Jindal Saw - from Khandwala Securities
CMP: INR 620 Target Price: INR 813 (12-Months) BUY
Investment Arguments: Jindal SAW Limited (JSL) is a part of USD 6 billion Jindal Group. The company is into manufacturing and marketing of submerged arc welded (SAW) pipes both in spiral and longitudinal varieties, seamless pipes and ductile iron pipes.
1 Largest domestic player: The Company is the largest pipe producer in India with capacity of 1.25 million tonne pipes annually. Its SAW pipes division, Seamless pipes division and Ductile iron pipes division have a capacity of 950,000 tonne, 100,000 tonne and 200,000 tonne respectively.
2 Expansion plans: JSL would add about 200,000 tonne of spiral pipe capacity by March 2008 for catering to escalating oil & gas as well as water transportation sectors. The company would increase its seamless pipe capacity from about 100,000 tonne to 250,000 tonne by June 2008. The company is also putting 15 MW power plant based on waste gases, which would improve its profitability.
3 Improving utilization: The current capacity utilization for pipe plants for the last financial year stood at 46%. There is further scope of improving utilization, which would improve the volume going forward. However, in the pipeline industry, capacity utilization often depends on the thickness and diameter of the pipes being made, which means that achieving 100% capacity utilization is rather unlikely for any company.
4 Divesting US interest: The Company has recently divested its minority interest in US operations as the company want to focus on pipe business only. This divestment will fetch JSL post tax cash flow of over Rs.8,400 million (USD 200 million). JSL will gradually invest the funds for creation of additional world-class facilities along with modernization of existing facilities for improving the efficiency. This would also help the company to improve its EBITDA margin.
5 Strong Order book: The company has an order book of Rs.28,700 million (USD 700 million) for Indian operation (excluding US order book), which is going to be executed in this current financial year. The company is also expected to receive large amount of orders from upcoming oil and gas projects in India as well as abroad as cost of conversion in India is approximately USD 50/tonne vs. USD 90-110/tonne for overseas competitors.
6 High entry barriers for LSAW: The Company is pre-qualified by American Petroleum Institute (API) and all oil and gas major for providing LSAW (longitudinal submerged arc welded), where pre-qualification process could take 2-4 years.
Valuations: At the current price of Rs. 620, JSL is trading at a P/E multiple of 9.3x and 6.2x for FY2008E and FY2009E earnings respectively. Considering the company as specialize pipe producer, we value company’s business at Rs.706, which implies a P/E of 7x 2009E earning. Apart from core business, JSL has investments in group companies, which works out to be Rs.153 per share. In view of steel businesses and group companies, we have provided 30% discounted to above value at Rs.107 per share. Our target of Rs.813 represents 31% return from the current levels.
