Jindal Saw (SAWPIP) 64

Result Update November 20, 2015 Rating matrix Rating : Hold Target : 60 Target Period : 12 months Potential Upside : -6% What s Changed? Target Changed from 85 to 60 EPS FY16E Changed from 13.2 to 12.7 EPS FY17E Changed from 17.8 to 16.0 Rating Unchanged Quarterly Performance Q2FY16 Q2FY15 YoY (%) Q1FY16 QoQ (%) Revenue 1345.0 1591.4-15.5 1912.2-29.7 EBITDA 188.7 209.4-9.9 161.8 16.6 EBITDA (%) 14.0 13.2 87 bps 13.2 82 bps PAT 101.1 74.6 35.4 104.2-3.0 Key Financials Crore FY14 FY15 FY16E FY17E Total Op. Income 6655.9 8324.7 9273.7 10920.2 EBITDA 640.1 935.7 1107.8 1387.0 Net Profit -85.6 25.9 369.5 464.7 EPS ( ) -3.1 0.9 12.7 16.0 Jindal Saw (SAWPIP) 64 Mixed performance Jindal saw reported a mixed Q2FY16 performance wherein the topline and EBITDA came in lower than our estimates while PAT came in higher than our estimate. While pipe sales volumes came in marginally lower than our estimate, muted realisations primarily resulted in a miss at the topline level. On the back of tax credit, reported PAT came in higher than our estimate Topline for the quarter was at 1345.0 crore, down 15.5% YoY and 29.7% QoQ, and below our estimate of 1620.7 crore EBITDA came in at 188.7 crore, down 9.9% YoY and 25.3% QoQ and below our estimate of 210.8 crore. EBITDA margin was at 14.0%, marginally higher than our estimate of 13.0% During the quarter, Jindal Saw reported tax credit. Subsequently, ensuing PAT was at 101.1 crore, up 35.5% YoY and above our estimate of 72.7 crore Order book declines QoQ On a sequential basis, the order book of Jindal Saw declined ~17% QoQ. Jindal Saw s order book at the end of Q2FY16 was at ~US$800 million. The break-up is as under: Valuation summary FY14 FY15 FY16E FY17E P/E NA 71.7 5.0 4.0 Target P/E NA 67.2 4.7 3.7 EV / EBITDA 11.8 9.7 8.1 6.1 P/BV 0.5 0.5 0.5 0.4 RoNW (%) -2.4 0.7 9.2 10.4 RoCE (%) 3.3 4.6 6.0 8.1 Stock data Particular Amount Market Capitalization ( Crore) 1736 crore Total Debt (FY15) ( Crore) 7832 crore Cash and Investments (FY15) ( Crore) 639 crore EV ( Crore) 8929 crore 52 week H/L ( ) 116/51 Equity capital 60.91 Face value 2 Price performance (%) Return % 1M 3M 6M 12M Jindal Saw -10.4-18.9-4.8-28.1 Maharashtra Seamless 0.0-12.7-26.0-51.9 Research Analyst Dewang Sanghavi dewang.sanghavi@icicisecurities.com Large diameter pipes US$500 million Ductile iron pipes US$280 million Seamless pipes US$10 million Pellets US$10 million Orders for large diameter pipes are slated to be executed by June/September 2016 while for ductile iron pipes, the same is slated to be executed in the next 12-18 months or more. The company has participated in various bids and is likely to get orders in phases. The current order book includes export operations of ~35%. Major export orders are from the Middle East, the Gulf region, South East Asia and the Far East. Utilisation level of saw pipe segment, key monitorable, going forward Over the last couple of years, the saw pipe segment has been operating at muted capacity utilisation levels. The current order book of the large diameter pipe segment (LSAW and HSAW) is ~5,00,000 tonnes. Due to seasonal issues and summer in the Middle East, Q2FY16 has seen muted sales, which are likely to improve in subsequent quarters. Going forward, the management expects additional business opportunities primarily in the domestic water sector. Declining order book, higher debt continues to weigh! Going forward, we have modelled sales volume of 1.20 million tonne (MT) for FY16E and 1.35 MT for FY17E. We have a cautious view on the company due to elevated debt levels and a declining order book. We have valued the stock at 6x FY17E EV/EBITDA. Subsequently, we have arrived at a target price of 60 and assigned a HOLD recommendation to the stock. ICICI Securities Ltd Retail Equity Research

Variance analysis Standalone Operations Q2FY16 Q2FY16E Q2FY15 YoY (%) Q1FY16 QoQ (%) Comments Total Operating Income 1,345.0 1,620.7 1,591.4-15.5 1,912.2-29.7 Topline came in lower than our estimate due to muted realisations Other Income 43.8 38.1 27.6 58.6 39.1 11.9 Employee Expenses 108.4 105.3 91.2 18.8 105.5 2.7 Employee expense came in broadly in line with our estimate Raw Material Expenses 768.1 863.4 861.5-10.8 1,161.1-33.8 Other Expenses 279.8 441.2 429.2-34.8 393.0-28.8 EBITDA 188.7 210.7 209.4-9.9 252.7-25.3 EBITDA came in lower than our estimate EBITDA Margin (%) 14.0 13.0 13.2 87 bps 13.2 82 bps EBITDA margin came in higher than our estimate Depreciation 60.2 61.6 63.1-4.6 58.6 2.6 Depreciation expense came in broadly in line with our estimate Interest 82.7 78.9 64.9 27.5 83.0-0.3 Interest expense came in marginally higher than our estimate Exceptional Item -17.9 0.0-5.0 260.8 4.5-496.9 Exceptional items primarily represent net result of amounts on account of reinstatement of foreign exchange denominated assets and liabilities (other than long term foreign exchange denominated loans) PBT 71.7 108.4 104.1-31.1 154.7-53.6 Total Tax -29.4 35.8 29.5-199.5 50.5-158.1 Tax expense consists of current tax (net of MAT credit entitlement) while deferred tax expense is net of assessed tax credit for prior period amounting to 52.7 crore PAT 101.1 72.6 74.6 35.4 104.2-3.0 Aided by tax credit, PAT came in higher than our estmate Key Metrics Sales volume (Pipe ) (in tonne) 198,858 200,000 193,000 3.0 260,700-23.7 Sales volume came in lower than our estimate Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Total Op. Income 10,685.6 9,273.7-13.2 11,982.4 10,920.2-8.9 Topline revised downwards for FY16E and FY17E EBITDA 1345.3 1107.8-17.7 1552.5 1387.0-10.7 EBITDA estimate revised downwards EBITDA Margin (%) 12.6 11.9-64 bps 13.0 12.7-26 bps Margins revised downwards for FY16E Adj PAT 403.1 369.5-8.3 498.2 464.7-6.7 PAT estimate revised downwards Assumptions Current Earlier Comments FY16E FY17E FY16E FY17E Pipe Sales volume (in lakh tonne) 12.0 13.5 12.0 13.5 Maintained estimates Pellet external sales (in lakh tonne) 12.0 12.0 12.0 12.0 Pellet EBITDA/tonne ( /tonne) ICICI Securities Ltd Retail Equity Research Page 2

Company Analysis Utilisation level of saw pipe segment, key monitorable, going forward Over the last couple of years, the saw pipe segment has been operating at muted capacity utilisation levels. The current order book of the large diameter pipe segment (LSAW and HSAW) is ~5,00,000 tonnes. Due to seasonal issues and summer in the Middle East, the quarter has seen softer sales, which are likely to improve in subsequent quarters. Going forward, the management expects additional business opportunities, primarily in the domestic water sector. Over a medium to longer term horizon, within the water sector segment, specific and renewed focus of the Government of India on infrastructure, including hydrocarbons pipeline as well as urbanisation is expected to accelerate. The management expects the domestic economy to need more pipelines, primarily for water and industrial applications. Net debt at consolidated level to remain at elevated levels As of June 30, 2015, the net debt of the company (standalone) was ~ 4727.7 crore (~US$ 718 million) including ECB/long term and funds working capital & other unsecured loans. This includes working capital loans of 2435.5 crore (~US$370 million), which remained at an elevated level. Exhibit 1: Net debt levels at consolidated level to remain elevated ( crore) 7500 6000 4500 3000 4615 5757 7192 7125 6570 1500 0 FY13 FY14 FY15 FY16E FY17E Net Debt ICICI Securities Ltd Retail Equity Research Page 3

Key takeaways from conference call and other highlights In terms of geographical break-up, sales in India contributed 89% while sales outside India (exports) contributed the balance 11% On total sales of pipes and pig iron, blended EBITDA/tonne for the quarter came in at ~ 10000/tonne. The EBITDA/tonne for pellets came in at ~ 800/tonne compared to 1200/tonne in Q1FY16 In Q2FY16, Jindal Saw produced ~87000 tonnes of large dia pipes, which corresponds to the planned production and delivery schedule With respect to DI pipes and pig iron unit, operations were in line with the planned production during the quarter where the company produced more than one lakh tonne of DI pipes and 10800 tonne of pig iron. The current order book of DI pipes is at 375000 tonne. Going forward, due to fall in commodity prices, realisations are likely to remain soft The demand for seamless pipes remained weaker due to dumping of imported material in India, mainly from China and imposition of anti-dumping duty by North America and Europe on OCTG products. In general, on account of continued weakness in oil prices, demand for OCTG pipes remained much weaker. The trend is likely to continue over a medium term. The company is working on the development of a few new product lines in the premium segment, which will help maintain production and sales in line with capacity. The production of seamless pipes in Q2FY16 was ~21000 tonnes Due to the sharp decline in iron ore prices and availability of cheaper product in the market, operations in the pellet plant were contained while the company produced ~263000 tonnes of pellets in Q2FY15. The management expects a further decline in sale prices of pellets. Hence, the profitability in the pellet unit may get adversely impacted due to the same. The company is working on cost control measures to remain competitive Jindal Saw has deferred its decision to execute a steel plant at Bhilwara (Rajasthan) for the time being The company has completed major projects including DI facility, beneficiation and pellet plant at Bhilwara, etc. As hot metal in the DI segment is available for the company, the emphasis is on maximisation of DI pipe production for higher value addition. This required some de-bottlenecking and increase in finishing and other facilities in the DI segment The company is currently undertaking a restructuring process, which is likely to take six to nine months for completion, subject to approval from concerned authorities ICICI Securities Ltd Retail Equity Research Page 4

Valuation Going forward, we have modelled sales volume of 1.20 million tonne (MT) for FY16E and of 1.35 MT for FY17E. We have a cautious view on the company due to elevated debt levels and declining order book. We have valued the stock at 6x FY17E EV/EBITDA. Subsequently, we have arrived at a target price of 60 and assigned a HOLD recommendation to the stock. Exhibit 2: Valuation matrix Sales Sales Growth EPS EPS Growth PE EV/EBITDA RoNW RoCE ( Crore) YoY (%) ( ) YoY (%) (x) (x) (%) (%) FY14 6655.9-1.6-3.1 353.4 NA 11.8-2.4 3.3 FY15 8324.7 25.1 0.9 LP 71.7 9.7 0.7 4.6 FY16E 9273.7 11.4 12.7 1327.0 5.0 8.1 9.2 6.0 FY17E 10920.2 17.8 16.0 25.8 4.0 6.1 10.4 8.1 ICICI Securities Ltd Retail Equity Research Page 5

Company snapshot 200 180 160 140 120 Target Price: 60 100 80 60 40 20 0 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Jan-08 The company receives an 800 crore order from Cairn Energy India for supply of line pipes, tracer tube, insulation and bends for Barmer Salaya pipeline project of Cairn. The pipeline project, from Mangala oilfield to Salaya, will cover over 600 km with a weight of about one lakh tonne May-08 The company allots 26,00,000 warrants and 27,30,000-9.5% compulsorily convertible debentures (CCDs), both convertible into equity shares of the company at 819 each to Anbeeco Investments Ltd, Cyprus. Anbeeco Investments belongs to the promoter group of Jindal Saw Apr-09 Anbeeco Investments Ltd declines to convert the warrants allocated to it by the company. Consequently, the advance amount of @ 10% of per warrant stands forfeited in accordance with Sebi guidelines Jun-09 The company announces the receipt of orders/letter of award (LoA) aggregating to more than 1000 crore (US$210 million) for supply of large diameter pipes and ductile iron pipes in domestic and export markets. The total order book now stands at US$750 million (approximately 3600 crore) Jan-11 The company executes a mining lease agreement for 30 years with the Rajasthan Government for iron ore mines in the state. The mines have ~180 MT of reserves of various categories of iron ore, based on initial estimates Jul-11 The company makes full and final payment towards redemption of foreign currency convertible bonds (FCCBs) outstanding as on date Nov-11 The company announces the receipt of order/letter of award aggregating to ~ 1000 crore for supply of large diameter pipes (L saw pipes) and ductile iron pipes for various export markets. These orders are scheduled to be executed gradually in the next 12 months Jan-13 Morgan Stanley raises its stake in the company to about 5%, following additional 2.44% stake buying through open markets May-13 The company reports dismal results for FY13. Reports a loss at the PAT level amounting to 19 crore vis-à-vis 189 crore profit in FY12 Jul-13 The company announces the appointment of Neeraj Kumar Exhibit as 3: Group Valuation Chief Executive matrix Officer & wholetime director with effect from July 1, 2013. Mr Kumar has earlier worked with Jindal Saw Ltd as Director (Finance) & CFO from 2002 to 2006Sales Sales Growth EPS EPS Growth PE EV/EBITDA RoNW RoCE ( Crore) YoY (%) ( ) YoY (%) (x) (x) (%) (%) Top 10 Shareholders FY14 6655.9-1.6-3.1 Shareholding 353.4Pattern NA 11.8-2.4 3.3 Rank Name Latest FY15 Filing Date % O/S8324.7 Position (m) 25.1 Change (m) 0.9 (in %) Sep-14 LP 71.7Dec-14 Mar-15 9.7 Jun-15 0.7 Sep-15 4.6 1 Jindal Organisation FY16E 30-Sep-15 17.80 9561.1 54.2 14.9-60.0 Promoter 46.3 46.3 48.8 51.3 51.3 10.9 1120.4 5.9 8.4 8.0 5.5 2 Sigmatech, Inc. 30/Sep/15 9.89 30.1 0.0 FII 18.1 11.5 10.9 10.2 10.2 FY17E 11236.4 17.5 16.3 49.7 3.9 6.1 10.7 8.2 3 Four Seasons Investments, Ltd. 30-Sep-15 9.30 28.3 0.0 DII 11.8 13.1 13.2 13.2 13.7 4 Reliance Capital Asset Management Ltd. Source: 30/Sep/15 Company, 9.24 ICICIdirect.com 28.2Research 0.3 Others 23.8 29.1 27.1 25.4 24.9 5 Danta Enterprises Pvt. Ltd. 30-Sep-15 7.74 23.6 23.6 6 Anbeeco Investments, Ltd. 30/Sep/15 4.27 13.0 13.0 7 HSZ (Hong Kong) Limited 30-Sep-15 3.73 11.4 0.0 8 OPJ Trading Pvt. Ltd. 30/Sep/15 2.55 7.8 7.8 9 Jindal (Abhyuday) 30-Sep-15 1.83 5.6 1.6 10 Jindal (Deepika) 30/Sep/15 1.83 5.6 1.1 Source: Reuters, ICICIdirect.com Research Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Danta Enterprises Pvt. Ltd. 22.98m 23.57m Jindal Organisation -58.49m -60.01m Anbeeco Investments, Ltd. 12.68m 13.00m Dimensional Fund Advisors, L.P. -3.27m -3.36m OPJ Trading Pvt. Ltd. 7.58m 7.77m AllianceBernstein Hong Kong Ltd. -1.80m -1.91m Sahyog Tradecorp Pvt. Ltd. 5.21m 5.35m AllianceBernstein L.P. -1.09m -0.78m Jindal (Deepak) 4.15m 4.50m Pental Holding, Ltd. -0.91m -0.76m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 6

Financial summary (Consolidated) Profit and loss statement ( crore) (Year-end March) FY14 FY15 FY16E FY17E Net Sales 6648.7 8309.6 9263.7 10908.1 Other Operating Income 7.2 15.1 10.0 12.2 Total Operating Income 6655.9 8324.7 9273.7 10920.2 Raw Material Expenses 3719.4 4274.3 4894.2 5732.6 Employee Expenses 521.2 683.2 638.5 722.8 Other expenses 1775.3 2431.5 2633.2 3077.9 Total Operating Expend. 6015.8 7389.0 8165.9 9533.3 EBITDA 640.1 935.7 1107.8 1387.0 Growth (%) 6.0 46.2 18.4 25.2 Depreciation 321.3 402.9 413.2 440.2 Interest 392.0 539.8 460.9 442.9 Other Income 95.3 129.1 152.5 167.7 PBT before EI 22.2 122.1 386.1 671.5 Exceptional Item (EI) -67.7-56.1 0.0 0.0 PBT After EI -45.6 66.0 386.1 671.5 Total Tax 54.7 21.3 29.0 221.6 Net Profit Before EO (100.2) 44.7 357.2 449.9 EO (net of tax) 0.0-30.0 0.0 0.0 Minorites, Associates,etc -14.7-11.2-12.3-14.8 PAT After MI before EO -85.6 25.9 369.5 464.7 Balance sheet ( crore) (Year-end March) FY14 FY15 FY16E FY17E Liabilities Equity Capital 55.3 58.0 58.0 58.0 Reserve and Surplus 3513.1 3631.8 3968.9 4401.2 Total Shareholders funds 3568.4 3689.8 4026.9 4459.2 Total Debt 5962.9 7831.9 7531.9 7231.9 Deferred Tax Liability 115.8 108.6 108.6 108.6 Minority Interest / Others 157.8 154.3 166.6 181.4 Total Liabilities 9805.3 11784.9 11834.4 11981.5 Assets Gross Block 6796.8 8199.2 8699.2 9099.2 Less: Acc Depreciation 1424.3 1827.3 2240.5 2680.7 Net Block 5372.4 6372.0 6458.7 6418.5 Capital WIP 659.7 559.7 259.7 59.7 Total Fixed Assets 6032.2 6931.7 6718.5 6478.2 Goodwill 153.6 153.6 153.6 153.6 Investments 74.6 306.9 17.2 17.2 Inventory 1919.1 3002.4 3352.2 3769.4 Debtors 1744.7 2060.0 2335.0 2749.4 Loans and Advances 1342.1 1573.6 1593.6 1639.6 other assets 8.1 8.7 9.7 10.7 Cash 142.0 349.8 407.2 662.3 Total Current Assets 5155.9 6994.5 7697.6 8831.4 Current Liabilities 1537.4 2501.4 2612.2 3318.7 Provisions 73.5 100.3 140.3 180.3 Current Liabilities & Prov 1610.9 2601.7 2752.6 3499.0 Net Current Assets 3545.0 4392.8 4945.1 5332.4 Application of Funds 9805.3 11784.9 11834.4 11981.5 Cash flow statement ( crore) (Year-end March) FY14 FY15 FY16E FY17E Profit after Tax (85.6) 44.7 369.5 464.7 Add: Depreciation 321.3 402.9 413.2 440.2 (Inc)/dec in Current Assets (400.6) (1,630.8) (645.8) (878.6) Inc/(dec) in CL and Provisions (123.6) 990.8 150.9 746.5 Others 51.1 (7.2) - - CF from operating activities (237.4) (199.6) 287.7 772.7 (Inc)/dec in Investments 79.0 (232.3) 289.7 - (Inc)/dec in Fixed Assets (850.3) (1,302.5) (200.0) (200.0) Others (14.7) - - - CF from investing activities (786.0) (1,534.8) 89.6 (200.0) Issue/(Buy back) of Equity - 2.8 - - Inc/(dec) in loan funds 914.7 1,869.0 (300.0) (300.0) Dividend paid & dividend tax (32.3) (32.3) (32.3) (32.3) Inc/(dec) in Share Cap 33.5 106.2 12.3 14.8 Others (40.2) (3.5) - - CF from financing activities 875.7 1,942.1 (320.0) (317.6) Net Cash flow (147.7) 207.8 57.4 255.2 Opening Cash 289.7 142.0 349.8 407.2 Closing Cash 142.0 349.8 407.2 662.3 Key ratios (Year-end March) FY14 FY15 FY16E FY17E Per share data ( ) EPS (3.1) 0.9 12.7 16.0 Cash EPS 8.5 14.8 27.0 31.2 BV 129.2 127.2 138.8 153.7 DPS 1.0 1.0 1.0 1.0 Cash Per Share 5.1 12.1 14.0 22.8 Operating Ratios (%) EBITDA Margin 9.6 11.3 12.0 12.7 PBT / Total Operating income 0.3 1.5 4.2 6.1 Reported PAT Margin (1.3) 0.3 4.0 4.3 Inventory days 188.3 256.4 250.0 240.0 Debtor days 95.8 90.5 92.0 92.0 Creditor days 50.0 52.0 60.0 65.0 Return Ratios (%) RoE (2.4) 0.7 9.2 10.4 RoCE 3.3 4.6 6.0 8.1 RoIC 3.4 4.8 6.2 8.6 Valuation Ratios (x) P/E NA 71.7 5.0 4.0 EV / EBITDA 11.8 9.7 8.1 6.1 EV / Net Sales 1.1 1.1 1.0 0.8 Market Cap / Sales 0.3 0.2 0.2 0.2 Price to Book Value 0.5 0.5 0.5 0.4 Solvency Ratios Debt/EBITDA 9.3 8.4 6.8 5.2 Debt / Equity 1.7 2.1 1.9 1.6 Current Ratio 3.2 2.7 2.8 2.5 Quick Ratio 2.0 1.5 1.6 1.4 ICICI Securities Ltd Retail Equity Research Page 7

ICICIdirect.com coverage universe (Pipes) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) ROCE(%) ROE(%) Sector/Company ( ) TP ( ) Rating ( Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Jindal Saw 64 60 Hold 1949.1 0.9 13.2 17.8 76.2 5.1 3.8 9.8 6.8 5.7 4.6 7.9 9.3 0.7 9.9 11.9 Maharashtra Seamles 148 135 Hold 1015.3 17.6 4.0 13.0 8.4 36.7 11.4 13.7 36.8 11.2 2.0 0.1 2.0 4.0 0.9 3.0 ICICI Securities Ltd Retail Equity Research Page 8

RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 9

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