Emkay assigns buy to Jindal Saw; target Rs 941

MUMBAI: Emkay Global Financial Services has maintained ���buy��� on Jindal SAW for a revised target price of Rs 941. The company���s Apr-Jun 2008 results were inline with the brokerage expectations. Jindal Saw has reported 34.76 per cent growth in net sales from Indian operations on year on year basis.

In Apr-Jun 2008, the company reported net turnover of Rs 1,017.5 Out of the total net revenue in Apr-Jun 2008, 59 per cent was from exports and 41 per cent was from sale in India.

EBITDA margin of the company during the quarter expanded by 337 basis points on y-o-y basis and thus stood at a firm level of 15.9 per cent. The improvement in the margin is attributed to the selling off of low margin US operation. But in the coming quarter, the margin is expected to be at a lower level of around 14.5 per cent primarily on account of lower margin contributed by fixed price contracts on DI pipes. The substantial rise in
prices of coal is expected to impact the margins on DI pipes.

Net profit remained strong at Rs 70.2 crore with profit after tax margin of 6.9 per cent. The profit after tax margin declined against Jan-Mar 2008 on account of higher financial expenses of Rs 55 crore. It included Rs 12 crore of translation losses on FCCB and Rs 17-18 crore of losses on options and forward contracts.

Jindal SAW has a strong order book of USD 1.12 billion which includes over 55 per cent of exports orders. These orders are to be executed by April/May 2009. Out of the total USD 1.12 billion, USD 760 million are of large diameter pipes, USD 170 million are of DI Pipes and USD 160 million are of Seamless pipes.

The capital expenditure plans are running as per schedule. Installation of PQF mill and other equipments in Seamless plant will be completed by September/October 2008. The commercial production in power plant began in phases. The additional 200,000 MTPA of LSAW and 350,000 MTPA of HSAW facilities are expected to start trail run in 2008. The company is incurring a total of USD 200 million on these plans for which the funds are already tied up.

The management has not given any update on new businesses. As per previous guidance, the company expects Rs 100 crore of revenue from waterways business and from Jindal Water Infrastructure, the management expects to execute orders upto Rs 325 crore in this year.

Emkay believes that the new ventures would strengthen the topline and bottomline and earning per share of Jindal Saw. The new businesses would diversify its business model by de-risking it from raw material price volatility and currency volatility. Currently Emkay has not included any contribution from the new ventures in their estimates.

Emkay has already factored in, the impact of rise in important raw material prices like coal, iron ore, etc in their estimates for CY08E and CY09E. On the basis of CY08E and CY09E revised earnings per share of Rs 48.5 and Rs 79.1, the scrip is trading at an attractive PE multiple of 11.6x and 7.1x respectively.

The target price includes Rs 145 per share as value of quoted investment (at 50% discount to its market value) and Rs 796. At their target price, the scrip discounts CY09E EPS of Rs 79 by 11.9x.