Pipe maker Jindal SAW Ltd’s shares may have rebounded smartly from their recent lows, but are still 85% lower compared with the highs in January last year. The turnaround in the company’s business fundamentals is equally dramatic.
The company is a leading manufacturer of submerged arc welded (SAW) pipes used in the transportation of oil and gas. In the first half of last year, prices of SAW pipes had been rising and contracts were coming in thick and fast, thanks to soaring crude prices.
But with the sharp correction in crude, energy firms have been postponing expansion contracts. While prices for Jindal SAW’s pipes have corrected, the more critical issue is that the firm’s order book has drop-ped from $1 billion (Rs5,100 crore) to $840 million.
In the December quarter, revenues increased by 4.2% sequentially to Rs1,548 crore, while pre-tax profit fell by 13.5%. A report by Sharekhan research points out that operating margin fell last quarter owing to an order from Cairn Energy which was taken at lower margins.
The order book of $840 million is executable by November this year, giving rather low revenue visibility. Analysts expect price cuts by pipe makers to fuel demand. This could work since oil companies have been adopting a wait-and-watch approach, not only because of the fall in crude prices but also because prices of SAW pipes hadn’t corrected adequately. While prices have already fallen, a further correction may give oil firms comfort because of relatively low project cost. But, clearly, profits are expected to be under pressure as a result.
The company reported consolidated earnings per share of around Rs60 for the year ended December, which results in a price-earnings multiple of three times past earnings. Sharekhan expects earnings to grow this calendar year, and based on its estimated earnings per share of Rs79.30, the stock trades at just?2.25?times?2009?earnings.
But given the turn of events, earnings may not do as well as forecast. Even then, valuations are attractive, although in the current environment that is no guarantee there will be many takers for the stock.
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