Jindal Saw Ltd

Saw Pipes - Global scenario

Globally pipelines are the preferred mode of transportation for liquids and gases, thusone of the largest users of SAW pipes is the hydrocarbon sector. Demand for SAW pipes isdependent upon infrastructure spending in exploration, production and transportation ofoil and gas. Shrinking oil reserves coupled with rising demand is expected to fuel hugeinvestments in explorartion and production (E&P) activities. High oil prices haveresulted in natural gas increasingly emerging as the fuel of choice and hence major gaspipeline construction has been planned. Though capital expenditure cost in pipelines shigher as compared to road and rail, the logistics costs in the case of pipes works out tobe much lower, which results in higher benefits for companies that prefer to opt forpipelines to transport its products.

While pipeline manufacturing business is cyclical in nature as the demand from itsbiggest consumer viz the oil and gas sector s highly correlated to the outlook on oil andgas prices. In 2009, demand for pipeline infrastructure was modest on the back ofuncertainly over global economic growth, which prompted companies to delay or reduce theircapital expenditure. Factors such as increasing demand for clean fuels like natural gasand search for new oil reserves coupled with replacement demand in developed markets islikely to result in strong demand for pipeline infrastructure

While there is good demand for pipeline infrastructure in MENA region and Asia, the USand European markets are still important markets for pipe manufacturers. Although thegenera opinion is that the worst may be over for the US and European economies, if theseeconomies were to weaken again or revival of their economic growth were to be delayed,investments in pipeline infrastructure would be severely impacted. This could force pipemanufacturers in the US, Europe and Japan to focus on MENA and Asian regions, andconsequently result in higher competition for Indian vendors. Major users of line pipesare regions such as the Middle East, Russia, the US and UK and Africa. Of these, theMiddle East, Russia and the US together absorb more than half of the entire globalproduction of welded steel pipes and tubes.

Natural gas effect: Increased usage of natural gas will ensure steady investments ingas pipeline infrastructure. Naturalgas accounts for 68% of the world's pipelines. Despitethe level of low investments in new pipeline infrastructure, construction of new gaspipelines will continue because most had started before the global economic slowdown hadset in. The three major natural gas-consuming markets are North America, Europe andAsia-Pacific (mainly Far East Asian countries). In the USA, natural gas will dominateinvestments and construction work n transmission pipelines.

Seamless Pipes

Seamless pipe demand is very highly correlated with crude oil prices, which, in turn,depend on the global economic outlook. Although there has been some increase in globaldrilling activities recently, the increase in activities remains very low but the recoveryis expected to strengthen, with both activity levels and pricing improving.

SAW Pipes

India is the sixth largest energy consumer in the world and is one of the world'sfastest growing energy consumers. The energy consumption matrix in India is dominated bycoal, followed by oil and natural gas. While this pattern contrasts with the World EnergyConsumption Matrix, which is dominated by oil and natural gas, it is important to notethat the consumption of oil and gas has been growing over the years in India, incomparison with coal.

India is expected to have a spurt in the construction of pipeline infrastructurebecause the country's domestic gas availability s poised to increase two-fold over thenext four to five years. In addition, most of the exploratory blocks that have beenoffered under various rounds of the New Exploration Licensing Policy (NELP) will enter thedrilling phase over the next few years.

According to the EIA, energy demand grew by 3.5% pa in 1999-2005, which is expected toincrease to 3.7% pa during 2005-I5 and to slow slightly to a 3.5% CAGR for 20I5-30. By2030, we expect India to be the third-largest energy consumer n the world, after China andthe US (it currently ranks fourth). Also, India's energy demand is expected to surpass theenergy demand of the entire OECD Pacific region (which currently equals 60%). (MacquarieResearch Equities - Report 2009)

Worldwide, the percentage of global primary energy consumption of natural gas rose fromI9% in I980 to 24% in 2002. During the period between 200I and 2025, natural gas demand isexpected to see high growth in developing countries.. The Indian natural gas market isrelatively underdeveloped compared to other regions of the world. Production of naturalgas, which was almost negligible at the time of independence, s at present at the level ofaround 87 million standard cubic meters per day (mmscmd). The main producers of naturalgas are Oil& Natural Gas Corporation Ltd (ONGC), Oil India Ltd (OIL) and JVs of Tapti,Panna-Mukta and Ravva. Under the production sharing contracts, private parties likeReliance Industries Ltd (RIL) are also producing gas. According to Hydrocarbon Vision2025, by 2024-2025, the share of natural gas in total primary energy consumption wouldincrease to 20%. New explorations along with favourable policies of the government wouldincrease the demand for gas transportation infrastructure.

Ductile Iron Pipes

Water and irrigation is a potentially limitless opportunity in India. Low levels ofwater availability, dependence on rainfall for agriculture, urban growth throws upinvestment opportunities n this space. The government is also turning its focus oncreation of urban and rural infrastructure (including water resources and sewagemanagement), and has increased budgetary allocation for the same under JNNURM schemes,where the government had allocated funds of the order of Rs. 5000 Cr. In these efforts,international development finance institutions such as the World Bank and the AsianDevelopment Bank are extending monetary support to the government. This has generated astrong demand for Dl pipes that are increasingly being used for water and sewagetransportation.

SAW Pipes

The global economic meltdown, in last two years, has resulted n decreased demand foroil and petroleum products. This, in turn, has affected investments in oil and gasinfrastructure, particularly the construction of new transmission pipelines. However, itis a widely held belief that with construction costs and other related costs likely toshoot up in the near future, investing in new pipeline infrastructure will best serve theinterests of oil and gas companies once demand and prices of oil and gas reach higherlevels. However, despite the slowdown n new pipeline infrastructure, construction of newgas pipelines are expected to continue as planning of the various pipelines started beforethe global economic slowdown had set in.

Further, demand for welded pipes for oil & gas transmission s expected to be drivenmore by structural factors, like long-term infrastructure requirements, a shift to cleanerfuels (gas), new oil & gas sources and geo-politics than short- to medium-term oilprice fluctuations.

According to the global consultancy Simdex, 7I0 pipeline projects of ~326,000km are tobe constructed in the next five years, with principal demand coming from Asia followed byNorth America. At an assumed rate of 200 tonnes of pipes per kilometer and an averageprice of US$I, 200/tonne, it is estimated that the global demand for pipes could be aslarge as US$78bn. The increased demand in Asia may be fuelled mainly by the growingeconomies of China and India.

Investment in water supply and sanitation infrastructure

The government of India has planned investments of more than Rs 1.4 Tn ininfrastructure relating to water supply and sanitation in the Eleventh Five Year Plan.Yearly investment is expected to grow at CAGR of about 20% during FY08-FYI2. Thisinvestment will be carried out with participation from both public and privateinstitutions. Jawaharlal Nehru National Urban Renewal Mission (JNNURM) has been set-up todrive the infrastructure improvement in urban India. Demand for DI pipes is directlydependent upon the infrastructure spending n water supply and sanitation. In addition tothe above, there s huge demand for water pipelines to meet the requirement of raw water /make up water for various upcoming power plants in the country and normally the watersource is at a reasonable distance from the power plant locations. Given the hugeinvestment expected in this sector, it is expected that the demand for DI pipes will growby at least I5% per annum from FYI0-FYI2.

Following are major threats/ risks which may be faced by the Indian Pipe Industry:

* Slowdown in World economies: Slowdown in economy may result in low investment inhydrocarbon sector. Limited amount of capital investment may result in low exploration andproduction activities and hence low demand for new pipeline. Recent global meltdown hasseen delay in investment and projects in oil and gas sector, resulting into almost lowdemand for pipe.

* Raw material prices and its availability: The availability of steel and at thebudgeted price is a key risk to pipe manufacturers. High volatility in the input pricesand leading to volatility in steel plate/ coil prices could affect the profitability.

* Overcapacity resulting in pressure in Margins: Capacity expansion by playersworldwide, or by new entrants leading to oversupply coupled with economic slowdown, mayput pressure on realizations and margins. In a rising steel prices scenario, a largenumber of players or oversupply could increase the bargaining power of buyers and themanufacturers may not be able to pass on increased costs to the buyer. These factors couldput pressure on margins.

* Increased global Competition: Global Competition especially in seamless and ductileiron (DI) pipes, though at an early stage, could pose problems for Indian pipemanufacturers in the medium to long term.

* High volatility in freight rates: Freight costs are approximately 5-7% of the SAWpipes operating costs. A high volatility in freight costs can affect the profitability ofpipe producers, if the charter agreements have not been entered to hedge the oceanfreights.

* Credit availability: The credit crunch or adverse liquidity situation can force thepipe buyers to default in payment for pipe supplies, delay or deferment in projectexecution etc.

* Foreign exchange: The Indian Pipe manufacturers are subject to foreign exchange risksdue to high imports and exports. The company is also subject to the same.

* Government regulation: Any adverse change in Government of India regulation canaffect the industry.

Jindal SAW Limited - Business & Outlook

Jindal SAW carries out its businessin two distinct undertakings including (a) Pipemanufacturing business undertaking and (b) Investment business undertaking. Both theactivities are distinct and diverse in their business characteristic, growth trajectories,risk profiles and require entirely different approaches.

Pipe manufacturing business

Jindal Saw has diversified from a single product company to a multi-product company,manufacturing large diameter submerged arc welded pipes and spirally welded pipes andbends for the energy transportation sector; carbon, alloy and stainless steel seamlesspipes and tubes manufactured by conical piercing process used for industrial applications;and DI pipes for water and sewage transportation. Besides these, the Company also providesvarious value added products like pipe coatings, bends and connector castings to itsclients. The Company is also expanding its capacities in HSAW pipes and DI pipes segment,targeted towards domestic and export demand. This enables it to have relatively lowerdependence on the oil and gas sector. Going forward, Jindal Saw plans to further leverageits presence n DI pipes through setting up a Greenfield project in United Arab Emiratesfor the middle-eastern and other regions. This will allow the Company to focus on theglobal markets for ductile iron pipe business as well.

Recent meltdown in globe has seen weakness in demand for SAW pipes. However, with eventof downside in the energy sector, Company's product portfolio offers flexibility in termsof target industry and application. Company's HSAW segment caters to energy as well aswater transportation sector mainly to domestic market. Indian energy and watertransportation sector was among the least affected sector during recession period. Ductileiron pipe finds application for transportation of water and sewage system, which did notlost its momentum, rather propelled its expansion plan.

Seamless pipe however was affected by slowdown in oil and gas CAPEX as well as downturnin auto sector. Company's seamless pipe division meets demand from auto, power and oil andgas segment. Auto and Power contributes 35-40% of revenue from seamless division of theCompany.

Overall Company's product portfolio is diversified to auto, power, water and sewage,and oil & gas segments which mutually balances the upturns and downturns in any ofthese segments.

Investment Business Undertaking

The Company is also engaged in investment business by way of making investments inshares and other securities as well as other financing activities of group companies andstrategic investments in new ventures. These activities are carried out directly and / orthrough its NBFC subsidiary.

Jindal ITF - targeting India's infrastructure needs

Through its wholly owned subsidiary, Jindal ITF Ltd, the Company has ventured intobusinesses like water and waste water management, urban waste management, coastal andinland water transport, and rail wagon manufacturing. Of these businesses, water/wastewater management and costal/inland water transport have started generating revenue. Whilethese businesses may not generate significant business in near term, most of them are inthe infrastructure segment, which has huge long term potential considering the expectedgrowth of Indian economy.

The key risks are:

* Economic slowdown may effect the order book position of the Company in the interimperiod. This may have an effect on the lower capacity utilization, sales and profitabilityof the Company. However, the Company's diversified product portfolio allows it to mitigatethis risk to a larger extent.

* Increased competition in all the segments from other players. However, the Companybelieves that competition s healthy for the industry and to mitigate this risk it remainscommitted for its sustained efforts for optimization of resources, cost control andexpanding the markets.

* Company' ability to meet the financial requirements. The Company has improved itsdebt/equity position and also has sufficient cash in hand to meet the ongoing capitaexpenditures as well as to insulate it from uncertainties. Company has sufficient bankfacilities in place to meet sudden requirements.

* Company's exposure in Foreign exchange may have an effect on the financials of theCompany. The Company s currently exposed to certain foreign exchange derivativetransaction with a negative mark to market position. The Company is proactively managingthe position on regular basis and now follows a policy to meet its requirements.

FINANCIAL AND PRODUCTWISE PERFORMANCE

The highlight of the operations for 2008 and 2009-10 are as under:

Major highlights are as under:

Company's Sales mix:

Iron & Steel pipes includes sale of L SAW pipes, H SAW Pipes, DI Pipes and SeamlessTubes. The company continued to remain focused on the value added production and thus theproduction of Pig Iron is further reduced to negligible level in 2009-l0.

During the period:

A) l3004485 equity shares were allotted to the holders of 2600897- 9.5% UnsecuredCompulsorily convertible Debentures (CCD's) of Rs 8l9/- each (each CCD convertible intofive equity shares)

B) Company has not taken any additional long term loan. The value of the balance amountof FCCB and ECB has changed due to the fluctuation in the respective foreign currencies.

C) The liquidity position of the company remained comfortable. Interest on borrowingwere lower in this year as well

D) The earnings ratios have improved. The EBITDA improved to app. l8.5% as compared toapp. l4% in the previous year.

E) Net worth of the Company increased to Rs. 3,64l Crores as at March 3l, 20l0 asagainst Rs. 2,35l Crores as at December 3l, 2008

F) Net fixed assets (including capital work in progress) as at March 3l, 20l0 increasedto Rs. 2l33 Crores as against Rs l,886 Crores as at December 3l, 2008

Internal Control and Their Adequacy

The Company has reasonable system of internal control, pre defined authority levels andthe management routinely tests the powers, checks, policies & procedures and mechanismto supervise. The Company has adequate internal audit systems to ensure that alltransactions are authorized, recorded and reported correctly. Moreover, the Companycontinuously upgrades these systems in the line with the world class accounting practices

The internal control systems consist of regular operative performance evaluation anddevising corrective measures thereof and comprehensive internal and external audits.During the year, the Company used services of Singhi & Co., Chartered Accountant toindependently evaluate adequacy of internal controls and conducts transactions as well asmanagement audit. The direct reporting of the internal auditors to the Audit Committee ofthe Board ensures Independence of the audit and compliance function.

The Audit Committee also reviews the adequacy of internal controls, systems and thecompliance thereof. Further the annual financial statement of the Company are reviewed andrecommended by the Audit Committee for the consideration and the approval of the Board ofDirectors. The Committee also reviewed the internal controls system, significantaccounting policy, major accounting entries, etc. during the year.

The Company's assets are adequately insured against the loss of fire and other risk,which considered & perceived necessary by the Management from time to time.

Material Developments in Human resources/ Industrial Relations

Processes and Practices initiated & embedded in the system continue to be reviewedand strengthened. Negotiating the tough global economic meltdown, the organizationreiterated its focus on encouraging investments in people through merit oriented payrevisions and differential pay reviews. Rewards & recognition coupled with retentionof contributing and key skills / employees remained the edifice of the organizationphilosophy.

Focus on developing talent pool and employee capability was achieved through lateralhiring, increased emphasize on learning & skill up gradation via in-house &external training, job rotations, multi skilling and inter unit developments in green& brown field projects. Critical skills identification & ramp up planningcontinues at the operating level. Cultivating talent factored n the need for future skillsresulting out of changes in technology or processes.

Continuous review of Policies / Practices with the view to making them contemporary& uniform in application is an ongoing process. Steps continue to be regularlyinitiated to improve processes at Unit levels for better control& productivity.

To improve quality of work life, medical, housing, welfare, recreational, educationfacilities have been reviewed and upgraded. Where required, expertise is beingcollaborated in improving the quality of education at our Schools.

CSR development activities continue to be a focus on the belief that benefits percolateto the society in which we habitat and co-exist.

Cordial industrial relations prevailed across the Company. The Management places onrecord the contribution of employees during the year and their unstinted &wholehearted involvement n raising the bar and achieving continuous improved targets andproductivity.