Positives

JSL currently has a strong order book position of USD 1.225 billion (Rs 49.6 billion), which is 1.29x of its FY06 turnover. The Indian order book position of the total is around USD 725 million and approximately USD 500 million is from its US operations. These orders will be executed by April - May 2008.

The Indian order book of USD 725 million includes about USD 615 million for SAW pipes and the balance represents the normal running order book of about USD 110 million for DI pipes and Seamless tubes.

Indian operations contributed approximately 59% of overall consolidated sales and the US branch contributed the balance 41%. This ratio was 56% and 44% respectively in Q2FY07.

Exports formed 72% of overall revenues and the domestic market contributed the balance 28%.

The capex plans of the company are per schedule. The capital expenditure is aimed towards increasing production and delivery capability with enhanced profitability. The total capex by September 2008 is expected to be around Rs 4.5 billion. Funds have already been tied up for the proposed expansion.

Financial Highlights

JSL has declared encouraging Q3 FY07 results with net sales increasing by 34% to Rs 12.85 billion.

Operating Profits during Q3 FY07 increased by 45.1% y-o-y to Rs 1.6 billion, followed by an increase in PAT of 98.7% yo- y to Rs 820.5 million.

The key reason for the sharp jump in profits vis-à-vis growth in operating profits is a sharp decline in the interest cost during the quarter, which came down by 32.7% in Q3FY07 to Rs 253.5 million, compared to Rs 376.4 million in Q3FY06. This decline was primarily due to better working capital management and retirement of certain high cost loans.

Operating profit margins (OPMs) at 12.5% in the current quarter recorded 95 bps increase y-o-y due to lower cost of raw materials as a percentage to sales.

For the nine months ended June 30, 2007 (9MFY07), the net turnover was at Rs 37.47 billion, a growth of 37.2% over the same period last year (9MFY06). Operating Profits during 9MFY07 increased by 42.9% y-o-y to Rs 4.43 billion followed by an increase in PAT of 65.1% y-o-y to Rs 2.12 billion.

Revision in Estimates

We are revising our EPS estimates for FY07E and FY08E to Rs 58.2 and Rs 80.15 respectively (on diluted equity of Rs 508 million for FY08E) from our earlier estimate of Rs 55.5 and Rs 70.8 (upward revision of 4.8% and 13.2% for FY07E and FY08E) mainly taking into account the expected margin expansion due to adequate booking of raw materials for the existing order book position and also due to expansion of its DI/CI capacities which are high margin products. We believe the earnings for the quarter were substantially higher than our estimates mainly due to improved profitability from its US operations and better working capital management, resulting in lower interest costs, compared to our estimates.

Outlook

The company is one of the leading players in the pipes sector. The current thrust on E&P activities across geographies has resulted in a surge in demand of SAW pipes. The company caters to an exhaustive client base and its growing demands. JSL is geared up to take the benefit of the bullish trend in these sectors. We expect it to demonstrate better performance going forward.

We expect JSL’s revenues to grow at a CAGR of 25% over FY06-09E and net profits to grow at a more robust CAGR of 44% over the same period. The stock currently trades at a P/E multiple of 11.6x FY07E and 8.4x FY08E, which looks attractive. We expect the stock to re-rate positively in line with other peer group companies. Thus, with a target P/E of 12X FY08E earnings, we maintain our ‘BUY’ recommendation and a price target of Rs 962 (an upside of 43%).