Stock Fundamentals

Jindal SAW: Sell

Adarsh Gopalakrishnan | Updated on March 12, 2018

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Jindsaw

Welded pipe supply glut and input cost pressures pose a challenge for Jindal SAW.



Investors should sell their shares in pipe producer, Jindal SAW, given that profitability in the sector is hampered by overcapacity. At the current market price of Rs 172, Jindal SAW trades at 18 times the trailing 12-month earnings. Given the company has few advantages over peers in terms of input costs, the premium over Maharashtra Seamless, Welspun Corp and Man Industries is unjustified.

The welded pipe supply glut squarely leaves pricing power in the hands of the buyer. Couple this with input cost pressures resulting from the shortening steel cycle and it makes for a challenging environment for pipe makers. The company has run up 32 per cent in three months, which more than factors in the gains to be had from a strengthening rupee.

Jindal SAW's core business is making a range of steel pipes used in the transportation of oil, gas and water.

The broad product mix was supposed to be a hedge against the concentration risk inherent in pure play companies operating in the individual segments. But as it has panned out, the company's broad-mix has not provided the intended hedge from competition and slow-growth. Utilisation rates remain well below the 45 per cent mark which is in line with peers.

During the last five years, several pipe players upped capacity two-three fold in an effort to cater to anticipated growth from infrastructure and oil spending. But the anticipated infrastructure spending increases during the duration have been lacklustre. This, together with increasingly volatile input costs, have only served to shorten order books.

The company's order book of around Rs 3,500 crore provides revenue-visibility for three quarters. As a consequence of heavy competition among capacity-laden players over the last few quarters, order book growth has come at the cost of operating margins.

HOW SALES FARED

Jindal SAW's net sales grew by 22 per cent to Rs 3672 crore during the nine-months ended December 2011 (it had posted negative growth in the nine months period a year ago). This was on account of higher steel prices which the company bases its own product prices.

Overall, expenses soared by 40 per cent, hurting operating margins which slipped by eight percentage points to 10.5 per cent. Net profits, excluding a Rs 80-crore exceptional loss (due to forex), slipped by forty per cent to Rs 230 crore.   Record levels of oil exploration over the last year are expected to translate into spending on oil and gas transportation infrastructure over the next three years. Global competition is likely to keep a tight check on pricing power though.

Much like the last one year, pipe producer's attempts to fill their order books are likely to come at the heavy expense of margins. Further, barring the seamless category, Jindal SAW has heavy domestic competition on both welded and ductile iron production fronts.

Continued delays in commissioning iron ore mines in Rajasthan have done little to alleviate raw material cost pressures. Similarly, metallurgical coal prices may also remain a pressure point in the input costs.

The company is working on further capacity additions of a DI facility in West Asia and a seamless facility in the US. These additions are unlikely to hurt the balance-sheet, given debt-equity levels of 0.7. However, both the additions are unlikely to provide the serious boost needed for flagging margins in the domestic operations.

Published on March 24, 2012

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