| Summary of Contents STOCK IDEA Jindal Saw
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs830
Current market price: Rs635 Opportunities in the pipeline Key points - De-risked business model: Jindal Saw Ltd (JSL), the largest pipe manufacturer in the country, is expected to make the most of a huge opportunity in the pipe sector due a global surge in E&P activities and a strong domestic demand. JSL is present in almost all pipe segments, which makes it a de-risked and strong play on the booming Indian pipe sector.
- Strong order book: It enjoys a strong order book of $700 million, ie almost 1.1x its FY2006 sales from Indian operations. Executable by May 2008 this strong order book and the buoyancy in the pipe industry provide good visibility to its future earnings.
- Margin expansion: We expect a sharp improvement in the margins of JSL going forward due to the sell-off of its US business (which was less profitable), better product mix in favour of seamless and ductile iron pipes, and greater operating efficiencies. The OPM of the company is expected to improve from 10.6% in FY2006 to 15.2% in FY2009.
- US sell-off positive: We regard the sell-off of the US operations as a positive for the company, since its lower margin was dragging the company's overall profitability. Moreover, JSL has been able to get a good price from the stake sale and the transaction would lead to a post-tax inflow of $275 million. The company would utilise part of this to repay some amount of debt and expand its capacity.
- Attractive valuations: Considering its strong growth potential, strong improvement in its margin and the buoyancy in the pipe segment, we believe the stock is trading at very attractive valuations. We expect the profits of the company to grow at a CAGR of 40% over FY2006-09. At the current market price of Rs635, the stock is discounting its FY2009E earnings by 7.6x and is available at an EV/EBIDTA of 3.6x, which is lower than that of its peers. We, therefore, recommend a Buy on JSL with a price target of Rs830.
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