Jindal Saw (JSAW): CMP: 520, Market Cap: Rs 166 bn, TP: Rs 818 (~60% upside)

Favourable Industry Tailwinds & significant debt reduction to drive the earnings growth.

Company Background:

JSAW (a unit of the PR Jindal group), is a leading player in the steel pipes and pellets industry in India and overseas. It holds significant market share in SAW and
Ductile Iron Pipes domestically (~25% market share in SAW pipes and ~20% market share in Ductile Iron Pipes) and has a strong presence in regions like
Latin America and MENA. ~60% of the company’ revenues come from the water supply and sanitation (WSS) which is growing rapidly in India and globally and
the remaining from O&G and other segment which supports the company in a volatile industry scenario. Its client base includes both government and private
sectors across various industries, ensuring stability and growth opportunities. Overall, JSAW is well-positioned for sustained success with its market leadership,
diversified revenue streams, and global presence.

Where is JSAW placed in the Industry?

Investment Thesis:

 DI and HSAW is witnessing strong industry tailwinds (contributing to ~55% of overall EBITDA): Being the largest player in HSAW and DI Pipes in
India, Jindal Saw is a key beneficiary of strong industry tailwinds in the water segment on account of govt schemes like Jal Jeevan Mission and AMRUT.
of These two schemes are expected to create a cumulative demand of 10mn tonnes providing strong visibility for the next 3-5 years.
 Higher exports/overseas mix leading to higher margins (LSAW contributes to ~7% of overall EBITDA): Exports/overseas mix has been on a rising
trend for JSAW. It has improved from 30% in FY22 to 35% in FY24 and is expected to improve 40% in the next 2 years due to higher exports of
LSAW/ HASW pipes on account of strong demand in US & Saudi Arabia and pick up in utilizations in Abu Dhabi DI Plant on account of global supply
deficit. Major export order is from NEOM, projects in Middle East, Europe and Saudi.
 Improving product mix: Stainless Steel Pipes offer highest margins in the steel pipe space and improvement in utilizations in SS pipes segments from
current estimated utilizations of 80% will lead to improvement in EBITDA/tonne for the company. This segment is expected to entirely cushion the
estimated fall in EBITDA/tonne in carbon steel seamless pipe segment. Additionally, entry into premium connections provides a long term growth
opportunity in SS pipes. JSAW’s entry into premium connections in the OCTG market via Hunting JV is a positive development for the company.
Currently, this product is imported into India and the company is expected to substitute imports via these products. These products also have good
potential in MENA and Africa region. Total project exposure for the JV is expected to be Rs 2.5 bn (including Capex and Working Capital). JV is
expected to breakeven in 1st year of operations-i.e FY25.
 Significant debt reduction leading to lower interest outgo: As there are no major capex lined up for the company, JSAW will utilize majority of its
proceeds towards debt reduction in the near to medium term. We expect the company to repay ~Rs 30.0 bn debt in the next 2 years which will reduce the
net debt/EBITDA from 1.7x to 0.8x by FY26E. This will reduce the interest outgo by Rs 4.0bn by FY26E.
 Diversified product portfolio- hedging via pellets (~15% of EBITDA): Company’s presence in pellets helps them mitigate any downside risk in case of
sudden rise in coking coal prices which is a key RM for DI Pipes (this contributes ~40% of overall EBITDA)
Key Risks:

 General slowdown in the market

 Significant reduction in steel prices (However, Post Covid, company has added Price Variation clauses with majority of their govt contracts as prior to
that they had witnessed huge losses due to sharp increase in steel prices)

Why are we pitching now?

 We believe in sustenance of EBITDA of Rs 33.0 bn+ per annum. The market was not factoring this as consensus estimates are below Rs 30.0 bn per
annum for the next 2 years
 As there is no capex lined up, we believe the company will use majority of excess cash to repay debt. We expect the company to repay debt significantly.
 Attractive valuations trading at 5.4x FY26E EV/EBITDA. This is much cheaper than peers.
 Net CFO(inc)/Market Cap Yield is 13% for FY26.
B&K View and Valuations:

Over the preceding half-decade, the company faced stagnant steel pipes volumes, lingering at 13 lakh tons (~60% utilization) due to challenges such as rising steel
prices and declining demand. However, recent indicators signal a turnaround, with volumes surging to around 17 lakh tons in FY24 (~20% YoY growth). This
resurgence is driven by robust orders in both domestic and export markets, particularly in segments with favourable margins (LSAW & Coated HSAW Pipe order
wins). Foreseeing a 7.0% volume CAGR over the next two years, the company capitalizes on scale advantages and significant debt reduction, fuelling an expected
earnings spike of ~150.0% in FY24E compared to FY23 (with a 14% earnings CAGR expected over the next two years, FY24E-26E). With a positive long-term
outlook supported by a diverse product portfolio, effective hedging strategies, restrained CAPEX, and debt reduction initiatives, the stock's current trading at
5.4x FY26E EV/EBITDA indicates a potential ~60% upside based on an 8x EV/EBITDA valuation.

Key Trigger: Rising Order Book, higher exports, debt reduction

Key Financial highlights:

Financial Highlights (Rs mn)

FY21 FY22 FY23 FY24E FY25E FY26E
Net sales 1,06,636 1,32,984 1,78,678 2,03,396 2,20,556 2,33,508
EBITDA 12,415 14,020 16,653 33,560 34,627 36,194
PBT 4,993 6,215 7,105 21,208 23,650 27,361
Adj PAT 3,278 3,759 4,432 15,270 17,264 19,974
EPS (Rs) 10.0 12.9 20.5 50.2 56.5 65.2
Net Worth 69,830 73,642 79,228 96,897 1,16,882 1,39,975
Net Debt 43,240 51,337 44,669 57,037 44,926 27,922
Capital Employed 1,25,860 1,36,660 1,31,631 1,62,500 1,69,185 1,72,898
ROCE (%) 7.9 8.2 10.2 19.8 18.1 18.3
Net CFO(Inc Interest) 13,152 -948 9,456 3,532 17,692 21,948
Capex -2,643 -4,035 -4,925 -17,500 -7,500 -7,184
Free Cash 7,749 -6,740 5,170 -13,968 10,192 14,763