Stock Idea - Jindal Saw

Recommendation: Buy

CMP = Rs 904

Price target: Rs 1,302

Result highlights:

• Jindal Saw Ltd's (JSL) Q5FY2007 numbers were ahead of expectations on the back of higher topline and improved margins. The net revenues marked a growth of 35.1% yoy to Rs 1,611.7 crore due to high growth witnessed in the submerged arc welded (SAW) pipe and the ductile iron (DI) pipe segments.
• The US division, which contributed Rs 535 crore to the topline during the quarter, has been hived off. Since the US division was operating at lesser margins of about 8-9%, its hiving off would result into an expansion in the company's profit margins. On the back of a favourable product mix, lesser contribution of the US division, and greater efficiencies, the operating profit margin expanded by 100 basis points yoy and 50 basis points sequentially to 12.4%. Consequently, the operating profits surged by 46.3% to Rs 199.8 crore. Lower taxes led the profit before extraordinaries to grow by 83.1% to Rs 110.1 crore.
• JSL's order book at the end of the quarter stood at $1 billion executable by January 2009, with more than 65% contribution coming from international markets. Of this, $775 million orders were for SAW pipes, while the remaining orders were for DI and seamless pipes. The company has announced new initiatives and has identified opportunities in new areas of infrastructure, transportation and fabrication industry, all through wholly owned subsidiary Jindal ITF. In all, the capex of Rs 1,800 crore is planned to be spent on these businesses with 25% equity contribution. 
• To fund these plans, the company would also be issuing 26 lakh warrants and 27.3 lakh convertible debentures to the promoters, convertible at Rs 819 per share. I maintain positive outlook on the company considering strong scope for its core business and margin expansion.
• I maintain Buy recommendation on the stock with a price target of Rs 1,302.