Jindal Saw (SAWPIP) 67

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1 Result Update Rating matrix Rating : Hold Target : 72 Target Period : 12 months Potential Upside : 7% What s Changed? Target Changed from 90 to 72 EPS FY16E Changed from 17.5 to 12.6 EPS FY17E Changed from 20.6 to 17.2 Rating Unchanged Quarterly Performance Q4FY15 Q4FY14 YoY (%) Q3FY15 QoQ (%) Revenue EBITDA EBITDA (%) bps bps PAT Key Financials Crore FY14 FY15 FY16E FY17E Total Op. Income EBITDA Net Profit EPS ( ) Valuation summary FY14 FY15 FY16E FY17E P/E NA Target P/E NA EV / EBITDA P/BV RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization ( Crore) 2030 crore Total Debt (FY14) ( Crore) 7832 crore Cash and Investments (FY14) ( Crore) 639 crore EV ( Crore) 9223 crore 52 week H/L ( ) 116/53 Equity capital Face value 2 Price performance (%) Return % 1M 3M 6M 12M Jindal Saw Maharashtra Seamless Research Analyst Dewang Sanghavi dewang.sanghavi@icicisecurities.com Flattish order book; margins in line May 8, 2015 Jindal Saw (SAWPIP) 67 Jindal Saw reported a good set of Q4FY15 numbers on the back of better-than-expected pipes sales volume. Pipe sales volume for the quarter stood at ~2,63,000 tonnes, higher than our expectation of ~2,30,000 tonnes. Subsequently, the topline and EBITDA came in higher than our estimates. However, PAT came in lower than estimates on account of forex loss Standalone revenues for Q4FY15 increased 17.2% QoQ and 52.8% YoY to crore and was higher than our estimate of crore The company reported an EBITDA of crore, up 62.3% QoQ and 61.5% YoY (our estimate: crore). The EBITDA margin came in line with our estimate at 12.6% The company reported an exceptional loss of crore on account of foreign exchange loss. Subsequently, reported PAT for the quarter stood at 71.1 crore Order book remains flattish QoQ On a sequential basis, the order book of Jindal Saw has remained firm. Jindal Saw s order book at the end of Q4FY15 stood at ~US$980 million. The break-up is as under: Large diameter pipes US$630 million Ductile iron pipes US$330 million Seamless pipes US$10 million Pellets US$10 million Orders for large diameter pipes are slated to be executed by March-June 2016 while for ductile iron pipes, the same is slated to be executed in the next months. The company has participated in various bids and is likely to get orders in phases. The current order book includes export operations of ~35%. Major export orders are from the Middle East, the Gulf region, South East Asia and the Far East. The order book of ductile iron pipes is only for Indian facilities. The order book of UAE facilities (~125,000 tonnes - valued at US$135 million) is in addition to the above order book of US$330 million. Utilisation level of saw pipe segment, key monitorable, going forward Over the last couple of years, the saw pipe segment has been operating at muted capacity utilisation levels. However, with the improvement in the economic scenario, the capacity utilisation level is likely to improve, going forward. While the current order book of the large diameter pipe segment (LSAW and HSAW) stands at ~5,50,000 tonnes, the pace of execution of the order book is likely to be a key monitorable, going forward. The management expects operations in this segment to get ramped up gradually in line with the orders in hand. Firm order book augurs well, higher debt continues to weigh! Going forward, we have modelled sales volume of 1.08 million tonne (MT) for FY16E and of 1.19 MT for FY17E. Even though a firm order book augurs well for the company, we have a cautious view on the back of elevated debt levels, which are likely to rise further on account of planned capex. We have valued the stock at 6x FY17E EV/EBITDA. Subsequently, we have arrived at a target price of 72 and assigned a HOLD recommendation to the stock. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Standalone Operations Q4FY15 Q4FY15E Q4FY14 YoY (%) Q3FY15 QoQ (%) Comments Total Operating Income 2, , , , Topline came in higher than our estimate on the back of better-thanexpected sales volume Other Income Other income came in higher than our estimate Employee Expenses Raw Material Expenses 1, , Other Expenses EBITDA On the back of higher sales volume EBITDA came in higher than our estimate EBITDA Margin (%) bps bps EBITDA margin came in line with our estimate Depreciation Interest Interest expense came in higher than our estimate Exceptional Item Forex loss adversely impacted reported PAT PBT Total Tax PAT Reported PAT came in lower than our estimate on the back of forex loss Key Metrics Pipe Sales volume (in tonne) 263, , , , Assumptions Current Earlier Comments FY16E FY17E FY16E FY17E Pipe Sales volume (in lakh tonne) Marginally downward revised sales volume Pellet external sales (in lakh tonne) Pellet utilisation maintained ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Utilisation level of saw pipe segment, key monitorable, going forward Over the last couple of years, the saw pipe segment has been operating at muted capacity utilisation levels. However, with the improvement in economic scenario, the capacity utilisation level is likely to improve, going forward. While the current order book of large diameter pipe segment (LSAW and HSAW) stands at ~ tonnes, the pace of execution of the order book is likely to be a key monitorable, going forward. The management expects operations in this segment to get ramped up gradually in line with the orders in hand. Over a medium to longer term horizon, demand and demand drivers are likely to improve, auguring well for the company. Potential opportunities are expected primarily from the implementation of new pipeline projects in the coming years, resurgent growth of the US economy and increased demand from natural gas exploration operations. On the domestic front, specific and renewed focus of the government on infrastructure, including the hydrocarbon pipeline as well as urbanisation, is likely to accelerate demand further. Net debt at consolidated level to decline; albeit gradually As of March 31, 2014, the net debt of the company (standalone) was ~ 4098 crore (~US$655 million) excluding CCDs of 241 crore but including ECB/long term and funds working capital & other unsecured loans. The total working capital (including buyer s credit of ~ 1180 crore) was ~ 1999 crore. Total term loans (rupee loan/rupee NCD/ECB, etc.) outstanding were ~ 2099 crore. Consolidated net debt of the company as on March 31, 2014 stands at ~ 7200 crore. Debt in Jindal ITF stands at ~ crore. Exhibit 1: Net debt levels at consolidated level to decline; albeit gradually ( crore) FY13 FY14 FY15 FY16E FY17E Net Debt ICICI Securities Ltd Retail Equity Research Page 3

4 Key takeaways from conference call and other highlights In terms of geographical break-up of pipes, sales in India contributed 60% while sales outside India (exports) contributed the balance 40% On total sales of pipes and pig iron, blended EBITDA/tonne for the quarter came in at ~ 8500/tonne vis-à-vis 8600/tonne for Q3FY15. The EBITDA/tonne for pellets came in at ~ 1700/tonne As on date, consolidated debt on the books stands at ~ 7200 crore During FY15, Jindal Saw has produced ~3.80 lakh tonnes of LSAW and HSAW pipes (previous year ~2.90 lakh tonnes) The company produced ~3.18 lakh tonnes of DI pipes in FY15 as compared to 2.73 lakh tonnes in FY14 indicating an increase of ~16.5% The management expects a further improvement in production of DI pipes in FY16 backed by order book of ~4 lakh tonnes. Further, the company is improving the finishing line capacity, which will convert pig iron to pipes The demand for seamless pipes and tubes has remained subdued in line with the weaker trend in the oil & gas market. Falling oil prices may continue to have an adverse impact on OCTG product demand. The company is focusing on enlarging the product range, which will take care of the challenging environment. The production of seamless pipes in FY15 was ~1.28 lakh tonnes, which was at a similar level in FY14 Operations in the pellet plant remained stable while the company produced ~11.99 lakh tonnes of pellets in FY15 (previous year 7.19 lakh tonnes) The company has not undertaken any new major project initiative during the quarter. It is in the process of improvising the productivity of various facilities, de-bottlenecking and introducing value added products, especially in the seamless segment. The capacity of beneficiation and other processes is being enhanced to efficiently process the low quality of the iron ore and, thereby, increase the production of pellet with full reliance on the internally beneficiated iron ore concentrate The DI pipe facility in Abu Dhabi is currently producing more than tonnes pipes per month while the management has guided for a volume of ~ tonnes Jindal ITF has diverse business interests in logistics, infrastructure and waterways sectors. With a view to achieve better management focus, synergies and business strategies to develop the growth potential in relevant business markets, a composite scheme of arrangement between JITF and wholly owned subsidiaries of the company, viz. JITF Urban and JITF Shipyards has been filed before honourable the High Court of Allahabad (UP) providing for transfer of the infrastructure business and waterways of JITF to JITD Urban and JITF Shipyards, respectively, and capital reorganisation of all three companies. The scheme is currently pending for approval ICICI Securities Ltd Retail Equity Research Page 4

5 Jindal Tubular US LLC HSAW facility in US On August 29, 2014, the company through its offshore subsidiary viz. Jindal Tubular US LLC (JTUL) has substantially acquired all assets of PSL North America LLC at ~US$105 million through an order passed by the United States Bankruptcy Court for the District of Delaware on August 15, This is an HSAW facility capable of producing hydrocarbon and water pipes with a total name plate capacity of ~ tonnes per annum. JTUL has completed ongoing capital expenditure for enhancing the capability to produce higher diameter water pipes. The facility has been tested and approved by the water authority. JTUL has started participating in tenders for oil, gas and water business opportunities. The management expects to secure orders for all verticals in the US. There are no repayments of any long term loans until the end of FY19. Issue of shares to promoters on preferential basis During the quarter ended December 31, 2014, the Board of Directors of Jindal Saw and shareholders had approved issuance of million compulsorily convertible debentures (CCD) on a preferential basis to one of the promoter s group company. Each CCD shall be converted into one equity share of the face value of 2/- of the company at a minimum price of 81.1 (Including a premium of 79.1) per equity share in accordance with the Sebi ICDR regulations ( Issue price ) The entire amount ( crore) was received within the stipulated time-frame and CCDs were allotted in time. The introduction of capital will facilitate the build up of long term capital of the company, which shall be helpful for supporting various business requirements. Valuation Going forward, we have modelled sales volume of 1.08 million tonne (MT) for FY16E and of 1.19 MT for FY17E. Even though a firm order book augurs well for the company, we have a cautious view on the back of elevated debt levels, which are likely to increase further on account of planned capex. We have valued the stock at 6x FY17E EV/EBITDA. Subsequently, we have arrived at a target price of 72 and assigned a HOLD recommendation to the stock. Exhibit 2: Valuation matrix Sales Sales Growth EPS EPS Growth PE EV/EBITDA RoNW RoCE ( Crore) YoY (%) ( ) YoY (%) (x) (x) (%) (%) FY14P NA FY15E LP FY16E FY17E ICICI Securities Ltd Retail Equity Research Page 5

6 Company snapshot Target Price: Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Jan-08 The company receives an 800 crore order from Cairn Energy India for supply of line pipes, tracer tube, insulation and bends for Barmer Salaya pipeline project of Cairn. The pipeline project, from Mangala oilfield to Salaya, will cover over 600 km with a weight of about one lakh tonne May-08 The company allots 26,00,000 warrants and 27,30, % compulsorily convertible debentures (CCDs), both convertible into equity shares of the company at 819 each to Anbeeco Investments Ltd, Cyprus. Anbeeco Investments belongs to the promoter group of Jindal Saw Apr-09 Anbeeco Investments Ltd declines to convert the warrants allocated to it by the company. Consequently, the advance amount 10% of per warrant stands forfeited in accordance with Sebi guidelines Jun-09 The company announces the receipt of orders/letter of award (LoA) aggregating to more than 1000 crore (US$210 million) for supply of large diameter pipes and ductile iron pipes in domestic and export markets. The total order book now stands at US$750 million (approximately 3600 crore) Jan-11 The company executes a mining lease agreement for 30 years with the Rajasthan Government for iron ore mines in the state. The mines have ~180 MT of reserves of various categories of iron ore, based on initial estimates Jul-11 The company makes full and final payment towards redemption of foreign currency convertible bonds (FCCBs) outstanding as on date Nov-11 The company announces the receipt of order/letter of award aggregating to ~ 1000 crore for supply of large diameter pipes (L saw pipes) and ductile iron pipes for various export markets. These orders are scheduled to be executed gradually in the next 12 months Jan-13 Morgan Stanley raises its stake in the company to about 5%, following additional 2.44% stake buying through open markets May-13 The company reports dismal results for FY13. Reports a loss at the PAT level amounting to 19 crore vis-à-vis 189 crore profit in FY12 Jul-13 The company announces the appointment of Neeraj Kumar as Group Chief Executive Officer & wholetime director with effect from July 1, Mr Kumar has earlier worked with Jindal Saw Ltd as Director (Finance) & CFO from 2002 to 2006 Top 10 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Jindal Organisation 31-Dec Sigmatech, Inc. 31/Dec/ Reliance Capital Asset Management Ltd. 31-Dec Four Seasons Investments, Ltd. 25/Mar/ HSZ (Hong Kong) Limited 31-Dec Dimensional Fund Advisors, L.P. 31/Mar/ Reliance Life Insurance Company Limited 31-Dec LIC Nomura Mutual Fund Asset Management Company L 31/Dec/ Canara Robeco Asset Management Company Ltd. 31-Mar Van Eck Associates Corporation 30/Apr/ Source: Reuters, ICICIdirect.com Research Recent Activity Buys (in %) Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Promoter FII DII Others Sells Investor name Value Shares Investor name Value Shares Four Seasons Investments, Ltd m 13.81m AllianceBernstein Hong Kong Ltd m -1.91m Reliance Capital Asset Management Ltd. 0.88m 0.59m Reliance Life Insurance Company Limited -1.36m -0.92m DSP BlackRock Investment Managers Pvt. Ltd. 0.58m 0.55m Mellon Capital Management Corporation -0.80m -0.78m Deutsche Asset Management (Asia) Ltd. 0.42m 0.30m Deutsche Asset & Wealth Management Investment GmbH -0.65m -0.50m Canara Robeco Asset Management Company Ltd. 0.29m 0.28m Neuflize OBC Investissements -0.58m -0.45m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 6

7 Financial summary (Consolidated) Profit and loss statement ( crore) (Year-end March) FY14 FY15 FY16E FY17E Net Sales Other Operating Income Total Operating Income Raw Material Expenses Employee Expenses Other expenses Total Operating Expend EBITDA Growth (%) Depreciation Interest Other Income PBT before EI Exceptional Item (EI) PBT After EI Total Tax Net Profit Before EO (100.2) EO (net of tax) Minorites, Associates,etc PAT After MI before EO Balance sheet ( crore) (Year-end March) FY14 FY15 FY16E FY17E Liabilities Equity Capital Reserve and Surplus Total Shareholders funds Total Debt Deferred Tax Liability Minority Interest / Others Total Liabilities Assets Gross Block Less: Acc Depreciation Net Block Capital WIP Total Fixed Assets Goodwill Investments Inventory Debtors Loans and Advances other assets Cash Total Current Assets Current Liabilities Provisions Current Liabilities & Prov Net Current Assets Application of Funds Cash flow statement ( crore) (Year-end March) FY14 FY15 FY16E FY17E Profit after Tax (85.6) Add: Depreciation (Inc)/dec in Current Assets (400.6) (1,630.8) (760.2) (1,262.4) Inc/(dec) in CL and Provisions (123.6) Others 51.1 (7.2) - - CF from operating activities (237.4) (199.6) (Inc)/dec in Investments 79.0 (232.3) (20.0) (20.0) (Inc)/dec in Fixed Assets (850.3) (1,302.5) (550.0) Others (14.7) CF from investing activities (786.0) (1,534.8) (570.0) Issue/(Buy back) of Equity Inc/(dec) in loan funds ,869.0 (300.0) (300.0) Dividend paid & dividend tax (32.3) (32.3) (32.3) (32.3) Inc/(dec) in Share Cap Others (40.2) (3.5) - - CF from financing activities ,942.1 (320.0) (317.6) Net Cash flow (147.7) (154.9) 50.9 Opening Cash Closing Cash Key ratios (Year-end March) FY14 FY15 FY16E FY17E Per share data ( ) EPS (3.1) Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income Reported PAT Margin (1.3) Inventory days Debtor days Creditor days Return Ratios (%) RoE (2.4) RoCE RoIC Valuation Ratios (x) P/E NA EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 7

8 ICICIdirect.com coverage universe (Pipes) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) ROCE(%) ROE(%) Sector/Company ( ) TP ( ) Rating ( Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Jindal Saw Hold Maharashtra Seamless Buy ICICI Securities Ltd Retail Equity Research Page 8

9 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 9

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