The Hindu Business Line : Jindal Saw: Hold

With a view to restructuring its capital and lowering the component of high-cost debt, Jindal Saw recently completed a $40-mn ECB issue. However, the risk stems from the possibility of pressure on margins due to higher input costs.

Mr P. R. Jindal, Chairman of Jindal Saw. Reaping gains from investments in oil pipelines and water-supply networks.

SHAREHOLDERS can consider retaining their holdings in the Jindal Saw stock. Despite the stock's sharp run up over the last three months, we believe there is scope for appreciation in the medium term. A diversified product mix, robust demand from user segments, improved financial profile and a strong order book position augur well for its growth.

At its current price, the stock trades at about 13 times its expected FY 05 earnings. Although it is richly valued, we believe that the premium is justified considering its positioning in the growing sector of saw pipes used in energy transportation.

Jindal Saw manufactures submerged arc welded pipes, (for high-pressure applications used in the oil and gas sector) seamless tubes and thick-walled pipes. Over the past few years, there has been a healthy trend in its performance.

Revenues have grown at a CAGR of about 26 per cent, while post-tax profits have recorded a growth of about 15 per cent over the last five years.

It has recently commissioned its fully integrated ductile iron (DI) and cast iron (CI) pipes facility at Mundra in Gujarat. These pipes, which are used in water and waste transportation business, are likely to improve their volume growth over the medium term and operating margins, in the initial phase.

Further, entry into DI/CI pipes diversifies the risk of a single product and project-driven business model.

The oil and gas industry, which is on a massive capacity expansion drive, offers good prospects for company's business. Higher demand from energy and social infrastructure sectors is likely to translate into higher volumes and better revenues for the company.

While the domestic demand is expected to come from new capacities, overseas demand-particularly in the US (where Jindal Saw has one of its Strategic Business Unit) is likely to be driven by the replacement and repair market, as fresh projects are difficult to come by.

Limited competition operating at nearly full capacity offers attractive opportunity to serve this market.

The company's robust order book in excess of Rs 1,000 cr, equivalent to about 50 per cent of its expected FY 05 sales is also a positive. It has a wide clientele, which include HPCL, BPCL, ONGC, GAIL, Reliance Petroleum and Indian Oil among others. It derives about 35 per cent of its revenues from exports to West Asia, Europe and Africa and has clients such as Bechtel, Shell, China National Petroleum Company, Qatar Petroleum to name a few.

With a view to restructuring its capital and lowering the component of high-cost debt, Jindal Saw recently completed a $40 mn ECB issue. Its proposal to raise another $75 mn through FCCB/ADR/GDR is expected to bring down the gearing level to about 50 per cent from the current level of about 70 per cent.

However, risk element stems from the possibility of pressure on margins due to higher input costs. Steel billets and rounds are the major raw materials, which constitute about 60-65 per cent of company's sales value.

Steel prices, after cooling off in the last few months are showing signs of firming up, which would be a major concern for the company.

Though the order book appears comfortable, given the long sales cycle in procuring orders, the possibility of volatility in earnings cannot be ruled out. Further, as the company derives over 30 per cent of its revenues through exports, exchange-related risks may also be a concern.

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