capex) DI
capacities are expected to start ~three months late in March/April 2012; the
mine should start by end FY12, and the drill pipe unit in the US has already
commenced. FY12 capex guidance is Rs10bn equally split between the
pipes/mines business and Jindal ITF. The pellet plant is expected to be
commissioned by December 2012.
JSL also announced the audited FY11 income statement and balance-sheet.
Working capital has increased in the form of inventory (plate and coil
inventory to reflect orders; should normalise), and higher payables. In FY11,
Jindal ITF likely reported a net loss of Rs300m. Management sales guidance
for FY12 was 1.0-1.1m MT.
JSL has leased European DI capacity of 100,000 MT at an annual rental of
Euro1.25m for five years and extendable over the same period. The rationale
for same is to build visibility in the Middle Eastern and European markets.
Lowering estimates and price target; maintain
Buy
Over the short to medium term, we expect weaker margins in DI, HSAW pipes
which we have reflected in our forecasts. Also, in line with lower order book
visibility, we have slightly tapered our volume assumptions. Further, we now
assume a higher capex for FY12, partly on account of Jindal ITF. In line with
this and slightly lower order book visibility, we lower our FY12/13 PAT
estimates by 15.7%/13.7% respectively.
We also lower our SOTP-based price target for the stock from Rs283 to
Rs205—a much larger proportion compared to the estimates downgrade. This is
because given expectations of a slight earnings decline in FY12, lower order
book visibility and some margin pressure, the core pipes + ITF business is
unlikely to command higher valuations, in our view. In line with this, we lower
our UBS-VCAM based valuation for the core pipes business to Rs172 from
Rs235. We now value the investment book (Hexa Tradex Limited) at a 60%
holding company discount (compared to 50% earlier) at Rs33. The market value
of its investment book has eased, as the stock prices of the key holding
companies have eased.
Jindal Saw’s stock has sharply corrected over the past few months
(underperformed Nifty by c20% through April-July 2011) on weaker results and
guidance for a muted Q1/Q2FY12. Post the sharp correction, the stock is trading
at a valuation of 5.3x FY13E PE, compared to a global sector median of 7.5x
and a historical median of 9.2x. While on FY12E, the stock is priced at +1
standard deviation on PE and EV/EBITDA, the stock reflects almost a
historically low range of valuations on FY13E. Based on our core pipes + mine
business valuation of Rs172, the implied PE for the stock on FY13E is c7.7x
(much lower than historical valuations).
We maintain our Buy rating on the stock based on our positive outlook for the
iron ore mine start by end FY12E and Middle East DI capacity, which has the
potential to sharply expand earnings for FY13E/FY14E. This is based on the
assumption that SAW pipe sales are likely to be flat for the next few years. The
Iron ore mine should support the improvement in DI margins and the seamless
drill pipe unit add to segment earnings, 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
Key risks for this stock are limited visibility on Saw pipes order book for FY13,
any unexpected sharp slowdown in the pipes sector, delay in the start and rampup
of iron ore mine and new DI capacity, and higher cost structure and weaker
margins in mining.
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