PSL-On the verge of exponential growth

PSL-On the verge of capturing exponential growth

With an order book of Rs 2400 crore executable by March 2008, and a HSAW pipe capacity of 1.1 mn tonnes-the largest in the country, PSL foresees massive growth, which can be considered just short of revolutionary.

As against FY07 Revenues of Rs 1600 crore and after tax profits of Rs 60 crore, FY08 Revenues should rise to Rs 2400 crore and after tax profits exceed Rs 100 crore.

On an expanded Equity of Rs 34 crore, FY 08 EPS should work out to Rs 29, valuing the current market price of Rs 305 at just 10 times earnings forecast for the on-going financial.

While the UAE based pipe plant has gone commercial in April 2007, during the year new pipe plants are to be set up in China and the USA.

Over the next five years demand for Oil and Gas pipelines will work out to 21000 kms from Gail, RIL, Essar and Gujarat State Petronet. This expansion of gas pipelines alone will cost Rs 42000 crore as per current estimates.

That apart there will be demand for water pipelines and renewal/modernisati on of existing oil, gas and water pipelines within the country.In addition, about 220,000 kms of Oil and Gas pipelines are to be set up in the Middle East, China and the USA, which works out to a demand of roughly 30,000 kms per annum over the next 7 years.

There is a huge global demand-supply mismatch which should work to the advantage of pipe manufacturers in India. Concerns like PSL would benefit with ideally located coastal plants as also plants located within the consuming nations.

Overview

PSL is the largest manufacturer of high-grade large-diameter spiral (helical) submerged arc welded pipes, or HSAW pipes, in India, with a capacity to produce up to 1,100,000 tonnes per year. Our HSAW pipes are used primarily in the transmission of oil, gas and water. PSL manufactures HSAW pipes in 11 HSAW pipe mills and pipe coating mills located in five cities geographically spread throughout India.

PSL is also one of the four pipe manufacturers in India with an integrated pipe coating capability for among other things, pipe corrosion protection. PSL designs and builds its own pipe manufacturing and coating equipment in-house and also undertakes turnkey HSAW plant and machinery manufacturing.

Through its wholly-owned subsidiary PSL Corrosion Control Services Limited ("PSL Corrosion"), corrosion protection for reinforcing steel bars used in laying reinforced concrete in the construction industry by the fusion bonded epoxy coating process. The other types of coating services provided by us are polyethylene coating, coal tar enamel coating, fusion bonded epoxy coating, concrete weight coating, cement mortar lining, liquid epoxy coating and elastometric and field joint coating.

Demand for Pipes- Domestic ScenarioOil and Gas Sector

Pipeline transport is the cheapest mode of transportation of petroleum products. It is approximately 50% and 125% cheaper than railways and roadways respectively. Inspite of this, only about 25% of the total petroleum products are transported through pipelines in India as against about 65% in the developed countries.

This has been on account of low level of investments in the past in laying of pipelines in India. However, this is expected to change in the coming years with large capex lined up by hydrocarbon companies and pipelines emerging as the preferred mode of transportation due to its inherent advantages such as lower operational cost, safety and protection against pilferage.

The total pipeline infrastructure in India for oil and gas is around 18,000 km. Oil and gas majors have already announced plans to lay around 21,000 kms of pipelines over the next few years and more projects are expected to be announced going forward:Pipeline projects of some oil and gas majors: Gails existing network of pipelines will increase from the present 5340 kms to 18448 kms; RIL's network mainly KG2 and KG6 pipelines would be 6000 kms, and Essar Oil and GSPL will add close to 4000 kms of fresh oil and gas pipeline capacities.

One of the significant developments in recent times is the initiative to establish a National Gas Grid. Of the under mentioned projects, only a few are completed or are under implementation, which indicates that there are a number of pipeline projects lined up in the near future.GAIL, GSPL, Gas Transportation & Infrastructure Company Limited and other players have planned various crosscountry and regional pipelines. GAIL itself is planning 12,000 km of new trunk lines over the next five to seven years, even if some of the projects are delayed by 2-3 years and some are shelved, demand is expected to be in excess of average 3,000 km p.a. over the next 7 years.

Another important development in the country has been a number of gas-finds by players such as Reliance and ONGC. Gas consumption in India is set to take off with rising crude prices, which is putting pressure on need to find alternative sources of fuel, and improved availability with discovery of new gas fields and setting up of huge LNG terminals.

Moreover, gas, being a cleaner fuel, makes it a favourable source of energy. This presents another big opportunity to the sector, as pipes are the only means of transporting gas. There are expectations of manifold increase in gas supplies over the next 5 years with GAIL, RIL, ONGC and Indian Oil having clearly articulated elaborate investment plans in laying pipelines.

Water Pipelines

Apart from oil and gas pipelines, all Indian state governments (and in particular the Gujarat, Rajasthan and Kerala state governments) are increasing their focus on laying water pipelines to various locations within their states where water is in short supply, particularly since international organisations such as the World Bank and the Asian Development Bank are now funding such projects across India.

Water pipelines are large diameter pipes which can best be delivered using HSAW technology.Expand capacity by setting up new pipe manufacturing unitsThe Company intends to take advantage of the announced increases in the market by adding capacity in locations, which shall be closer to the areas of demand. The energy rich Middle East continues to be in the limelight for pipe manufacturers with major projects declared in this area.

In addition, the market for transportation of water within Middle East will also boost the requirement of pipelines.According to study by Simdex, there is demand for about 76,074 kms of pipeline in Middle East and Asia. In order to cater to this demand, PSL has set up a plant in Hamriyah, UAE with an annual capacity of 75,000 MTA which has been commissioned in April, 2007.

In USA, the growth in gas consumption has further necessitated laying of new pipelines and enhancement of existing pipeline network. Moreover, replacement of the existing water distribution network would further add to the demand of pipes in this region. To cater to this growing demand, PSL has proposed to establish a pipe manufacturing facility in the USA.