Pipe manufacturer Jindal Saw Ltd has announced the execution of a mining lease agreement with Rajasthan for iron ore mines in the state. The area under the lease is about 1,557ha, and initial estimates suggest the mines have reserves of around 180 million tonnes. This lease is for 30 years.
Investors have cheered the development, which will help the company go in for backward integration of its ductile iron pipes business. Jindal Saw’s stock increased by 3% to Rs195 per share on a day when broader markets were flat. In the last fiscal, which was a 15-month period for Jindal Saw, the ductile iron business contributed 26% of its revenue.
According to the company, the backward integration would result in savings of Rs3,500 per tonne on iron ore, and annual savings of Rs300 crore Ebitda (earnings before interest, tax, depreciation and amortization). The company intends to set up a beneficiation plant, which is expected to start contributing from the second half of the next fiscal year.
Analysts expect this development to add to earnings in the next fiscal. Investors can look forward to some upgrades in analysts’ earnings estimates.
Graphic: Naveen Kumar Saini / Mint
The company’s stock has underperformed the BSE-200 index of the Bombay Stock Exchange ever since it announced disappointing financial results for the quarter ended September, mainly due to lower sales. In fact, the stock has underperformed since the beginning of this fiscal year, too.
Operating revenue in the September quarter had declined by 42% year-on-year to Rs802 crore, as sales volumes fell by 20% on account of poor performance of large diameter pipes comprising longitudinal submerged arc welded (LSAW) pipes and helical submerged arc-welded (HSAW) pipes. HSAW pipes are made from hot-rolled coils welded helically, while LSAW pipes are manufactured from steel plates welded longitudinally.
Jindal Saw had maintained at the time that it could not execute significant HSAW orders during the September quarter. In the December quarter, HSAW volumes are expected to show improvement.
But this may put some pressure on the operating profit margins, as HSAW pipes are lower margin products while LSAW pipes enjoy higher margins. The backward integration plans, therefore, come as a shot in the arm at the right time for the stock.