Jindal Saw Ltd’s (JSL) Q1CY2009 numbers are ahead of our expectations on the back of a strong top line. The company’s revenues grew by a brilliant 53.7% year-on-year (y-o-y) to Rs1,463.6 crore during the quarter.
The operating profit margin (OPM) was lower on account of the greater contribution of Cairn Energy India’s order, which has a lower margin.
Consequently, the OPM stood at 12.6% during the quarter as against 15.4% in Q1CY2008. The OPM was more or less similar sequentially, as the operating profit grew by 25.9% yoy to Rs184.6 crore.
A higher interest charge (on account of a Rs9.5-crore cash loss due to foreign currency derivatives) and a higher depreciation charge led to a 14.6% growth in the profits to Rs97.8 crore.
We expect the challenging times to continue for the company and the multiple concerns would remain as a hangover on the stock.
The order book remains under pressure, having come down from about $840 million to $750 million, and the trend might continue for another six to nine months.
This is going to have a significant impact on the visibility of the company’s future revenues. In the wake of the slowing order flow, the entire industry is likely to forego its margins in an attempt to boost its order inflow. Further, competition in the domestic market has intensified.
Moreover, the lack of clarity with regard to JSL’s investments in its subsidiaries also remains a concern for the stock. We also highlight the concerns relating to the company’s adoption of accounting norms.
The company has outstanding derivative contracts, where the bankers have estimated a marked-to-market (MTM) loss from all outstanding contracts at approximately $103 million, but the same has been neither charged to the Profit & Loss Account nor considered in the Balance Sheet.
The gain or loss on the same is being accounted on settlement, which is different from the standard accounting practices and may weigh on the stock’s valuations.
In view of the slackening order inflow and the expected fall in the margins, we are downgrading our CY2009 earnings estimate by 16.9% to Rs65.9 per share.
The next year is likely to be tougher, with the revenues expected to see a significant fall on account of slower order inflow as well as a fall in the realisation. Hence, we expect the top line to decline by 20.5% and the earnings to fall by 27.7% to Rs47.6 per share in CY2010.
In view of the multiple concerns, we believe that the company would continue to trade at a discount to its peers. It also might not enjoy the valuation multiples that it had commanded in the last couple of years due to the lack of revenue visibility in the sector.
During some of the previous downturns, the stock had traded at about 5-7x its one-year forward earnings.
At the current levels, the stock is trading at 4.7x its CY2010E earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 2.1x.
We believe that the valuations are attractive even after the downgrades. Even though the stock has seen a strong rally of 55% in the last one month, it still presents an upside for long-term investors.
We maintain our BUY recommendation on the stock with a revised price target of Rs312, valuing it at 5.5x one-year forward earnings (the average of CY2009E and CY2010E earnings).