The government has scrapped the export levy on pipes and tubes imposed last month. We believe that the withdrawal would act as a significant booster for the sector and the sector should go back tracking the fundamentals as the concerns relating to government intervention are done away with.
Jindal Saw Ltd’s (JSL) order book currently stands at $1.09 billion. Of this, $775 million is for submerged arc welded (SAW) pipes, $165 million for ductile iron (DI) pipes and $60 million for seamless pipes. Export contributes about 65% (almost $650 million) to the total order book.
The earnings are likely to be affected to the extent of the sales booked in the previous one month only, and hence we are marginally reducing our CY2008E estimates by 2.3% to Rs61.6. We maintain our CY2008E earnings estimate at Rs90.5.
Outlook and valuations
We believe that the core business of JSL would continue to do well on the back of buoyant demand outlook. Margins in the DI pipes division might be impacted due to the rising coking coal prices. However, capacity expansion and commencement of the captive power plant should help mitigate the adverse impact to a certain extent.
At the current level, the stock is trading at 6.3x its CY2009E earnings and is available at an enterprise value (EV)/ earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.2x. We maintain our BUY recommendation with a price target of Rs910.