>JINDAL SAW LIMITED: Hidden value in Rajasthan (MACQUARIE RESEARCH)

Event
■ We spoke to management of Jindal Saw Limited (JSAW) to get an update on the business. We remain confident that JSAW will be able to grow its order book as the demand outlook is improving. Rajasthan iron ore mines are likely to get environmental clearance by 10 April. We believe these mines can add more than 20% to our valuations. Adjusting for investments, JSAW is trading at a modest 6.0x FY12E PER.

Impact
■ Iron ore mines provide 20% upside potential to our valuations. JSAW has received approval from the government for mining of two iron ore mines in Rajasthan. As per a third-party appraisal report, these mines have iron ore resources of 129m tonnes (avg Fe content 30%). Even after factoring in higher cost and low Fe content, we believe these resources have a value of
US$250m based on NPV.

■ Land acquisition will be a key catalyst. JSAW plans to start beneficiation of mine by August 2010, if it receives the environmental clearance. The block is on the non-forest land; hence, forest clearance should be easier. We think the biggest challenge will be the acquisition of land, as the area covers 71,590 households. We do not believe the market is ascribing any value to these resources, which can change if the project gets these statutory clearances.

■ Welded pipe order book set to improve: The pipe orders from the MENA region have picked up, as is evident from some of the recent orders. Pipe orders from Iraq, which were held up due to the election, will now be awarded. GAIL’s tenders for three new pipelines have been delayed, and orders are now expected to be awarded in June quarter. We expect JSAW to maintain the order backlog in the current quarter and grow it significantly over the next six months.

■ DI strong, seamless improving. Order flows in the DI pipe segment remain strong. JSAW is currently making a margin of US$225/t, and the company is confident of being able to raise prices to pass through coal and iron ore prices. Seamless pipe demand is improving, but large orders will likely take a further three to six months to materialise.

Earnings and target price revision
■ No change.

Price catalyst
■ 12-month price target: Rs242.00 based on a Sum of Parts methodology.
■ Catalyst: i) New orders and ii) timely commissioning of new facilities

Action and recommendation
■ Upside risk to our earnings estimates. Management is guiding for production of 850–900k tonnes and a margin of Rs10,000/t in FY11E. Our estimates for production and margins are 8–12% and 5% lower, respectively.
■ Our SOTP-based target price of Rs242 includes Rs208 (14x FY11E PER) for the pipe business and Rs34 (70% discount to market value) for investments.

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