Jindal Saw: Maximising capacity usage to drive future nos

16 Jan 2010, 0431 hrs IST, Santanu Mishra, ET Bureau

FOR Jindal Saw, which manufactures steel pipes, the results for the quarter to December 2009 are probably one of the best in the past several quarters. The net profit of the company during the quarter almost doubled to Rs 170 crore. Such a robust growth in bottomline has come mainly due to reduced raw material cost. The company’s net sales declined by around 11.5%, reckoned on year-on-year basis. The stock performance, however, remained muted along with broader market indices in the past few days.

The company produces three categories of pipes –– welded, ductile and seamless. While the demand in the ductile segment continues to remain strong, the demand for welded pipes, especially overseas demand, has started picking up only now, albeit at a slower pace. Helical pipes accounted for around 60% of sales volume whereas ductile pipes contributed close to 28% during the quarter.

The ductile pipe segment, however, is on par with helical pipe segment when it comes to contribution towards the company’s operating profit. This is because operating profit per tonne of pipe produced is close to $300, compared to $135 in the case of helical pipe segment. Overall, the company had a blended operating profit of $256 per tonne, which is at least 20% higher than what it was last year. The management, however, feels that it may not be possible to increase the current operating margin of 21% further.

There are several factors behind this. First, there is now a greater competition in the domestic market. Second, the local market is becoming more and more important in its overall order book. Unfortunately, the margin in domestic projects like the one by GAIL, is relatively lower. What all these mean is that future growth in bottomline is likely to come mainly from topline growth, especially from volume growth.

The company already has an order book of close to 650 thousand tonne valued at $750 million. The helical pipe and ductile pipe accounts for 61% and 34% of this order book, respectively. The management expects the entire sales volume in the next year to be around one-third higher than the current order book. It means more orders are likely to come in the near term.

The company is utilising most of its existing capacities to meet the current orders. Further, it is readying itself to grab a share of these new orders coming on its way. Its capacity is going to increase by another 250 thousand tonne in the next 12-15 months at a cost of nearly Rs 600 crore. The company now has close to Rs 800 crore of gross debt and almost equal amount of cash, making its net-debt almost zero.