Jindal Saw Ltd’s order book remains stagnant at $1 billion (Rs 4,480 crore) from a quarter ago. That wasn’t supposed to happen.
With the Brent crude staying consistently above the $100-mark, the Japanese earthquake raising questions about nuclear power and the focus on shale gas, pipe makers were supposed to see a rebound in orders. Jindal Saw, which gets half its orders from the West, was expected to benefit from the recovery in those countries as well.
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In a report published earlier this year, Religare Securities Ltd forecast that 15,000km, or $4 billion, of pipe orders will come from the domestic market alone in the next three-four years.
Sure, orders can be lumpy in the capital goods business, but those bullish predictions seem a pipe dream yet. Order inflows have not gathered enough pace.
One reason why the order book remains stagnant is because Jindal Saw’s volumes rose 14.8% from a quarter ago to 204,480 tonnes for the three months ended March; but even that rise fell short of the 225,000 tonnes it had predicted while announcing the December quarter results.
While demand is gradually growing for steel pipes, supply is gaining even faster. Notwithstanding this glut, Jindal Saw and rivals such as Welspun Corp. Ltd are planning to expand factories over the next couple of years.
While such capacity expansion with an eye on long-term demand is to be commended, it will bring pain in the next few quarters. Margins will automatically squeeze as firms bid aggressively for orders.
Consider Jindal Saw’s March quarter numbers. Overall realizations per tonne have fallen 5.2% from a quarter ago. Sure, revenue has risen 7% from a year ago, but total expenses also ballooned by nearly 24%.
The company can’t even complain too much about higher raw material expenses since it had a good inventory of semi-finished pipes, which it sold. The full impact of rising input costs—unless the current slump in commodity prices continues—will be felt in the coming quarters.
Thus, for the March quarter, earnings before interest, tax, depreciation and amortization (Ebitda) fell 39% from a year ago. In per tonne terms, Ebitda fell to Rs 8,212. That’s about 27% less than the full-year average of Rs 11,356 per tonne.
As a result, net profits, too, fell by more than half from a year ago. Disappointed investors drove down the stock by 3.24%, albeit in a weaker market. The next couple of quarters don’t look bright, with pressure on revenue and profitability; the company admitted as much in a statement.
Graphic by Sandeep Bhatnagar/Mint
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