Just few minutes ago, HSBC Equity Research has downgraded Jindal Saw Ltd to UNDERWEIGHT. This change in recommendation comes after the back of poor Q4 results from the company. Another Jindal Group company, JSW Steel had to face the same plight earlier this morning.
Jindal Saw (JSAW) had favourable coal prices for a long time, but the inventory of this low-cost (USD100/t) coal is over, the contract for which expired in April 2008. Management guided recently that new supplies should come in only at USD300/t. With this, margins for ductile iron (DI) pipes should collapse.
With the 200% increase in coal price, DI pipes’ EBITDA margin should erode to 0% in the next three quarters of 2008, from 19% in Q1. Seamless pipes’ EBITDA margin of 9.5% for Q1 2008 (year to Dec) was significantly below our estimate of 15%.
HSBC reduced target PE multiple for JSAW at the lower end of the band to 10x from 13x. Based on March 2008 EPS, PE-based fair value is INR570 per share.