Stock Review: JINDAL SAW

BUSINESS:

Jindal Saw has, over the years, retained its position as the market leader in the pipe industry. It produces large diameter SAW pipes, spiral pipes and bends for the energy transportation sector. It manufactures carbon, alloy and stainless steel, seamless pipes and tubes for industrial applications and ductile iron (DI) pipes for water and sewage transportation. Its key raw materials include round steel billets, hot roll coils, steel plates, pig iron and scrap. It currently operates at a capacity of 2.2 MT, of which 300,000 tonnes are from overseas operations. Since it is present across various geographies, it is in a good position to capture growth opportunities across developed and developing economies. The company's current order book stands at 4,000 crore, with about 50% exposure to overseas orders.

EXPANSION:

For the year 2012, the company plans to expand the capacity of its DI division to 200,000 tonnes in India and 300,000 tonnes in Abu Dhabi. It has also planned the construction of a pellet plant with a capacity of 1.2 tonnes.

FINANCIALS:

On a CAGR basis, its sales have grown 78% while net profit has grown 62% over the past four years. In the third quarter ended December 31, 2010, the company posted a 27% drop in net profit, while sales fell 22%. This was mainly on account of lower SAW pipe sales due to delays in certain projects and an extended monsoon. However, this is likely to change given a renewed traction in demand. During the quarter, the company bagged two large orders of 165,000 tonnes and 90,000 tonnes from Australia and Myanmar, respectively.

VALUATIONS:

The stock has gained 8.1% in the past 12 months while the returns on the Sensex were 9.7%. It earned 20% return on capital and 17% on equity in FY10. At 214, the stock traders at 10.6 times its trailing 12-month trailing PE and an EV/EBITDA of 6.6 times.

INVESTMENT RATIONALE

Globally, the pipes sector is expected to grow from $15-17 billion to around $80 billion over the next five years. Since Jindal Saw occupies a significant market
share, the growth potential is huge. At 58% of revenue, raw material cost plays a crucial role in the sector.

   To offset rising iron ore prices burden, Jindal Saw has recently signed an agreement with the Rajasthan government to mine ore, giving it an advantage over peers. This is likely to improve its margins in future.

   The company is virtually debt free with a debt/equity ratio of 0.3x. The stock offers a good investment opportunity for investors who wish to take advantage of an undervalued sector, which is on the brink of massive growth.