Stock Review: JINDAL SAW

 

The Jindal Saw scrip ended 3.3% lower on Thursday as its March 2011 quarter numbers turned out to be dismal. Though the company's order book has been growing, its inability to execute orders is reflected in its numbers. Moreover, high raw material and freight costs eroded its margins — a scenario which is unlikely to improve in the near future.

Jindal Saw's sales growth was a tiny 6% year-on-year to . 1,155.4 crore during the March quarter. In addition, higher steel, fuel and shipping costs caused a fall in margins to the tune of 1200 basis points to 15%. With realisations falling by 37% over the year-ago period, net profit stood at . 80.2 crore, down 56%.

The company is in the process of increasing its ductile iron capacity by another 2 lakh MTPA and is expected to commence operations from this expansion before the end of FY12. The capital expenditure for this plant, which will have an additional waste heat recovery-based power project and a coke oven, is expected to be approximately . 350 crore. It is also expected to start operations at its Rajasthan iron ore mine before the end of the next fiscal.

These backward integration projects will push up the company's margins in the coming years. The company's delayed drill pipe project in the US is expected to commence trial runs by end-June 2011.

To capture the overseas market better, the company is expanding operations in Saudi Arabia by setting up a 3 lakh MTPA ductile iron pipe plant through a joint venture.

Currently, the company earns over two-third of its revenue from India while the rest comes from international markets. The company's order book crossed the $1-billion mark as on April 30, 2011, more than half of which is from overseas clients. Orders are to be executed within FY12 itself. The order book is slightly over its annual revenue for FY11.

At . 183.35, the stock trades at 11.1 times its trailing 12-month earnings, which is not expensive. However, given the rising input costs, increasing interest costs and depressed margins, it would be prudent to stay away from the scrip for the time being.