Jindal SAW

Investors can consider buying shares in pipe-maker Jindal SAW, whose stock trades at Rs.219 which is 11 times its CY-09 earnings. The company's positives include a complete product portfolio of welded, seamless and ductile iron (DI) pipes that may enable bidding for a wide range of projects. The integrated DI production also gives an edge to the operating margins, which are higher than most peers.

Jindal SAW produces over 1.5 million tonnes of welded pipes, 250,000 tonnes of seamless pipes and 300,000 tonnes of ductile iron pipes across four locations in India. The company has worked to expand its Indian production capacity and pay back debt since selling its US' pipe and slab operations in November 2007. Production capacities across product lines are up by 50 percent since then.

The company saw its stand-alone top line grow by 13 per cent between FY-08 and FY-09, while net profits soared by 60 per cent aided by lower raw material and interest costs.

The company has aggressively moved to pare debt on its books with gross debt for the consolidated operations moving from over Rs 1,800 crore in FY-08 to Rs 1,200 crore in FY-09. The current debt-equity ratio is estimated at 0.45:1 which should provide additional scope for borrowing to operationalise iron ore mines in Rajasthan and expand the DI pipe production facility. The standalone interest coverage ratio stands at 7.3 times.

Domestic market

DI pipes are likely to be huge beneficiaries of Rs 80,000 crore urban renewal spending on water and waste management over the next five years. The company plans to add 200,000 tonnes to its current capacity of 300,000 tonnes of DI pipe capacity by June 2011. The integrated DI production facility also boasts of superior margins than its welded pipes. These margins may receive a boost with further integration using iron ore from its Rajasthan mines, which the company estimates could save it Rs 300 crore annually from the second half of 2011.

The company's order-book stands at Rs 3,500 crore, which is about 60 per cent of FY-09 sales. Since the order-book is a source of concern, the company will have to focus on volumes instead of attempting to cherry-pick high-margin projects. This will enable it to capitalise on welded pipe capacity, which is currently running at less than 50 per cent utilisation levels. Exports-to-domestic sales ratio stood at 65:35 but with a strengthening domestic market, the scales are tipping in favour of domestic sales as demand for water and sewer pipelines drive growth.

Another major driver of domestic growth is gas pipeline projects lined up by GAIL and Reliance. These projects are expected to generate demand for roughly 2.5-3 million tonnes of pipeline. A higher domestic order-book may imply lower operating profit margins.

Steel prices

Globally, Simdex estimates point to demand for 65 million tonnes of pipeline over the next five years. Jindal SAW, with its presence in welded and seamless tubes, is well positioned to bid for domestic and global projects in OCTG (Oil-Country Tubular Goods) segment.

While domestic factors may drive immediate demand, in the long run, pipe replacement demand from the US market and global oil and gas projects incentivised by higher oil prices will be significant for volume growth, considering the strong competition for domestic projects.

Jindal SAW's raw material requirements include slabs for LSAW production and coils for HSAW production. Suppliers for both include Posco of Korea, Essar of India, besides others from Ukraine and China.

Considering that global steel capacity utilisation levels remain below 80 per cent, timely supply may not be a constraint, but volatile prices most certainly are. Steel prices have been on the rise since the start of the year due to soaring raw material costs and rising demand. This poses a threat to the 17 per cent operating margin the company enjoyed in CY-09.

Operating margins went as high as 21 per cent for the quarter ended December, thanks to low raw material costs.

Operating in oil and gas industry also requires quality accreditation which the company does have thanks to a roster of clients which include GAIL, ONGC and L&T, Brechtel, Saudi Arabian Oil company and Sinopec.

The company's investments in other O. P. Jindal group companies and cash holdings are a sweetener to this stock.

via BL