Jindal Saw
Full of energy
The largest pipe manufacturer in the country, is expected to make the most of a huge opportunity in the pipe sector due to surge in domestic and export demand for oil and gas pipelines
| Buy | Jindal Saw |
| BSE Code | 500378 |
| NSE Code | JINDALSAW |
| Bloomberg | JSAW@IN |
| Reuter | SAWP.BO |
| 52-week High/Low | Rs 941 / Rs 350 |
| Current Price | Rs 846 (as on 30th November 2007) |
Jindal Saw (JSL) is the largest pipe manufacturer in the country. The company offers total pipe solutions – Lsaw, seamless, DI and Hsaw pipes under one umbrella. Its business model mitigates risk of a slowdown in any of its business segments. Its diversified multi-product, multi-location strategy provides it with a resilient business model.
Set to avail of the strong global and domestic demand for pipes
Given the rising demand for crude and the resulting upsurge in the fuel's prices, exploration and production (E&P) activities have received a major boost globally in the past few years. Worldwide, plans are afoot to lay down more than 240,000 kilometre of pipelines in the next few years. Bulk of this demand is accruing from the USA, the Middle East and Asia. Even the domestic pipe market continues to grow at a rapid pace, given the sharp rise in E&P activities and under-penetration of pipe infrastructure in the country. The penetration of pipe infrastructure in India is just about 33% compared with 59% of the USA and about 75% of France.
India currently has an oil and gas pipeline network of about 26,000 kilometre. Considering the already announced plans, there would be an addition of almost 18,000 kilometre of pipelines in the next four to five years. GAIL India itself has line up a capital expenditure plan of Rs 18000 crore and would be almost doubling its existing pipe network of 5,400 kilometre while Reliance Industries would be adding 5,000 kilometre of pipeline in the next five years. Also, there exists huge potential in the water transportation segment, which is expected to witness a strong growth too, considering the government's thrust on improving the country's water infrastructure.
Global demand for linepipes over the next five years is estimated at 60m ton (211,042km). This translates into a US$60b opportunity for Lsaw and Hsaw pipes. The global triggers being Rising crude prices and oil shortages, Rising demand for gas, Need to connect marginal oil fields with main hubs, Increase in refining capacity, Need to create water transport infrastructure, Cost effective and eco-friendly mode of transportation.
Indian companies like Jindal Saw can be expected to avail of this huge opportunity as Indian companies have Significant freight advantage and cheap labour.
On the domestic front, India’s minuscule linepipe network of about 18,500km, chiefly in the western and northeastern regions, for transporting crude oil, refined products and gas, compares poorly with that of France (1,70,000 km network) and the US (3,29,600 km). Merely 32% of the total petroleum products made in India are transported via linepipes. This is bound to change. Crisil, an independent research house, expects investment up to Rs 31700 crore in the Indian linepipe infrastructure over the next 3-4 years. Pipes alone would constitute about 75% of this cost, translating into an opportunity of about Rs 22800 crore.
Strong order book
JSL is sitting on a strong order book of Rs 28.8 billion ($700 million), which is executable in the next eight to nine months. Out of this, about $525 million pertains to the LSAW segment, $75 million to the HSAW segment, $60 million to the seamless pipes segment and $40 million to the DI/CI segment. The company has also participated in bids worth Rs75b (US$1.8b), which would ensure continuous order flow.
Sold off US operations, which had low margins
JSL had, in August 2007, sold off its investment in the US business. US revenues accounted for about 36% of its total FY2006 revenues for the company. The US business had a capacity to manufacture 1.2mmtpa plates and 0.5mmtpa pipes. The US operations were less profitable as compared with its Indian operations. This was because of lower efficiencies and lack of modernisation in plants. The sell-off of the minority stake in the US subsidiary is a positive move for the company, as it released cash from less profitably overseas capacity for expanding/acquiring more profitable Indian capacity.
The transaction will yield post tax cash inflow of exceeding USD 200 million against a nominal initial equity investment. The funds inflow will add significant value to JSL business. JSL will gradually invest the funds for creation of additional world class facilities, investment in new business opportunities and for modernization of existing facilities, wherever required. Pending deployment of the fluids, JSL will de-leverage its balance sheet resulting in reduction in finance costs and improvement in credit profile. Further, the divestment will also reduce the investments in working capital.
Capex to cater to the strong demand
Anticipating substantial worldwide demand for pipes, the company has built in adequate capacities in all its product categories. It is also undertaking a capacity expansion exercise. The company would be expanding its current capacity of 1.25mmtpa by another 0.7mmtpa (58%) to 1.95mmtpa over the next two years. It plans to spend approximately Rs 700 crore towards capacity expansions. Further, the company would be spending close to Rs 75 crore for the installation of a waste heat recovery power plant. Possible acquisition also can not be ruled out. The expansion as well as any acquistion will be financed from the proceeds from sale of the US operations.
This will enable the company to grow along with buoyant growth in demand.
Impressive results for the period ended September 2007
For the quarter ended Sept'07 Jindal Saw reported a 27% rise in net sales to Rs 1428.61 crore. OPM (Operating Profit Margin) increased by 300 basis points to 11.9%. Thus operating profit stood at Rs 169.92 crore, up 70%.
PBT stood at 128.67 crore, up 90% and Net Profit attributable to equity shareholders doubled to Rs 85.29 crore.
For the 12 months ended Sept'07 Jindal Saw reported a 34% rise in net sales to Rs 5176.07 crore. OPM increased by 120 basis points to 11.8%. The resultant operating profit stood at Rs 613.07 crore, which was 50%.
PBT improved by 75% to Rs 446.64 crore and Net Profit attributable to equity shareholders was up 84% to Rs 293.43 crore.
The company is extending its year end to December 2007, thus its FY will end in December 2007 and will consist of 15 months. However the last three months of FY 07 will not include financials of US operations.
Margins will continue to improve
The company is likely to continue with its margin improvement due to the following reasons.
a) US sell-off: The US operations of the company were yielding lower margins (in the region of 8-9% against about 14-15% in its Indian operations). This was on account of a lot of inefficiencies in its manufacturing processes and lack of modernisation due to financial constraints. The sell-off of the US business would straightaway improve the overall margins of the company.
b) Better capacity utilisation: The strong demand for pipes, both globally and domestically, would trigger an overall improvement in its capacity utilisation, particularly in the DI pipes and seamless segments. This would lead to better operational leverage.
c) Setting up of a sintering facility and a CPP: Last year the company set up a sintering facility, which helped it to improve the margins of its DI pipes from about 13-14% in FY2006 to about 18% currently. Further, by December 2007 the company is installing a captive power plant (CPP), which would help it to reduce its power cost to about Rs 2 per unit, thereby improving its DI margins further.
d) Better product mix: Seamless and DI pipes enjoy higher margins as compared with the SAW pipes.
Also by setting up a waste heat recovery based captive power plant of 15MW to utilize coke oven gases (understood to have got commissioned recently) and by enhancing the production capacity of seamless division by installing the PQF mill (also recently), JSl would see its margins expanding, going forward.
Valuations are attractive
For the calendar year 2008, which will be the first full year of operations without US business, the company should be reporting an EPS of Rs 59.6, which will shoot up to Rs 89.8 in calendar year 2009. Current price of Rs 846 discounts the projected FY 2007 EPS just 14 times and FY 2009 EPS just 9.4 times.
| | 0709 (12) | 0712 (15) (P) | 0812 (12) (P) | 0912 (12) (P) |
| Net Sales | 5176.07 | 6100.37 | 3974.48 | 5464.91 |
| OPM | 11.8% | 12.0% | 15.1% | 15.9% |
| OP | 613.07 | 733.23 | 600.15 | 866.19 |
| OI | 7.34 | 9.18 | 18.85 | 17.55 |
| PBIDT | 620.41 | 742.41 | 619.00 | 883.74 |
| Interest | 115.73 | 135.50 | 83.2 | 91.52 |
| PBDT | 504.68 | 606.91 | 535.80 | 792.22 |
| Dep | 58.04 | 73.2 | 74.5 | 96.85 |
| PBT | 446.64 | 533.71 | 461.30 | 695.37 |
| Tax (incl. Pref. Dividend) | 153.21 | 183.06 | 158.22 | 238.51 |
| PAT | 293.43 | 350.64 | 303.07 | 456.86 |
| EPS (Rs)* | 57.7 | 55.1 | 59.6 | 89.8 |
| * Annualised on current equity of Rs 50.88 crore | ||||
| Jindal Saw: Results |
| | 0709(3) | 0609(3) | Var. (%) | 0709(12) | 0609(12) | Var. (%) |
| Sales | 1428.61 | 1123.4 | 27 | 5176.07 | 3855.67 | 34 |
| OPM (%) | 11.9 | 8.9 | | 11.8 | 10.6 | |
| OP | 169.92 | 99.79 | 70 | 613.07 | 409.93 | 50 |
| Other inc. | 1.92 | 16.90 | -89 | 7.34 | 23.13 | -68 |
| PBIDT | 171.84 | 116.69 | 47 | 620.41 | 433.06 | 43 |
| Interest | 28.19 | 33.85 | -17 | 115.73 | 126.16 | -8 |
| PBDT | 143.65 | 82.84 | 73 | 504.68 | 306.90 | 64 |
| Dep. | 14.98 | 15.29 | -2 | 58.04 | 51.90 | 12 |
| PBT | 128.67 | 67.55 | 90 | 446.64 | 255.00 | 75 |
| Tax | 38.60 | 19.89 | 94 | 144.14 | 87.14 | 65 |
| Net Profit | 90.07 | 47.66 | 89 | 302.50 | 167.86 | 80 |
| EO | 0.00 | -0.09 | LP | 0.00 | 8.34 | PL |
| Net Profit after EO | 90.07 | 47.57 | 89 | 302.50 | 176.20 | 72 |
| Preference dividend | 4.78 | 4.66 | 0 | 9.07 | 8.70 | 4 |
| PAT | 85.29 | 42.91 | 99 | 293.43 | 167.5 | 75 |
| EPS (Rs)* | 67.1 | 33.7 | | 57.7 | 32.9 | |
| * Annualised on current equity of Rs 50.88 crore | ||||||
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