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Based on the January 2007 portfolios of domestic mutual funds, Jindal Saw Ltd (JSL) (Idirect Code: SAWPIP) was among the most bought mid-cap stocks with fund houses investing a net Rs 118 crore in the scrip. The company posted a 49.5 per cent growth in its third quarter results, on the back of a net profit of Rs 60.13 crore for the quarter ending December 31, 2006 compared to Rs 40.21 crore for the quarter ended December 31, 2005.
JSL operates through four strategic business units (SBU) namely SAW pipes, Ductile Iron spun pipes (DI), seamless tubes and US operations. The firm operates as an ancillary to the infrastructure development sector covering oil and gas sector, water, sewage transportation as well as automobile and general engineering industries among others. With the government placing emphasis on the need for oil and gas security, there has been frenetic exploration and production activity in the country which holds great potential for seamless pipe manufacturers. A similar demand lies in the transportation of water and sewage treatment, with substantial fiscal outlays for these areas. So far in India, there has been greater reliance on railways and roadways rather than pipelines which is the preferred mode of transportation in most other countries. India too is realising the cost and environmental efficiency that pipes offer. Hence there is a large potential market for pipes within the domestic market itself.
As far as the international market is concerned, JSL has managed to place itself strategically and has received accreditations from many global oil majors, placing it in a better position to bid for international projects. In the seamless pipe industry (used for oil and gas transportation) receiving accreditations is a long process and is crucial in building a strong reputation for quality. The closest global competitors are from Japan and Europe, and India has a clear cost advantage compared to these companies. This advantage arises on account of both labour input as well as the much cheaper freight charges incurred owing to the proximity to key markets in the Middle East through its Indian operations. JSL has been able to further leverage its site locations through its operations in the US.
Within the domestic market, JSL has the most robust order book of over Rs 6,500 crore as well as the most diverse product portfolio within the pipes industry. It competes with companies such as Maharashtra Seamless, Welspun Gujrat, Man Industries and PSL. Further, JSL is the only Indian manufacturer to have facilities in the US. Nearly 75 per cent of its revenue comes from large diameter pipes, 15 per cent for DI pipes and the remainder from seamless tubes. Given that the margins in the DI segment are higher, JSL has expanded capacity in this segment, and is in the process of rationalising the skewness in its product portfolio by expanding capacities in the DI and seamless tubes businesses.
A threat to margins lies in the escalating steel prices, however, the management as a policy does not absorb any price risk on this front.
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