PSL: Buy


Helical pipes in demand

Well-timed capex

Steel prices, a risk

With large capacities for helical pipes and a big order book, PSL faces strong growth prospects.




With newer facilities being added, the growth momentum is likely to continue.

Srividhya Sivakumar

Investments with a two-three year perspective can be considered in the stock of PSL. The company's strengthening order book, expansion in capacities and healthy demand from user industries also suggest strong growth prospects. With an installed capacity of over a million tonnes per annum, PSL appears best placed to benefit from the rising global acceptance of helical pipes.

At the current market price of Rs 320, the stock trades at about 10 times its likely FY-09 per share earnings on a fully diluted basis.

This appears fairly reasonable considering PSL's growth potential. Investors, however, can consider buying the stock in lots given the broad market volatility.

Business


PSL has the largest HSAW (helical submerged arc welded) pipe manufacturing facility in the country. Further, the company also has an integrated pipe coating and an in-house engineering facility that makes pipe manufacturing and coating equipment.

PSL enjoys a significant share of the helical pipes market in India. Helical pipes are finding wider acceptance and newer applications, globally, due to their lower cost structure and improved welding technology.

Helical pipes are now increasingly being used in non-critical applications in onshore oil and gas transportation and water projects in the west Asian countries and North America.

In the domestic market, the expected ramp up in city gas distribution and the increasing number of onshore blocks awarded under NELP may keep the demand buoyant. That the domestic market is, by and large, price-sensitive may also lead to a preference for helical over line pipes.

Competitive edge

PSL appears best placed to capitalise from such growth opportunities. Besides a strong domestic presence, the company has presence in the UAE and has initiated steps to set up shop in the US.

This should help it gain wider presence in the overseas market, which offers high growth and margin potential over the next two years.

In the domestic market, the company's large production facility will help it meet incremental demand, even as its domestic peers are in the midst of expansion plans. The company's presence spanning over five states in the country is an advantage too. Apart from improving its accessibility to project sites of its end-users, a well-spread network will help PSL bring down its freight costs significantly.

Freight costs form a major cost component for pipe makers. Bring a manufacturer of helical pipes, PSL enjoys the unique advantage of being able to relocate its pipe mills near the project sites of its clients.

In addition, PSL's engineering facility also provides it with a relatively low cost structure for setting up HSAW plants vis-À-vis its peers. The company's order-book position reinforces the strong demand scenario. It has an order-book of over Rs 3,400 crore, including the latest order win of Rs 1,225 crore from HPCL and L&T.

Expansion in capacities

To benefit from increasing overseas demand, the company is in the process of setting up capacities in UAE and the US. The UAE facility, with a capacity of 75,000 million tonnes per annum, is expected to commence production soon.

PSL plans to get this facility API accredited. That apart, the company is also setting up a facility in the US (capacity of three lakh tonnes per annum) by way of a 78 per cent joint venture with the US-based A&L Group. This facility is likely to begin production by mid-FY-09. These overseas ventures, apart from diversifying the company's revenue base, will also help it expand margins.

Strengthening financials

Over the last three years, PSL has reported a compounded revenue and profit growth of over 21 per cent and 30 per cent respectively.

With newer facilities being added, the growth momentum is likely to continue. PSL's high reliance on debt due to higher inventory requirements has been a constraint. But higher demand and utilisation levels may help in this aspect.

The recent hike in HR coil prices, a critical raw material for making helical pipes remains a concern. We expect the company to offset some impact of this hike by increasing its prices.

All the same, given the volume-driven nature of its business, the scope for price hikes may be limited. Margins are, thus, likely to remain sedate till such time steel prices stabilise