Emkay Sector Update

17th June, 2008

Private Client Research
Pankaj Kumar Steel Pipes - Sector Update
pankaj.kumar@emkayshare.com
+91 22 66121243
Export duty on steel pipes rolled back
Steel pipes exporting companies have got a sigh of relief as the union government
has finally rolled back the 10% export duty on steel pipes and tubes. This is a
positive move for the pipe and tubes exporting companies such as Welspun Gujarat
Stahl Rohren, Jindal Saw, Man Industries (India), Ratnamani Metals, PSL, etc. Earlier
Government of India in its notification on 10th May 2008 levied 10% export duty on
steel pipes and tubes which was a negative move and would have resulted into lower
competitive advantage to domestic pipes exporting companies against its global
peers. Since the move was implemented from the immediate effect, the pipe exporting
companies had to pay 10% export cess on existing order also. Line pipe manufacturing
business has lower net profit margin of 5-9%, hence the 10% exports cess on existing
orders would have negatively affected the bottomline for these players.
As the pipe players had delayed the delivery of most of the completed order in
anticipation that the government would roll back the duty, the quarterly earning for
these players may not be severely affected. As per our discussions with these players,
Welspun Gujarat Stahl Rohren (WGSRL) and Jindal Saw are expecting a hit to the
extent of Rs 200 mn and Rs 80-100 mn respectively in their April-June quarterly
financials. On the other hand Man Industries (India) does not expect any hit on the
earnings as it has delayed the delivery of orders. PSL does not have any major
export orders to be delivered from India, hence it is unlikely to get impacted by the
duty. We maintain our BUY recommendation on these scrips with certain revision in
Welspun Gujarat, Jindal Saw and Man Industries (India).

Welspun Gujarat Stahl Rohren Ltd

As per the management of WGSRL, Q1FY09 financials is expected to take a hit to
the extent of Rs 200 mn. During the last one month, the company took conservative
approach on bidding for fresh exports orders due to existence of export duty and
thus witnessed a slowdown in order intake. Due to all these factors we downgrade
our FY09E EPS by 4.2% to Rs 24.9 as against our previous estimate of Rs 26.
However we maintain our earning estimates for FY10E at Rs 44.9. We also downgrade
our target price on the scrip to Rs 527 by taking conservative assumptions in our
DCF valuation and maintain BUY on the scrip. At our target price the scrip discounts
FY09E and FY10E EPS by 21x and 11.7x respectively.

Jindal Saw
The management of Jindal Saw is expecting its financials taking hit to the extent of
Rs 200 mn during April-June 2008 quarter. Due to this CY08E EPS of the company
is expected to get negatively impacted by 3.5% and thus we downgrade our EPS
estimate for the year to Rs 50.5 from our previous esimate of Rs 52.3. We maintain
BUY and target price of Rs 1045 on the scrip.

Man Industries (India)

The management of Man Industries (India) has confirmed that there is no significant
impact on the current quarter earnings of the company as it had postponed its
delivery for the last one month and hence did not pay any export duty. We currently
maintain our financial estimates for the company and would revisit the same once
the company declares its FY08 audited results. The scrip currently discounts FY08E

Contd...

C-6, Ground Floor, Paragon Center Pandurang Budhkar Marg, Worli, Mumbai – 400 013. India
17 th June, 2008 Emkay - Private Client Research

and FY09E EPS of Rs 12.3 and Rs 16.2 by 7.7x and 5.9x respectively. We maintain
BUY on the scrip with downgraded target price of Rs 150. At our target price the
scrip discounts FY09E EPS by 9.25x.

Financial Estimates :
Welspun Gujarat Jindal SAW Man Industries
Financials Rs mn FY09E FY10E CY08E CY09E FY08E FY09E
Net Sales 52131 74230 40425 57025 15192 19836
Growth 31% 42% -42% 41% 34% 31%
EBITDA 11380 16447 5709 8313 1776 2307
Growth 70% 45% -29% 46% 38% 30%
EBITDA Margin 21.8% 22.2% 14.1% 14.6% 11.7% 11.6%
Net Profit 4883 8428 2831 4543 831 1119
EPS Rs 24.9 44.9 50.5 81.0 12.3 16.2
P/E (x) 15.0 8.3 11.4 7.1 7.7 5.9
*CMP: WGSRL Rs373, Jindal Saw Rs 574, Man Industries Rs 95
Source Emkay PCG Research

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Steel Pipes - Sector Update 2

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Steel Pipes - Sector Update 3
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Name Sector Tel No E-mail id

Daljeet S. Kohli Head of Research +91 22 6612 1205 daljeet.kohli@emkayshare.com
Manish Balwani Cement, Construction, Real Estate +91 22 6612 1278 manish.balwani@emkayshare.com
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Steel Pipes - Sector Update 4