Jindal SAW: Rapid firing in all directions - Outside View by Luke Verghese

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Jindal SAW: Rapid firing in all directions
Oct 13, 2010

Good planning by the patriarch

The most wonderful aspect of the O.P. Jindal group that is most readily visible to the eye is that there appears to be little scope for the four brothers to get into a succession tangle. The late O.P. had apparently done his homework well, before passing on. At least this is the clear message that wafts across from the Pritviraj Jindal point of view, on a perusal of the Jindal SAW annual report. The Jindals are primarily in the steel business, period. The brothers Jindal, Pritviraj, Sajjan, Ratan and, Naveen, run a clutch of steel companies. But if one looks at the investment portfolio of Jindal SAW, it is quite evident that this company does not have any visible interlinkages with the other major companies in the group, run by the other three siblings. If it has, then the linkage can only be through the several investment companies, that are its subsidiaries, or through other mysterious investment companies to which it has advanced moneys, but in which the parent has no direct stake per-se. In any event, the innards of these investment companies are not available for public scrutiny.

The suffix SAW

If one is wondering as to how Jindal affixed the name SAW as a suffix, well, it is an acronym for Submerged Arc Welded - which the management claims involves complex technology. The company is primarily in the business of making steel pipes, of the seamless and the non seamless variety, and comprising of all shapes and sizes. It caters to the needs of the oil and gas transport industry, and water and sewage transport. Its applications are also in industrial piping. A large canvas if one may say so.

As a lateral diversification, it has mothered a new entity called Jindal ITF - this acronym stands for Infrastructure, Transport, Fabrication. ITF in turn has spun off four companies - Jindal Water Infrastructure, Jindal Waterways, Jindal Urban Infrastructure and, Jindal Rail Infrastructure. As the names suggest, they are into total water solutions, logistics, and local cargo movement, converting solid waste into power, and fabrication for the transportation sector. But being of recent vintage and acutely capital intensive to boot, they are all as yet to get off terra firma. (Also stay tuned to these johny come lately's sponging off the mother unit for some time to come). As a part of the waterways project, Jindal Waterways now has 7 ships and one barge for domestic intermodal operations.

Touchy notes to the accounts

Some of the notes to the accounts regarding the subsidiaries are very revealing. 'The company has unquoted investments of Rs 3.1 bn in subsidiary companies which have accumulated losses as per the latest balance sheet - considering the long term strategic and future prospects, no provision is necessary'. 'An amount of Rs 2.2 bn is outstanding from subsidiary companies which have accumulated losses'. The total advances to subsidiaries at year end in reality however were Rs 6 bn. The latter figure excludes an inter-corporate deposit (name of beneficiary not known) of Rs 1.3 bn at year end. The parent indeed has very deep pockets, and is not shy of sticking its neck out. And, with the American and Dubai subsidiaries also picking up steam, the parent can be counted on to dig ever deeper into its cash lode, to cater to the insatiable demands of these foundlings. The American and Dubai subsidiaries will directly cater to the demand germinating from these two regions - which implies heavy capex for a start.

The most eyebrow raising revelation is the rather casual declaration, that the year end balances of the debtors, creditors, and other advances, are subject to confirmation by the counter parties. This is a primary audit requirement, and especially so, given the humungous size of its operations. We seem to wallow in a 'chalta hai' attitude to any matter of import.

Expanding in all directions

In tandem with the related diversifications, the company is pumping up the adrenaline by expanding its own capacities to manufacture iron and steel pipes, and, anticorrosion coating on steel pipes, which are its bread and butter revenue generators. So much so, that the recently expanded capacities completely outstrips the company's ability to find a market for its produce. Steel pipe capacity utilization was a mere 47% of stated capacity while the anticorrosion unit was flogged at only 44% of capacity. However, what is left unsaid here is that the production during the year was in itself higher by 35% and 42% respectively, over that of the preceding year. But looking at it another way, the plants were also being operated at less than half their stated capacity, to generate revenue.

What allows the company to get away with rapid expansion, in anticipation of a bigger market in the offing, is twofold. On the one hand it ekes out sufficient margins on its produce, enabling it to generate sufficient cash flow from operations. But more importantly it manages its debt funding in a very tricky but patented manner, made famous by the late Dhirubhai Ambani. Given its brand equity in the market it has little difficulty in issuing convertible debt and then converting this debt into equity at a stratospheric premium. The trick of course is to ensure that its share price is maintained at an attractive price level prior to the date of exercising this option, in order to entice the holder of the debt to exercise the option, and after exercising the option, to keep the ex-right price in high orbit.

Managing its debt

In FY10 for example, it converted debentures worth Rs 2.1 bn into equity by issuing a mere 13 m shares of Rs 2 each, or for the equivalent of the face value of Rs 26 m. That is money for jam. But wait, there is more to come. It will convert foreign currency bonds (FCCBs) to the tune of Rs 3.3 bn in 2011 into equity shares of Rs 2 each at a premium of Rs 133 per share. So the management has its work cut out for it. One could therefore expect the company to post ‘good’ returns in the current year too. The alternative to conversion is not an attractive option for the issuer’s point of view. The holders have the option of redeeming the debentures at a premium to the issue price, you see.

There was a significant shift in the manner in which its sales were realized. With the market within the country suddenly growing, the company affected 60% of its sales by value within the country, with the balance accounted for by export sales. In the preceding year the percentage figures were 44% and 56% respectively. What can however affect its profitability ratios significantly is the forex factor, as 70% of the raw materials that it consumes by value is imported.

Favorable market forces at play

In tandem with the higher production and sales was the favorable movement of market forces, as its operations suddenly moved into another gear. The net cash generated from operations rocketed to Rs 18.1 bn from Rs 3.9 bn in the preceding year, thanks to higher production and higher price realizations on the one hand, and the market forces moving in its favor on the other. A sharp favorable turn on the working capital front (inventories, debtors) contributed Rs 7.2 bn cash against a negative flow of Rs 2.3 bn in the preceding year. That worked out to a turnaround of Rs 9.5 bn in fund flow. It is indeed amazing that the working capital market conditions can change so abruptly.

The Subsidiary logjam

The most interesting aspect of this company as with most other large family owned enterprises is the significant play of subsidiaries and affiliates which are christened as investment companies. Jindal Saw is no exception here. In 2009 one of its wholly owned subsidiaries, Highgate Consultants, which is in the business of finance and investments merged with the parent. This subsidiary was no waif by any yardstick, judging from the massive transfer of its accumulated profits of Rs 4 bn into the reserves of the parent company. But in the current year this merged unit does not appear to have generated any much income, judging either from the sales income schedule, or from the other income schedule.

Then there are its many other offspring, some of whom are subsidiaries, some not. Hexa Securities, and S.V. Trading for example. The name given to the latter gives no clue of its possible occupation but the parent is quite partial to the latter. It had an outstanding of Rs 3.8 bn from the latter at year end, against an outstanding of a much lower Rs 1.7 bn from the former. Then there are some seven other investment companies to which it has made advances to (not very significant amounts though) with no repayment schedules factored in. The interesting part of this deal is that the parent does not appear to have any direct investment in these companies. One guess is that these companies are merely some sort of investment fronts of the parent. It will help if managements were a little more forthcoming, on such seeming subterfuges.

Not that these subsidiaries in to-to do much on the sales generation front. Jindal SAW has provided the brief balance sheet details of 18 subsidiaries. Of these a mere 9 contribute to the turnover. The combined value addition of these siblings toted up to Rs 3.3 bn. But since they are not yet able to stand firmly on their spindly legs the profit before tax of the combined entity is less than that of the stand alone parent.

Disclosure: Please note that I am not a shareholder of this company

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.


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