Jindal SAW: seamless company fractured performance?
The recently concluded IPO of Venus Pipes and Tubes got oversubscribed 16.3 times. Although the issue size of Rs 165 crore was tiny as compared to that of LIC IPO, the investor behaviour is slightly jarring.
On one hand, some well-established listed companies in the iron and steel pipes space have come under tremendous pressure during the recent market sell-off. On the other, the lure of quick listing gains still seems to be attracting investors to relatively new players.
We thought it would be a good idea to review the performance of Jindal SAW—once a market favourite, now a dud. For the last one decade, the stock has been languishing in a tight range.
Jindal SAW is one of the leading iron and steel pipes and accessories manufacturing companies globally. Its product portfolio includes Submerged Arc Welded (SAW) pipes, Ductile Iron pipes (DI pipes), carbon alloy, stainless steel pipes and tubes and Pellets.
The company has a comfortable order-book position of USD 630 million (~Rs 4,800 crore) of which half the orders are for DI pipes. The rising contribution of DI in the top line is on account government orders—either direct orders or through appointed EPC contractors.
In FY20, the SAW pipes volume accounted for 50.2% in the total pipes volumes of the company but by FY22 their share dropped to 34.7%. The contribution of DI volumes in the total pipes volumes has gone up from 38% to slightly above 45% between FY20 and now.
Classical performance indicators such as Return on Equity (RoE) and net profit margins have been lacklustre. The Company’s Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) margin of 5.2% in Q3FY22, was the lowest in the last several quarters.
This margin erosion is largely on account of rising raw material costs. Between January 2021 and January 2022 HR steel prices have shot up nearly 30%, coal prices and iron ore prices have jumped 300% and 75% respectively.
Nonetheless, despite such an uncertain and hostile pricing environment, the company not only honoured its order execution commitments but also looked through rising costs without getting into litigation with suppliers demanding the contracted rates.
That said, the company went slow on fresh order-bookings to protect future margins and focused more on order execution. It has expressed its comfort in being able to handle an order book of upto a USD 1 billion efficiently. In other words, as the execution speeds up the new order flows might see an uptick.
Close to 15% to 20% of the order book is export-driven. Since oil prices have firmed up, the company has been anticipating higher export orders in the foreseeable future.
The company’s borrowings have gone up lately, partially to fund the working capital requirements. Due to the uncertain price environment, Jindal SAW has been maintaining a high-inventory to ensure that it remains insulated against any immediate price escalation.
But what’s likely to motivate the higher demand for pipes?
As the metal prices went through the roof over the last two years, private sector players and governments alike deferred their big capex and infrastructure projects. But now the fear of economic slowdown is capping the unprecedented rally in metals. And that may nudge corporations and governments to speed up the execution of high value infrastructure projects, which may give rise to a huge pent up demand.
The company has been working on niche products to tap domestic and international opportunities. Jindal SAW’s joint venture with Hunting Energy is said to be completely path-breaking in this regard.
The joint venture is setting up Oil Country Tubular Goods (OCTG), a threading plant in India which has a domestic annual market of Rs 1,500 crore. This is an initiative under Atmanirbhar Bharat and will offer import substitution opportunities.
And here’re some triggers for the piping industry going forward:
- Investment revival in the oil and gas sector globally
- Growing dominance of the gas economy in India
- River linkages
- Government’s mission to provide drinking tap water to all rural households by 2024
- Pent up demand from the construction and infrastructure sector
High inflation and rising bond yields have become talking points globally. But in equity markets sometimes what meets your eye isn’t something you should bother about.
As various countries of the world start working on their energy security, on the back of the Ukraine-Russia war, the years of draught in hydrocarbon investments might end. This would be a positive for the piping industry. Similarly, execution of large value infrastructure projects may also gather momentum since metal prices are under pressure. And let’s not forget, if the GDP growth is under threat globally, government spending may do some heavy-lifting, to compensate for the sluggish performance of other components of GDP.
On this backdrop, it remains interesting to see how much promise companies such as Jindal SAW still hold.
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