05102009160050 pipe industry report

Industry Pointer

- 1 - Monday, October 05, 2009

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.

PIPE INDUSTRY REPORT

““PPrrooffiittss iinn tthhee PPiippeelliinnee””

Industry Pointer



CONTENTS Section 1: Industry Executive Summary……………………………………………………………………………... Energy Demand key driver for pipeline projects…….……………………………………...... E&P continues despite fall in crude prices……………………………………………………. International Demand Outlook…………………………………………….............................. US Expenditure on Projects…………………………………………………………….……….Replacement market in US & Russia……………………………………………………......... International Supply Outlook…………………………………………………………………….Demand Supply Situation………………………………………………………………………..Domestic Scenario………………………………………………………………………………. Water Infrastructure Projects: A key driver for HSAW & DI Pipes…………………………..Product Wise Demand Scenario: Seamless Pipes…………………………………………...Product Wise Demand Scenario: DI Pipes…………………………………………………….Product Wise Demand Scenario: SAW Pipes…………………………………………………HSAW Technology takes over LSAW applications…………………………………………...Porter Analysis…………………………………………………………………………………… Accreditation Process: A significant entry barrier……………………………………………..Competitive Edge for Indian Players over other exporters………………………………….. Industry Concerns……………………………………………………………………………...... Section 2: Companies PSL Limited (PSL)…….………………………………………………………………………….Welspun Gujarat Stahl Rohren Limited (WGSRL)…………………………………………… Jindal Saw Limited (JSL)………………………………………………………………………... Section 3: Glossary Pipes: Types, Applications, Size, Raw Materials & Key Differentiators…………………….Pipes: Classification………….….................................................................……………….. Section 4: Appendix Appendix 1: World GDP by Region ……………………………………………….................. Appendix 1: World Liquid / Oil Consumption by Region.....................................................Appendix 1: World Natural Gas Consumption by Region……………………………………

3 4 5 6 77899

111213141617171819

202937

4647

484950

Industry Pointer



Executive Summary: Pipe Industry

Source: Simdex, Ventura Estimates

Pipes in Focus: SAW Pipes Estimated Supply (MTPA) 19,461,000

Estimated Demand (MTPA) 19,558,440

Excess Demand (MTPA) 97,440

Key Demand Drivers 710 pipeline projects worldwide totaling US$ 117 bn

Huge replacement market yet to open up

Huge domestic Investments in Pipelines led by GAIL

Water projects another demand driver

Top Players & Capacity (MTPA) Jindal Saw 1,690,000

Welspun Gujarat Stahl Rohren 1,500,000

PSL 1,475,000

Capacity Additions planned (MTPA) Jindal Saw 460,000

Welspun Gujarat Stahl Rohren 600,000

PSL 225,000

Listed Pipe Manufacturers Vs SENSEX

Commensurate with the global recovery, the pipe industry is expected to benefit considering the quantum of investments proposed for the pipeline projects across the globe. The business potential for the SAW pipe manufacturers from these projects is pegged at US$ 117 billion over the next four to five years. The Indian Pipe manufacturers which have majority of the revenues coming from exports & having accreditations from oil & gas majors across the globe are expected to garner a sizeable share from these projects. In addition to the new projects, the replacement market in North America would be an additional demand driver for the Indian pipe manufacturers. The demand-led growth coupled with healthy order book and capex plans augurs well for the Indian players. We are initiating coverage on the Pipe Industry with the top three picks being PSL, Welspun Gujarat & Jindal Saw.

Key Investment Highlights

Demand driven growth to continue The global pipeline requirements is expected to be ~98 million tons with a total of 710 projects and an opportunity of more than $117 billion across the globe for the next five years. Thus the addressable market for the pipe manufacturers is pegged at $23.4 billion per annum while the tonnage requirement is estimated at 19.6 million tons per annum. With the close proximity to the ports coupled with lower labor cost & locational advantage, Indian players are expected to bag sizeable share of these orders. Further we believe the Indian companies is set to benefit from the proposed gas pipeline network to be built by GAIL, GSPL, and other domestic players, who have announced plans to construct pipeline transmission networks in India worth over Rs 20,000 crore.

High revenue visibility inspires confidence Indian pipe manufacturers have strong order book despite the challenging circumstances prevalent in the economy. These order books are set to galore with the demand for pipes likely to pick up over the next few years. This provides high revenue visibility for these companies.

Positive outlook especially for SAW pipe manufacturers While the demand for seamless & ERW pipes remain sluggish, the demand for SAW pipes is likely to remain firm as these pipes are basically oil & gas transportation pipes required for setting up oil & gas pipelines. While PSL is purely a SAW pipe manufacturer, Jindal Saw & Welspun Gujarat have majority of the revenues coming from this segment.

Our Recommendation

PSL WGSRL JSL CMP 177.0 262.0 765.0 EPS - FY11e 33.3 30.0 82.4 PE - FY11e 5.3 8.7 9.3 Target PE 7.5 12.0 10.0 Target Price 250.0 360.0 825.0 Upside (%) 41.0 37.5 7.8 Recommendation BUY BUY BUY ON DIPS

Industry Pointer

- 4 - Monday, October 05, 2009 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.

Commensurate with the increase in world GDP, the energy demand is likely to grow at a CAGR of 1.5%, led by growth in Non OECD countries which is at 2.3%, while demand for energy for the OECD countries is likely to grow at a CAGR of 0.6% till 2030

Energy Demand key driver for Pipeline Projects

Increasing GDP to drive energy demand

Economic growth & Development tends to be directly correlated with increased energy consumption. The International Energy Outlook for 2009 suggests that the World GDP would grow at a CAGR of 3% from 2006 to 2030, primarily led by growth in developing countries (GDP pegged at growing at a CAGR of 5.1% driven by China & India) while the developed economies are expected to grow at a CAGR of 2.1% till 2030. (Refer Appendix 1 for World Gross Domestic Product by Region)

Energy Demand to grow at a CAGR of 1.5%

Commensurate with the increase in world GDP, the energy demand is likely to grow at a CAGR of 1.5%, led by growth in Non OECD countries which is pegged at 2.3%, while demand for energy for the OECD countries is likely to grow at a CAGR of 0.6% till 2030.

World Total Energy Consumption by Fuel, 1990-2030 (Quadrillion Btu)

Region History Projections CAGR

1990 2005 2006 2010 2015 2020 2025 2030 (%)

Total OECD Liquids 83.6 99.4 98.8 92.4 94.0 95.8 97.2 99.4 0.0

Natural Gas 37.3 53.6 53.9 56.7 59.6 62.6 65.7 66.8 0.9

Coal 43.5 46.9 46.9 47.3 47.8 47.9 48.3 50.7 0.3

Nuclear 17.3 23.2 23.3 24.0 24.7 25.6 26.0 27.0 0.6

Other 16.0 18.3 18.8 22.4 26.3 29.5 32.3 34.3 2.5

Total 197.7 241.3 241.7 242.8 252.4 261.3 269.5 278.2 0.6

Total Non-OECD Liquids 52.9 71.0 73.6 82.3 89.3 98.4 107.4 116.4 1.9

Natural Gas 38.0 53.5 54.2 61.7 71.4 79.1 85.5 91.2 2.2

Coal 45.7 74.8 80.6 93.3 102.9 113.8 126.9 139.6 2.3

Nuclear 3.1 4.3 4.4 5.0 7.2 9.9 12.2 13.2 4.7

Other 10.3 17.2 18.0 23.1 28.4 33.2 35.8 39.8 3.4

Total 149.9 220.7 230.8 265.4 299.1 2334.4 367.8 400.1 2.3

Total World Liquids 136.4 170.4 172.4 174.7 183.3 194.2 204.6 215.7 0.9

Natural Gas 75.3 107.1 108.1 118.5 131.0 141.7 151.3 158.0 1.6

Coal 89.2 121.7 127.5 140.6 150.7 161.7 175.2 190.2 1.7

Nuclear 20.4 27.5 27.8 29.0 31.9 35.4 38.1 40.2 1.6

Other 26.3 35.5 36.8 45.6 54.6 62.8 68.1 74.1 3.0

Total 347.7 462.1 472.4 508.3 551.5 595.7 637.3 678.3 1.5

Source: International Outlook 2009, Release Date: May 2009

While the global demand for oil (liquid) would grow at a CAGR of 0.9% from 2006 to 2030, the demand for natural gas is expected to exhibit a CAGR of 1.6%. The oil demand of 0.9% is expected to come from developing economies only where as the demand for natural gas from the developing economies is expected to grow at 2.2% as compared to 0.9% growth to be driven by the developed economies.

Industry Pointer


The sustainability in E&P activities along with the scenario of crude prices likely to move up on account of depleting oil reserves & rising demand augurs well for the pipe transportation sector which forms the last leg in the entire chain

The demand for oil is likely to be driven by Asia which would grow at a CAGR of 2.7% till 2030, led by China & India where the oil consumption is likely to grow at a CAGR of 3.2% & 2.4% respectively. Brazil too is not far left behind, where the oil demand is likely to grow at a CAGR of 2.1%. (Refer Appendix 2 for World Liquid/Oil Consumption by Region) The Energy Information Administration (EIA) forecasts natural gas to form 24% of total energy usage by 2020, with the share of oil falling to 34%. This is largely driven by higher demand for natural gas which is pegged at a CAGR of 1.6% globally while oil is likely to grow at a CAGR of just 0.9%. (Refer Appendix 3 for World Natural Gas Consumption by Region) E&P continues despite fall in crude prices

When the Oil & Gas prices are high, many E&P companies invest their resulting strong cash flows in the development of existing properties & exploration for new reserves. These activities results in an increase in drilling activities which remains high until oil & natural gas prices begin to fall, at which point drilling activity (rig utilization rate) also declines. Thus rig utilization rate is one of the key factors in assessing the quantum of E&P activities. The table shown below lists the rig utilization rates for the different region & the variation over the last 12 months.

18th Sep, 2009 18th Sep, 2008 Region Rigs

Wkg Total Rigs

Rig Utn

Rigs Wkg

Total Rigs

Rig Utn

Africa - Other 0 3 0.0 1 2 50.0Africa - West 45 65 69.2 54 62 87.1 Asia - Far East 22 23 95.7 14 18 77.8 Asia - South 34 35 97.1 31 31 100.0 Asia - SouthEast 60 77 77.9 60 79 75.9 Australia 16 17 94.1 17 17 100.0 Black Sea 3 3 100.0 3 3 100.0 Europe - East 2 3 66.7 2 2 100.0 Europe - North Sea 63 75 84.0 65 69 94.2 Mediterranean 12 19 63.2 16 17 94.1 MidEast - Persian Gulf 70 93 75.3 73 85 85.9 MidEast - Red Sea 10 15 66.7 15 15 100.0 N. America - Canadian Atlantic 2 3 66.7 2 2 100.0 N. America - Canadian Pacific 0 1 0.0 0 1 0.0N. America - Mexico 36 39 92.3 32 32 100.0 N. America - US Alaska 0 1 0.0 1 1 100.0 N. America - US GOM 45 77 58.4 73 86 84.9 S. America - Brazil 41 48 85.4 33 38 86.8 S. America - Other & Carib. 2 3 66.7 2 4 50.0 S. America - Venezuela 13 13 100.0 10 10 100.0 Total 476 613 77.7 504 574 87.8

Source: RIGZONE

Industry Pointer


The global pipeline requirements is expected to be ~98 million tons with a total of 710 projects and an opportunity of more than $117 billion across the globe for the next five years

Though the rig utilization rates have reduced by around 10% from 88% to 78%, the fall is lower than the fall in the relative crude prices over the same period. Crude prices during the period under review had taken a hit of more than 20%. The sustainability in E&P activities along with the scenario of crude prices likely to move up on account of depleting oil reserves & rising demand augurs well for the pipe transportation sector which forms the last leg in the entire chain.

To make available these oil finds (resulting from E&P activities) to the end consumer, pipelines are extremely important mode of transport, recognized as the safest as well as the most economical way of distributing the vast quantities of oil & natural gas from production fields to refineries & from refineries to customers.

International Demand Outlook

To meet the increasing energy needs of global economies, oil & gas companies are investing in laying huge pipelines spanning thousands of kilometers. The following table indicates that more than 325,000 kms of pipeline projects would be laid down in the next four to five years.

Region Projects Total Length (kms)

*Qty (In million MT)

**Business Potential (US$

Bn) North America 192 73,736 22.1 26.5

Latin America 56 35,053 10.5 12.6

Europe 101 44,784 13.4 16.1

Africa 49 17,452 5.2 6.3

Middle East 111 43,626 13.1 15.7

Asia 142 95,003 28.5 34.2

Australasia 59 16,339 4.9 5.9

Total 710 325,974 97.7 117.3

Source: Simdex, US, May’09 Update, * Conversion rate of 300 ton per km, ** Conversion rate of $1,200 per ton

Based on these projects, the global pipeline requirements is expected to be ~98 million tons with a total of 710 projects and an opportunity of more than $117 billion across the globe for the next five years. Thus the addressable market for the pipe manufacturers is pegged at $23.4 billion per annum while the tonnage requirement is estimated at 19.6 million tons per annum.

Geography wise share of Expected Demand until 2014

North America

23%

Latin America

11%

Europe14%Africa

5%

Middle East13%

Asia29%

Australasia5%

Industry Pointer


Despite US facing recessionary pressures & cutting spend across various projects, its Crude & products pipeline as well as Natural Gas pipelines would witness an incremental spend of 16.5% & 63.6% respectively in CY09 The expected replacement demand for line pipes is much larger than that for new pipes, especially in US & Russia, which is yet to open up

According to CRU Analysis 2007 report (the Five-Year Outlook for API Pipe Steel), the demand for pipe will continue to remain bullish in near future owing to sturdy demand in energy consumption. Much of this growth will come from the large diameter pipes above 20". Thus, a considerable share of consumption will be for line pipe in the diameter range of 20"+ for crude oil transportation. US Expenditure on Projects

As per the table above, despite US facing recessionary pressures & cutting spend across various projects, its Crude & products pipeline as well as Natural Gas pipelines would witness an incremental spend of 16.5% & 63.6% respectively in CY09. This inspires confidence among global pipe manufacturers who are the key exporters to US. Replacement market in US & Russia: Huge opportunity yet to be open up The expected replacement demand for line pipes is much larger than for new pipes. A recent entrant to the growth drivers is the demand arising from the replacement of old pipelines, predominantly in the US & Russia. These pipes were laid in the late 1960s & 1970s. The average life of a pipe used for transportation of oil & gas is approximately 25 to 30 years. US Oil & Gas Pipeline Mileage

1960s 1970s 1980s 1990s

Oil Pipeline 190,944 218,671 218,393 208,752

Gas Pipeline 630,900 913,300 1,051,800 1,189,200

Industry Pointer


According to the industry sources, the pipe manufacturers across the globe are likely to add 2.7 million tons of HSAW and 2.3 million tons of LSAW respectively by CY2010

More than 1 million miles of gas pipelines out of the 1.5 million miles in the US were laid prior to 1975. These pipelines which have outlived their economic life have a pressing need for replacement to ensure smooth flow of operations. However while calculating the demand for line pipe, we have included only demand coming from new projects as the replacement demand has not yet open up. However we expect this segment to be highly demand accretive (as & when it comes) as the US companies alone will not be in a position to satisfy this additional demand, thereby being an excellent opportunity for Indian Saw Pipe manufacturers to service this demand, especially the ones (PSL & Welspun Gujarat) who have set up manufacturing facilities there.

International Supply Outlook

The increasing investments across the globe on the pipeline projects are thriving capacity additions to fill the demand supply gap. The region wise global capacities in the world in SAW pipes are as follows:

Global Pipe Capacities HSAW LSAW Total

North America 680,000 2,150,000 2,830,000

Western Europe 1,430,000 3,285,000 4,715,000

Eastern Europe 125,000 44,000 169,000

CIS 240,000 2,350,000 2,590,000

Asia 3,191,000 3,762,000 6,953,000

Middle East 845,000 980,000 1,825,000

South Africa 150,000 470,000 620,000

Africa 246,000 0 246,000

Other World 3,212,000 1,900,000 5,112,000

Total World 10,119,000 14,941,000 25,060,000

Source: Welspun Gujarat Annual Report 2008-09 Incremental additions of capacities (announced) According to the industry sources, the pipe manufacturers across the globe are likely to add 2.7 million tons of HSAW and 2.3 million tons of LSAW respectively by CY2010. Thus the total capacity of SAW pipes post additions is pegged at 29,940,000 MTPA. At an average capacity utilization of 65%, the production of saw pipes is estimated at 19.5 million tons.

Industry Pointer


There is likely to be a demand supply mismatch ~100,000 MTPA over the next few years. The gap is expected to widen only, once the replacement market opens up which would be much higher than the demand for new pipes The pipeline network in India for oil & gas transportation is approx. 13,517 kms with a penetration level of 32% which is much below the global standards

Demand Supply Situation

Total expected production of SAW Pipes (Supply) p.a. 19,461,000

Total Demand (excluding Replacement Demand) p.a. 19,558,440

Excess of Demand over Supply per annum 97,440 As witnessed above, there is likely to be a demand supply mismatch of ~100,000 MTPA. However while calculating the demand for linepipes; we have not taken into account the replacement demand which is expected to kick start soon & would be even higher than the demand coming from the new projects. Thus clearly the demand supply imbalance is likely to remain in favor of demand atleast for next few years.

Domestic Scenario

The domestic demand scenario for pipes is expected to remain firm over the next few years. The demand is expected to rise due to the following reasons:

Lower penetration of pipeline in oil & gas transportation High transportation cost via rail & road New projects announced by oil & gas transmission companies

Lower penetration of pipeline in oil & gas transportation

The pipeline network in India for oil & gas transportation is approx. 13,517 kms with a penetration level of 32% which is much below the global standards. With large investments by both public & private players in India, the share of transportation of oil & gas through pipeline is expected to increase in future.

32%

59%

75% 79%

0%

10%

20%

30%

40%

50%

60%

70%

80%

India USA France Global

Pipe penetration levels

The Ministry of Petroleum & Natural Gas (MOP&NG), India estimates that the share of pipelines might touch around 45% over the next 2-3 years.

Industry Pointer


GAIL, GSPL, and other domestic players have announced plans to construct pipeline transmission networks worth over Rs 20,000 crore

High transportation cost via rail & road

Globally, the transportation of petroleum products & natural gas is usually preferred by pipeline to other modes of transportation due to operational economies, coupled with benefits of a cleaner distribution chain. Pipelines are generally the most cost-effective way of transporting petroleum products and natural gas. It costs approximately Rs 1.30/Km as compared to rail Rs 2.20/Km & road Rs 3.02/Km.

New projects announced by oil & gas transmission companies

India has relatively under-developed gas pipeline infrastructure which is rapidly scaling up in tandem with the increasing demand & ramp up in supplies. Currently, the country’s gas requirements are serviced primarily through GAIL’s pipeline network, supported by some pipelines of other PSU’s like ONGC, and some regional players like Gujarat State Petronet (GSPL).

With Reliance Industries also jumping into the fray and last mile connectivity receiving a fillip due to entry of many players into the City Gas Distribution (CGD) domain, the bottleneck of pipeline connectivity is set to be alleviated. Huge Plans of some major domestic players

Company Total Length (Kms) Quantity (Tons) Business Potential (US$ Bn)

GAIL 6,215 1,864,500 2.2

Reliance Industries 3,630 1,089,000 1.3

GSPL 2,711 813,300 1.0

Total 12,556 3,766,800 4.5

Proposed Pipeline of GAIL

Pipeline – Phase I (by 2011) Length (Kms) Cost (Rs Cr) Additional Cap. (MMSCMD)

Dahej – Vijaipur / Grep Upgradation 1,115 5,000 66

Dadri – Bawana – Nangal 640 2,500 31

Chainsa – Jhajjhar – Hissar 450 1,000 35

Sub Total 2,205 8,500 132

Pipeline – Phase II (by 2012) Length (Kms) Cost (Rs Cr) Additional Cap. (MMSCMD)

Jagdishpur – Haldia 1,690 6,600 32

Dabhol – Bangalore 1,480 4,000 16

Kochi – Mangalore – Bangalore 840 3,500 16

Sub Total 4,010 14,100 64

Grand Total 6,215 22,600 196

The table above indicates the plans of some major pipelines in India announced by GAIL in two phases with a total capex of more than Rs 220 billion. The plans discussed above are for few large players in the domestic market. Thus the overall domestic market size would be much bigger.

Industry Pointer


The City Gas Distribution (CGD) in India is too poised to take off in a big way with the extension of the project to thirty cities in different states by 2009 besides Mumbai & Delhi In order to improve the sanitation levels as also to make available water to common man, the GOI has launched the various reform linked schemes which would drive demand for HSAW & DI Pipes

CGD poised to take off: The City Gas Distribution (CGD) in India is too poised to take off in a big way with the extension of the project to thirty cities in different states by 2009 besides Mumbai & Delhi. Currently CGD is operational only in Mumbai, Delhi & several cities in Gujarat while it is under implementation stage in more than half a dozen sates including Uttar Pradesh, Rajasthan, Madhya Pradesh, Maharashtra, Karnataka, Kerela, Andhra Pradesh & West Bengal. With investments of over US$ 2 billion, the network would be further expanded at a later stage to cover 200 cities in 15 states, providing gas to 160 million people. As of now, CGD accounts for just about 5-6% of the total gas consumption, at 5-6 mmscmd. But in the next four years, consumption is likely to grow to 20 mmscmd. Water Infrastructure Projects: a key driver for HSAW & DI Pipes Economic growth, population expansion and the influx of people into cities have sharply raised India's water requirements while increasing pollution risks. Asian Development Bank (ADB) is infact doubling its investment on water from $1.2 billion in 1999 to $2 billion in 2010 in the South and Southeast Asia region. Over 800 million people in the region face problems in accessing portable water of which nearly 50 percent are Indians. India has dismal sanitation levels as compared to global counterparts as displayed below:

In order to improve the sanitation levels as also to make available water to common man, the GOI launched the reform linked Jawaharlal Nehru National Urban Renewal Mission (JNNURM) along with Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT) in December 2005. The total outlay for the Urban Infrastructure and Governance component of JNNURM is Rs 315 billion for the Mission period i.e. 2005-2012. Water and Sanitation sector which covers water supply, sewerage, solid waste management and storm water drainage accounts for about 73.4% of the total number of projects sanctioned under JNNURM as on date and 80.8% of the total cost of projects sanctioned. In absolute terms, the number of such projects sanctioned is 340 out of a total of 463 projects sanctioned under the scheme.

Industry Pointer


The slump in E&P activities world wide (on account of stupendous fall in crude prices) over the last year has resulted in steep fall in demand for seamless pipes

Further under the Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT), out of a total of 969 projects, the water and sanitation sector accounts for 828 projects. The share of the water and sanitation sector in terms of cost is around 92% i.e. Rs 184 billion out of Rs 198 billion. Looking at the quantum of spend under the aforesaid schemes, this provides a huge opportunity for manufacturers of HSAW & Ductile Iron Pipes which would see heightened activities in terms of increasing order flows as the disbursements are likely to speed up. It may also be noted that the GOI has increased the annual budget allocation under the Rajiv Gandhi Drinking Water Mission from Rs 65 billion to Rs 73 billion in the Union Budget 2008-09.

Product wise demand scenario: Seamless Pipes

Seamless pipes & tubes are used both in oil & non-oil sector. Nearly 65% of the demand for these pipes comes from the oil & gas sector (E&P activities in particular) alone while the balance comes from shipbuilding, chemical, general engineering & automobile industries. Seamless pipe market is far more consolidated than welded pipe market (top 5 catering to almost 60% of the demand world-wide). This has led to greater pricing power for the seamless pipe manufacturers. USA is by far the largest consumer of the Seamless pipes.

However the current economic meltdown has had a material impact on the demand for seamless pipes. The slump in E&P activities world wide (on account of stupendous fall in crude prices) over the last year has resulted in steep fall in demand for seamless pipes. The resultant inventory pile up of seamless pipes had pushed prices to $1,000 per ton after having touched a high of $1,800 per ton.

However in the last three months prices have recovered to $1,200 per ton on account of resurgence in E&P activities in Middle East & Asia. Indian manufacturers are now eyeing Middle East, Asian & North American market for supply of Seamless pipes. Even though there is a huge fall in demand in the North American market, it still remains a major market contributing nearly 40% of the total seamless pipe demand globally. Domestic Market Share of Seamless Pipes

Seamless Pipes: Players & Market Share

15%

25%50%

10%

Maharashtra Seamless

Jindal Saw

ISMT

Imports

Industry Pointer


The demand for DI Pipes is expected to grow at a CAGR of 15% for next couple of years with only few players present in this segment

In the domestic market, over the years, ONGC has been only source of demand for the seamless pipes. However with RIL & Cairn India increasing their E&P activities, there has been a spurt in demand for these pipes. Thus the demand for these pipes in India is likely to increase going forward. However, the global demand is likely take nearly 6-9 months to stabilize.

Product wise demand scenario: Ductile Iron (DI) Pipes

DI Pipes are used for transportation of water & sewage distribution. Rising population in country has resulted in an increase in demand for safe water. This in turn has increased the demand for transporting good quality water from potential sources to distant cities without contaminating it. Demand drivers & Domestic Market Share of DI Pipes: Given the increasing demand & low penetration of water distribution and sewage infrastructure in the country, the growth prospect for this segment is favorable. India has 16% of the world’s population but is estimated to have just 4-5% of the world’s water resources. This is because slow implementation of water supply projects in India due to issues on funding of such projects. However with the multilateral finance institutions like ADB and World Bank, recognizing the need for pipeline network transmission of water in recent times, coupled with increasing focus of the Central Government, State Government & local bodies the path has been cleared for the development of the infrastructure.

The demand for DI Pipes is expected to grow at a CAGR of 15% for next couple of years. With only few players present in this segment, Jindal Saw which is targeting to double its capacity from 200,000 MTPA to 400,000 MTPA in next couple of years is all set to reap these benefits in the coming years.

DI Pipes: Players & Market Share

13%7%

27%

53%

Tata Metallics

Electrosteel Castings

Jindal Saw

Electrotherm India

Industry Pointer


In the current scenario, the demand for LSAW pipes has taken a hit on account of cheaper HSAW pipes which have the same applications as of the former

Product wise demand scenario: Saw Pipes

The demand for Submerged Arc Welded (SAW) Pipes is expected to remain strong not only in India but globally too considering huge projects announced for laying pipelines across the globe. Typically Saw Pipes are classified according to its manufacturing process as LSAW pipes (Longitudinal SAW pipes) & HSAW pipes (Helical / Spiral SAW pipes). While both these pipes are used for transporting oil & gas at high pressure, there is a basic difference between the two. While LSAW pipe is used for both offshore as well as onshore applications (on account of its tensile strength), HSAW can be used only for onshore applications. It may also be noted that since HSAW pipes are larger diameter pipes they are also used for water transportation.

LSAW pipes

The total capacity of LSAW (Longitudinal SAW) Pipes across the globe stands at ~15 million. Asia, Europe & CIS put together contribute nearly 63% of LSAW pipe capacities as showed below:

Region wise Global Capacities - LSAW

22%

0%

16%

25%

7%

3%

13%

14%North America

Western Europe

Eastern Europe

CIS

Asia

Middle East

South Africa

Other World

In the current scenario, the demand for LSAW pipes has taken a hit on account of cheaper HSAW pipes which have the same applications as of the former. However for offshore applications, only LSAW pipes are used. Middle East Region, where lots of E&P activities are shaping up are witnessing resurgence in demand for LSAW pipes. On the other hand North America, another major market for LSAW pipes have seen a structural shift to HSAW pipes resulting in lower demand for LSAW pipes.

Further with the incremental capacities of 2.5 million pipes coming over the next one year, this is likely to put additional pressure on the demand for LSAW pipes.

Country Capacity (MTPA)

China 400,000India 300,000Ukraine 200,000Saudi Arabia 300,000Iran 400,000Iraq 350,000Brazil 90,000Russia 500,000Total 2,540,000

Industry Pointer


In the current scenario, the demand for HSAW pipes has increased substantially on account of its lower cost as compared to HSAW pipes & wider acceptance than envisaged earlier

HSAW pipes The total capacity of HSAW (Helical / Longitudinal SAW) Pipes across the globe stands at ~10 million. Asia, Europe & Middle East put together contribute nearly 55% of LSAW pipe capacities as showed below:

Region wise Global Capacities - HSAW

14%

1%

2%

33%8%1%

2%

32%

7% North America

Western Europe

Eastern Europe

CIS

Asia

Middle East

South Africa

Africa

Other World

In the current scenario, the demand for HSAW pipes has increased substantially on account of its lower cost & wider acceptance than envisaged earlier. With the demand supply mismatch likely to remain in the near future along with the replacement demand particularly in US & Russia expected to take off soon, many players are expanding in this space as under:

Country Capacity (MTPA)

USA 920,000

Russia 70,000

China 150,000

Turkey 200,000

Central Asia 200,000

Iraq 150,000

Indian Players setting up in USA

*Welspun Gujarat 350,000

*PSL 300,000

Total 2,340,000

* already Commissioned

With these expansions, the total capacity of HSAW pipes globally over the next one year is pegged at 12.5 MTPA.

Industry Pointer


the HSAW pipes being comparatively cheaper than LSAW pipes primarily due to usage of HR Coils vis-à-vis costlier steel plates along with the former technology now at par with the latter, has managed to replace a majority of LSAW applications

HSAW Technology takes over LSAW applications

In the current environment, demand for HSAW pipes have gained prominence and has replaced LSAW applications in majority of the cases. This is due to inherent advantages of manufacturing HSAW pipes as compared to LSAW pipes, both of which are used for high pressure oil & gas transportation. The merits of HSAW over LSAW pipes include: Availability of raw materials and at lower cost: HSAW pipes are made from long rolled strips of steel known as HR Coils, whereas LSAW pipes are made from large flat plates of steel, known as plates. It is possible to procure an adequate supply of HR Coils domestically, whereas supply of plates is limited. Further, limited availability of plates in India makes plates more expensive than HR Coils. Currently the difference between the two is around $70-$ 100. Lower capital costs: LSAW pipe manufacturers require heavy equipment such as presses which require heavy foundations. These are built out of heavy steel components by specialized manufacturers. In contrast, HSAW pipe mills require lighter equipment. Therefore, PSL has lower capital costs to build and operate its pipe mills. Most suitable for large diameter pipelines: The HSAW technology provides for manufacture of large pipes using HR Coils. Diameter of pipes can be as large as 120 inches compared to about 56 inches using LSAW technology. Thus for water projects, where large diameter pipes are used, HSAW pipes are invariably used.

Pipes LSAW HSAW

Diameter (inches) 16” – 56” 18” – 120”

Thickness (mm) 4.8” – 38” 5” – 25”

Pressure High High

This limitation on LSAW pipes is because plates of such width are not widely manufactured by steel mills. Thus large diameter pipelines have to necessarily be manufactured using HSAW technology. To sum up, the HSAW pipes being comparatively cheaper than LSAW pipes primarily due to usage of HR Coils vis-à-vis costlier steel plates (used for manufacturing of LSAW pipes) along with the former technology now at par with the latter, has managed to replace a majority of LSAW applications.

Industry Pointer


The accreditation process requires approvals not only for the quality of pipes but also for the plant facilities. This eventually acts a as a strong entry barrier for the new entrant which takes atleast 3-5 years to cement its place in the industry

Porter Analysis

Accreditation Process: A Significant Entry Barrier

The Pipe industry is a highly consolidated industry with few large players capturing nearly 85-90% of the total market. Given that oil & gas transportation is hazardous, there are stringent quality norms set by global oil majors for pipe manufacturers.

Industry Pointer


India is always likely to have cost competitiveness advantage as compared to European & Japanese manufacturers while exporting pipes to Middle East, Asian & North American region on account of India’s geographical proximity to the region and also due to lower cost of conversion from plates/coils to pipes on account of lower labour costs

Thus in order to serve these global oil majors, it becomes essential for the pipe manufacturers to bide by the norms which are laid down by the American Petroleum Institute (API) besides having client accreditations. The accreditation process requires approvals not only for the quality of pipes but also for the plant facilities. This eventually acts a as a strong entry barrier for the new entrant which takes atleast 3-5 years to cement its place in the industry.

Competitive edge for Indian Players over other Exporters

North America, Middle East & Asian markets are amongst the key export destinations where the robust demand is likely to sustain over the next 5 years on account of various pipeline projects announced in the region. Of the total estimated length (325,974 Kms) of pipelines to be laid across the globe, North America (73,736 Kms), Middle East (43,626 kms) & Asia (95,003 Kms) constitute more than 65% of the total pie. The Indian pipe industry is among the world’s top three manufacturing hub after Europe & Japan. However India is always likely to have cost competitiveness advantage as compared to European & Japanese manufacturers while exporting pipes to Middle East, Asian & North American region on account of India’s geographical proximity to the region and also due to lower cost of conversion from plates/coils to pipes on account of lower labour costs. Thus Indian pipe manufacturers are expected to garner a larger pie of orders on account of the inherent cost advantage. We expect Welspun Gujarat & Jindal Saw to benefit the most as they have substantial revenues coming from the export markets. India Advantage as compared to European & Japanese counterparts:

Cost Advantage for Indian manufacturers on supplies to North America

US$ / ton Indian European JapaneseCost of Plate 800 800 800Conversion Cost 125 175 225Cost of Pipe 925 975 1025Freight 175 150 200Landed Cost 1,100 1,125 1,225Cost Advantage +25 -25 Cost Advantage +125 -125

Cost Advantage for Indian manufacturers on supplies to Middle East & Asia

US$ / ton Indian European JapaneseCost of Plate 800 800 800Conversion Cost 125 175 225Cost of Pipe 925 975 1025Freight 100 150 250Landed Cost 1,025 1,125 1,225Cost Advantage +100 -100 Cost Advantage +200 -200

Industry Pointer


Industry Concerns

• Slowdown in oil & gas capex – Demand for SAW pipes is mainly dependent on

oil & gas transportation expenditure. Any slowdown in the capex plans of oil & gas majors would severely impact the SAW pipe industry. However with the global recovery underway, we believe that the investments (for laying pipelines) are likely to speed up especially in US & European markets where the same was put on hold on account of the worst meltdown seen in many decades.

• High volatility in raw material prices – Prices of HR Coils & Steel plates which

form 70-75% of the total cost of pipes have been very volatile during the past two years. However to mitigate this volatility, the pipe companies have started to tie up raw material prices at the time of bidding for new orders thereby enabling them to maintain margins.

• Non Availability / Shortage of steel plates – Steel Plate industry is a highly

consolidated industry with very few players across the globe. Delay in availability of quality steel plates can be a cause of concern for the pipe producers. However companies like Welspun Gujarat have taken the lead in setting up plate cum coil mill to enable them timely sourcing of plates.

• Alteration / tampering of custom duties – The GoI had imposed a duty of 10%

on export of pipes w.e.f. May 10, 2008. However, it was withdrawn w.e.f. June 13, 2008. The duty impacted the export sales of major pipe companies in Q1 FY09. Any such interference by the GoI in future would impact the export revenues of pipe companies.

• Currency Fluctuations – Rupee too has been very volatile in the recent past.

Since majority of the Indian companies have bulk of the revenues coming from exports, it does have an adverse impact on the profitability of these companies. However the companies are now entering into forward contracts to mitigate the sharp fluctuation in the rupee.

• Import threat from China – Although China is a significant manufacturer of

SAW pipes, it does not pose a serious threat in the SAW pipe business in the near future because of strong domestic demand in China. However, in the seamless and DI pipes business, imports from China might lead to increased competition and thus affect realizations for Indian pipe manufacturers. However, the decision by the US government and the European Union to impose an anti-dumping duty on Chinese imports mitigates this risk to a certain extent.

Industry Pointer


PSL Limited CMP Rs 177 P/E 5.3x FY11e BUY

PRICE TARGET Rs 250/- (12 Months)

Index Details Sensex 17,135 Nifty 5,083 BSE Small Cap 7,587

Industry PIPE INDUSTRY

Scrip Details

Mkt Cap (Rs in crores) 946.2 Book Value (Rs) 162.2 Eq Shares O/s (Cr) 5.4 Avg Vol 150,901 52 Week H/L 226 / 59.5 Dividend Yield (%) 2.8 Face Value (Rs) 10 BSE Code 526801 NSE Code PSL

Shareholding Pattern (30th June 09) Shareholders % holding Promoters 49.1 Indian Institutions 14.2 FII’s 13.8 Non Promoter Corporate 11.7 Public 11.2 Total 100.0

PSL Limited Vs Sensex

PSL Limited is the largest manufacturer of high grade large diameter Helical Submerged Arc Welded (HSAW) pipes in India. The company manufactures & supplies pipes certified to API (American Petroleum Institute) standards for oil, gas as well as water transmission projects. PSL has a total manufacturing capacity of 1,475,000 MT per annum.


Surge in HSAW pipes demand augurs well for PSL The HSAW pipes are comparatively cheaper than LSAW pipes by $150 to $200 primarily due to usage of HR Coils vis-à-vis costlier steel plates used for manufacturing of LSAW pipes. Further with the former technology now at par with the latter, HSAW has managed to replace a majority of LSAW applications. PSL is well positioned to cater to this growing demand, being the largest manufacturer of HSAW pipes.

Commands a healthy market share in India PSL is a dominant player in the HSAW pipes space in India having a market share of more than 40%. The company’s leadership position in this space is evident from the fact that PSL has bagged majority of the large orders placed by GAIL.

Order book set to take off The company’s order book stands at Rs 4,586 crore which is ~1.2x its FY09 revenues with 30% alone being contributed by GAIL, its biggest customer. The company expects to bag a large share of orders for the proposed gas pipeline network to be built by GAIL, GSPL, and other domestic players, who have announced plans to construct pipeline transmission networks worth over Rs 20,000 crore.

Valuation & Recommendation

At CMP of Rs 177, the stock is trading at 7.5x & 5.3x its FY10 & FY11 earnings of Rs 23.7 & Rs 33.3 respectively. With the company consolidating its position as the largest manufacturer of HSAW pipes in India coupled with the strong order book & positive industry outlook, we recommend a BUY on the stock at current levels with a price target of Rs 250, an upside of more than 41% for a time horizon of 9 to 12 months.

Key Financials:

Y/E March, (Rs in crore) FY09 FY10e FY11e Net Revenues 3,648.9 4,125.0 5,250.0 EBIDTA 310.1 341.5 441.0

PAT 94.9 126.5 178.2

EPS (Rs.) 22.3 23.7 33.3

EPS Growth (%) 12.3 17.3 40.9

ROCE 13.1 13.2 15.4

RONW 15.1 15.6 17.7

P/E (x) 7.9 7.5 5.3

EV/EBIDTA (x) 5.4 5.1 4.0

Industry Pointer


PSL is the largest domestic manufacturer of high grade large-diameter HSAW pipes with a capacity to manufacture 1,475,000 MTPA & 13 HSAW mills located at strategic locations

Company Background

PSL Limited is the largest domestic manufacturer of high grade large-diameter spiral (helical) submerged arc welded pipes or HSAW pipes with a current capacity to produce upto 1,475,000 MPTA. The company manufactures & supplies pipes certified to API (American Petroleum Institute) standards for oil, gas as well as water transmission projects. It manufactures pipes at 13 HSAW pipe mills, 11 of which are located in five locations geographically spread throughout India and one each in the UAE & in North America. HSAW pipes are manufactured using both conventional process (in 11 of its pipe mills having an installed capacity of 825,000 MTPA) and a two-step process (in two of its pipe mills with an installed capacity of 650,000 MTPA). It may be noted that the pipe mills using conventional process are portable, which means they can be relocated when required, leading to lower pipe delivery transportation costs for the end users.

Location Pipe / Coating Mill Installed Capacity (MTPA)

Chennai 1 HSAW Pipe Mill – Conventional 75,000

Kandla

5 HSAW Pipe Mill – Conventional

1 HSAW Pipe Mill – Two Stage

375,000

350,000

Vizag 1 HSAW Pipe Mill – Conventional 75,000

Ahmedabad 1 HSAW Pipe Mill – Conventional 75,000

Jaipur 1 HSAW Pipe Mill – Conventional 150,000

Sharjah, UAE 1 HSAW Pipe Mill – Conventional 75,000

Mississippi, USA 1 HSAW Pipe Mill – Two Stage 300,000

Total HSAW Pipe Mill Capacity 1,475,000

*Two Step Mill – Pipe Manufacturing & Welding is processed at two different stages

PSL manufactures HSAW pipes which are typically used for transmission of oil, gas & water. It produces large diameter (18” upto 120”) HSAW pipes of varying thickness between 5mm to 25mm. All its pipe mills conform to the American Petroleum Institute (API) standards which makes it eligible to manufacture pipes for transportation of Oil & Gas. Other Allied services

Apart from its core activity of manufacturing pipes, the company provides pipe coating services which include pipe corrosion protection. Its pipe coating services are provided for both onshore & offshore pipe projects. In addition to Pipe manufacturing & pipe coating which contributes 95% (80% for pipe manufacturing & 15% for coating services) to the revenues, PSL also provides various other types of ancillary products and services related to the pipe industry such as induction pipe bending, sacrificial anodes (a form of corrosion protection for under water pipes) and turnkey HSAW plant and machinery manufacturing.

Industry Pointer


In the current environment, demand for HSAW pipes have gained prominence and has replaced LSAW applications in majority of the cases A dominant player in the HSAW pipe space having a market share of more than 40% in the terms of the total HSAW pipe capacity in India

Single Product Strategy: A Competitive advantage

PSL which manufactures only HSAW pipes (also a largest player under this segment) has a distinct competitive advantage vis-à-vis its peers which manufacture variety of other piping products viz LSAW pipes, Electric Resistance Welded (ERW) pipes and Seamless pipes. While the demand for ERW & Seamless pipes has been suppressed on account of the economic slow down, the demand for HSAW pipes have gained prominence and has replaced LSAW applications in majority of the cases. This is due to inherent advantages of manufacturing HSAW pipes as compared to LSAW pipes, both of which are used for high pressure oil & gas transportation. The HSAW pipes being comparatively cheaper than LSAW pipes primarily due to usage of HR Coils vis-à-vis costlier steel plates (used for manufacturing of LSAW pipes) along with the former technology now at par with the latter, has managed to replace a majority of LSAW applications. PSL is well positioned to cater to this growing demand.

Commands a healthy market share in India

PSL which is a largest manufacturer of HSAW Pipes in India is a dominant player in this space having a market share of more than 40% in the terms of the total HSAW pipe capacity.

Players by HSAW Capacities in India & Market Share

1,100,000

41%

500,000

19%

500,000

19%

550,000

21%

Jindal Saw

PSL

Welspun Gujarat

Man Industries

The company’s leadership position in this space is evident from the fact that PSL has bagged majority of the orders placed by GAIL. Further since the company has facilities at 13 strategic locations, it stands an edge over its competitors as far as the freight cost component is concerned, thereby putting it in the L1 position in most of the bids.

Industry Pointer


Its geographical dispersion across India enables it to relocate its conventional HSAW pipe mills to a location that is near to where the pipes are to be used The company which has produced 0.47 million tons of pipes in FY09 is expected to ramp up its production significantly to 0.55 million tons & 0.70 million tons in FY10 & FY11 respectively

Presence across multiple locations: A strategic Advantage

Large diameter pipes are costly to transport since a single trailer is able to carry only a limited number of pipes, resulting in high transportation costs per tonne. Therefore, it is economical for purchasers to order pipes from a source near the place of usage. PSL has pipe mills in five locations throughout India, namely Chennai, Kandla, Vizag, Jaipur and Ahmedabad. Its geographical dispersion across India along with in-house design & engineering capabilities enables it to relocate its conventional HSAW pipe mills to a location that is near to where the pipes are to be used, which in turn means lower transportation costs for delivery and also provides it with the advantage of bidding for any large contracts at very competitive rates. PSL has in-house design & engineering capabilities for developing equipments key for setting up pipe mills. This provides PSL with competitive edge in plant relocation. For example, in FY05, it relocated two of its HSAW pipe mills to Kandla, which is near a port, for the Sudan project to lower its transportation costs and relocated a pipe mill from Ahmedabad to Jaipur in FY06 for similar reasons.

Production ramp up at the US facility to drive growth

The recently inaugurated North American facility at Mississippi having a capacity of 300,000 MTPA commenced commercial operations in Oct’08. The production ramp up from this facility as well as the incremental domestic demand arising from the proposed projects would result in higher volume growth over the next two years.

Installed Capacity & Production details

-200,000400,000600,000800,000

1,000,0001,200,0001,400,0001,600,000

FY07 FY08 FY09 FY10 FY11-5.010.015.020.025.030.035.040.045.050.0

Installed Capacity Production Cap Utiln (%)

The company which has produced 0.47 million tons of pipes in FY09 is expected to ramp up its production significantly to 0.55 million tons & 0.70 million tons in FY10 & FY11 respectively thereby improving its capacity utilization from 32% in FY09 to 48% in FY11e. Thus PSL is expected to be in a higher growth trajectory both in terms of revenues as well as profitability for the next two years.

Industry Pointer


Capacity expansion at Vizag plant from 75,000 tons to 300,000 & modernization of its domestic facilities to supplement growth We believe the company is likely to bag a large share of orders for the proposed gas pipeline network to be built by GAIL, GSPL, and other domestic players over the next 3 to 5 years

Future expansion to supplement growth

Considering the increasing demand for HSAW line pipes domestically as well as globally PSL is contemplating to upgrade / expand its Indian facilities. For the said purpose, the company has recently raised ~ Rs 150 crore through issue of Qualified Institutional Placements (QIP). The use of these proceeds arising out of the issue is expected to be used for the following:

1. Procurement of capacity enhancing equipments, balancing equipments and quality enhancing equipments for its various Indian facilities including Chennai, Kandla, Vizag & Mahudi. The cost in this regard is expected to be ~Rs 50 crore.

2. Capacity expansion at Vizag plant from 75,000 tons to 300,000 at a cost of

Rs 200 crore. This plant has a strategic significance being close to KG Basin wherein huge investment in terms of laying pipelines is expected over the next two to three years. PSL is expected to bag a larger pie of orders connected to these pipelines due to its freight cost competitiveness as compared to its peers.

With the aforesaid expansion cum modernization plans, total capex is pegged at Rs 250 crore. While Rs 150 crore has been raised through the QIP, the balance is expected to be raised through the External Commercial Borrowings (ECBs).

Order Book set to take off

The company’s order book stands at Rs 4,586 crore which is ~1.2x its FY09 revenues. The company which has already completed the first five orders from GAIL by laying over 1,100 km of pipeline of varying diameters, has recently bagged the sixth order for supplying X-80 grade large diameter steel line pipes.

Details of major projects under execution

Major Projects Name of Customer Contract Value (Rs in crore)

Oil & Gas related Vijaipur-Dadri Pipeline GAIL 1,480Mundra-Bhatinda Pipeline – I IOCL 935Dahej-Vijaipur Pipeline GAIL 500Mundra-Bhatinda Pipeline – II HPCL-Mittal Pipelines 409FGT Project Florida Gas Trans Co 222Dahej-Vijaipur Pipeline Coating GAIL 212Water related Barmer Lift water supply – I L&T 308Indore Municipal Corporation Pratibha Industries 51DJB Dwaraka water supply L&T 23Others Indira Gandhi Super TPP Aravali Power Co. Pvt Ltd 61Coimbatore Project ETL Infra Services 41Coimbatore Muncipal Corp. Nagarjuna Construction 36

Industry Pointer


Of the unexecuted order book of Rs 4,586 crore, GAIL has contributed nearly Rs 1,500 crore representing more than 32% thereby being its key customer Last six out of seven large orders placed by GAIL have been bagged by PSL Going forward GAIL has aggressive capex plans (more than Rs 20,000 crore over the next 3-5 years) for expansion of its pipeline network by laying new pipelines to cater to most part of the southern, western, northern & far eastern regions of India.

As seen in the table, PSL has successfully executed large projects for some of the big players in the oil & gas sector namely GAIL, HPCL & OIL. Further down the line we believe the company is likely to bag a large share of orders for the proposed gas pipeline network to be built by GAIL, GSPL, and other domestic players, who have announced plans to construct pipeline transmission networks worth over Rs 20,000 crore. GAIL’s upcoming pipelines: A Huge Opportunity for PSL Of the unexecuted order book of Rs 4,586 crore, GAIL has contributed nearly Rs 1,500 crore representing more than 32% thereby being its key customer. Going forward GAIL has aggressive capex plans (nearly Rs 20,000 crore over the next 3-5 years) for expansion of its pipeline network by laying new pipelines to cater to most part of the southern, western, northern & far eastern regions of India. GAIL also aims to create the National Gas Grid (primarily in conjunction with Reliance Gas Transmission Infrastructure Limited (RGTIL) that has significant network coming up in eastern India. This represents a huge opportunity for PSL which has the best track record for bagging majority of the orders placed by GAIL. Orders bagged by PSL from GAIL

SN

Order Date Project Approx

MT Size (Rs in crore)

Year of completion

1 Dec’05 Dahej Uran Pipeline – I 47,000 240 2007

2 May’06 Dahej Uran Pipeline – II 36,000 181 2007

3 Jul’06 Dabhol Panvel Pipeline – I 31,600 220 2007

4 May’07 Dabhol Panvel Pipeline – II 27,700 111 2008

5 Jun’08 Vijaipur Dadri Bawana Pipeline 229,200 1,480 2010

6 Aug’09 Dahej Vijaipur Pipeline Upgradation 100,000 500 2011

GAIL’s proposed Pipeline projects

SN Project Length

(Km) Capex (Rs

in crore) Expected

completion

1 Dadri Bawana Nangal pipeline 640 2,360 2011

2 Chainsa Jhajjar Hissar Pipeline – II 450 1,250 2011

3 Dahej Vijaipur Pipeline – II 1,115 4,400 2011

4 Dabhol Bangalore Pipeline 1,480 4,060 2012

5 Kochi – Mangalore / Bangalore Pipeline 840 3,500 2012

6 Jagdishpur Haldia Pipeline 1,690 7,000 2012

Industry Pointer


In US, more than 1 million Km of pipes were laid prior to 1975. These pipes have almost outlived their economic life, requiring a pressing need for replacement thereby representing a huge market for HSAW pipe manufacturers globally A number of State Governments are investing in pipe infrastructure for water management with International organizations like World Bank and Asian Development Bank funding such projects, augurs well for HSAW pipe manufacturer like PSL

US Replacement Market: Another driver for PSL’s order book

In addition to the demand created from setting up new pipeline projects, the ageing of pipelines which needs to be replaced (on account of corrosion) represents a huge opportunity for the pipe industry. As per TMK, a global pipe player, the probability of pipelines surviving more than 33 years is low. In US, more than 1 million Km of pipes were laid prior to 1975. These pipes have almost outlived their economic life, requiring a pressing need for replacement. This represents a huge market for HSAW pipe manufacturers globally. PSL after having recently commissioned its commercial operations at its 300,000 MTPA HSAW plant facility in North America in Oct’08 is well positioned to cater to this replacement market. The company has already got its first order in this regard from Florida Gas Company valuing at US$ 418 million even before the new plant was set up. The successful & timely completion of this order is expected to throw a lot of opportunities (addressable market) to PSL going forward. Water Segment: Emerging Opportunities In addition to oil and gas transportation, water management presents another area of growth for the pipe industry. There is an increasing need to provide clean and safe drinking water in the country. This has resulted in a number of State Governments investing in pipe infrastructure for water management. International organizations like World Bank and Asian Development Bank (ADB) are also funding such projects across India. Water pipelines are large diameter pipes which can be delivered using HSAW technology. We expect PSL to garner a sizeable share in this segment particularly since it would be able to aggressively bid for water projects as it has the added advantage of relocating its pipe mills closer to the location where the pipes are required to be laid thereby lowering the costs of delivery of pipes. Financial performance

For the quarter ended Jun’09 (Q1FY10), total revenues were down 4% from Rs 658.9 crore to Rs 633.3 crore. PAT too slid by 13.4% to Rs 22.5 crore backed by higher interest & depreciation charges which were up 82% & 24% respectively. However the operational performance was better registering a growth of nearly 13% with OPM rising by 180 bps on the back of higher EBIDTA / ton which was up 3% YoY. EPS for the quarter stood at Rs 5.3. The company’s total revenues for FY09 jumped by 57%, to Rs 3,550 crore from Rs 2,262 crore in FY08. Its PAT for the period was however up marginally by 1.4% to Rs 85.9 crore from Rs 84.8 crore. OPM were down by 230 bps from 10.5% to 8.2%. The EPS for the year FY09 remained flat at Rs 20.2.

Industry Pointer


We expect the company’s net revenues & profitability to exhibit a CAGR of 22% & 44% respectively over the next two years

Financial Outlook

With the recently commissioned US facility & the incremental demand coming from the newly announced pipeline projects (Oil, gas & water), we expect the volumes to grow at a CAGR of 21% from 477,086 tons in FY09 to 700,000 tons in FY11 thereby improving its capacity utilization from 32% in FY09 to 48% in FY11e. Further we have not taken into account any volume expansion on account of its capex plans. These would be earnings accretive & we would upgrade the EPS estimates as these capex plans are completed. Thus PSL is expected to be in a higher growth trajectory both in terms of revenues as well as profitability for the next two years which are expected to exhibit a CAGR of 22% & 44% respectively. We expect the company’s net revenues to touch Rs 4,125 crore & Rs 5,250 crore in FY10 & FY11 respectively and the net profit at Rs 120.6 crore & Rs 178.2 crore respectively. EPS for FY10 & FY11 is pegged at Rs 22.6 & Rs 33.3 respectively (on fully diluted basis).

Key Concerns • HR Coils, key raw material for manufacturing of HSAW pipes constitute more

than 70% of the total cost of production. The prices of the coils have remained very volatile in the last one year. Any material change in the prices further would have a material impact on the financials of the company

• The high price differential between the plates & HR Coils has been the prime reason for the shift from LSAW pipes to HSAW pipes. Any moderation in the plate prices may reduce the competitive advantage for the HSAW pipes thereby having a material impact on the demand for this product.


At CMP of Rs 177, the stock is trading at 7.5x & 5.3x its FY10 & FY11 earnings of Rs 23.7 & Rs 33.3 respectively. With the company consolidating its position as the largest manufacturer of HSAW pipes in India coupled with the strong order book & positive industry outlook, we recommend a BUY on the stock at current levels with a price target of Rs 250, an upside of more than 41% for a time horizon of 9 to 12 months.

Industry Pointer


Exhibit 01: Financials and Projections

Profit & Loss Statement Key Ratios Y/E March, Fig in Rs. Cr FY2009 FY2010e FY2011e Net Sales 3,648.9 4,125 5,250 % Chg 59.1 13.0 27.3 Total Expenditure 3,338.9 3,783.5 4,809 % Chg 62.4 13.3 27.1 EBDITA 310.1 341.5 441.0 EBDITA Margin % 8.7 8.3 8.4 Other Income 0.0 40.0 40.0 PBDIT 310.1 381.5 481.0 Depreciation 68.8 80.0 90.0 Interest 102.8 110.0 125.0 PBT 138.5 191.5 266.0 Tax Provisions 43.7 65.0 87.8 Reported PAT 94.9 126.5 178.2 PAT Margin (%) 2.6 3.1 3.4 Raw Materials / Sales (%) 70.5 71.0 71.0 Employee Exp / Sales (%) 1.8 1.6 1.5 Other Mfr. Exp / Sales (%) 19.7 19.2 19.0 Tax Rate (%) 31.5 33.9 33.0

Y/E March, Fig in Rs. Cr FY2009 FY2010e FY2011e Per Share Data (Rs) EPS 22.3 23.7 33.3 Cash EPS 38.4 38.6 50.2 DPS 5.0 5.0 5.0 Book Value 162.2 174.9 202.4 Capital, Liquidity, Returns Ratio Debt / Equity (x) 1.7 1.4 1.3 Current Ratio (x) 1.1 1.7 1.8 ROE (%) 15.1 15.6 17.7 ROCE (%) 13.1 13.2 15.4 Dividend Yield (%) 2.8 2.8 2.8 Valuation Ratio (x) P/E 7.9 7.5 5.3 P/BV 1.1 1.0 0.9 EV/Sales 0.5 0.4 0.3 EV/EBIDTA 5.4 5.1 4.0 Efficiency Ratio (x) Inventory (days) 300 270 91 Debtors (days) 46 54 53 Creditors (days) 351 338 132

Balance Sheet Cash Flow Statement

Y/E March, Fig in Rs. Cr FY2009 FY2010e FY2011e Equity Capital 42.6 53.3 53.3 Reserves & Surplus 648.0 881.9 1028.9 Total Loans 1,142.3 1,315.6 1,410 Deferred Tax Liability -14.7 -14.9 -14.9 Total Liabilities 1,845.4 2,275.9 2,537.3 Gross Block 1,272.0 1,500 1,800 Less: Acc. Depreciation 347.8 427.8 517.8 Net Block 924.2 1,072.2 1,282.2 Capital Work in Progress 373.1 200.0 0.0 Investments 4.3 4.3 4.3 Net Current Assets 543.9 999.4 1250.8 Misc. Expd not w/o 0.0 0.0 0.0 Total Assets 1,845.4 2,275.9 2,537.3

Y/E March, Fig in Rs. Cr FY2009 FY2010e FY2011e Profit After Tax 94.9 126.5 178.2 Depreciation & W/o 68.8 80.0 90.0 Working Capital Changes 163.0 -158.8 -185.6 Others 4.6 12.6 20.0 Operating Cash Flow 331.3 60.2 102.6 Capital Expenditure -731.3 -54.9 -100.0 Change in Investment 0.0 0.0 0.0 Cash Flow from Investing -731.3 -54.9 -100.0 Proceeds from equity issue 0.0 149.3 0.0 Inc/(Dec) in Debt 237.6 173.3 94.4 Dividend Paid -24.9 -31.2 -31.2 Cash Flow from Financing 212.7 291.4 63.2 Net Change in Cash -187.3 296.7 65.8 Opening Cash Balance 400.5 213.3 510.0 Closing Cash Balance 213.3 510.0 575.8

Industry Pointer


Welspun Gujarat Stahl Rohren Ltd. CMP: Rs 262 P/E 8.7x FY11e BUY


Index Details Sensex 17,135 Nifty 5,083 BSE MID CAP 6,302


Scrip Details

Mkt Cap (Rs in crore) 4,873.2 Book Value (Rs) 83.9 Eq Shares O/s (Cr) 18.6 Avg Vol 1,039,950 52 Week H/L 278 / 48.5 Dividend Yield (%) 0.6 Face Value (Rs) 5.0 BSE Code 532144 NSE Code WELGUJ


Welspun Gujarat Vs Sensex

Welspun Gujarat Stahl Rohren Ltd (WGSRL), the flagship company of the Welspun Group is a prominent pipe manufacturer in the country, which caters to the global requirement of high grade Submerged Arc Welded (SAW) pipes both spiral (helical) as well as longitudinal pipes and the Electric Arc Welded (ERW) pipes. Its unique capability to manufacture higher end pipes of large diameter has established itself as a dominant player in the niche segment.


Capacity expansion to fuel growth With the increasing global demand for critical oil & gas pipelines, the company in the last fiscal i.e. in Feb’09 commissioned its 350,000 MTPA HSAW facility at Little Rock, Arkanas, USA at a cost of $150 million. Further the company has embarked upon on an expansion plan whereby it is expected to add another 0.6 million capacity to its current capacity of 1.5 million linepipe per annum, which would catapult the company into one of the top global manufacturers of large diameter pipes.

Backward Integration to be Margin accretive: Huge positive After facing initial teething problems, WGSRL has finally stabilized its steel plate mill at Anjar having a capacity of 1.5 MTPA with a capex of Rs 18 billion. This project will not only ensure timely raw material supplies but will also result in savings in cost of steel plates which are being imported at a much higher cost, thereby being margin accretive.

Strong Order Book provides earnings visibility WGSRL has a healthy order book worth Rs 6,975 crore. The exports constitute nearly 80% of the order book whereas the domestic orders contribute the balance. While Linepipe along with coating constitutes 90% of the order book, the balance comes from steel plates.

Valuation & Recommendation: At the CMP of Rs 262, the stock is trading at 11.0x its FY10e earnings of Rs 23.8 & 8.7x its FY11e earnings of Rs 30. With the company expected to witness strong volume growth coupled with its strong order book & the robust demand likely to prevail over the next three to five years, we recommend a BUY on the stock at the CMP with a price target of Rs 360, an upside of 37% from the current levels for 9 to 12 months horizon.

Key Financials:

Y/E March, (Rs in crore) FY09 FY10e FY11e

Net Revenues 5739.5 7400.0 8500.0 EBIDTA 634.8 1070.0 1265.0 PAT 213.5 443.0 559.0 EPS (Rs.) 11.4 23.8 30.0 EPS Growth (%) -40.3 107.5 26.2

ROCE 11.4 20.2 22.5 RONW 13.7 25.1 25.0 P/E (x) 23.0 11.0 8.7 EV/EBIDTA (x) 10.4 5.5 4.4

Industry Pointer



The only domestic company to successfully manufacture & deliver high thickness large diameter pipes for critical oil and gas applications.

Company Background

Welspun Gujarat Stahl Rohren Ltd (WGSRL), the flagship company of the Welspun Group is a one stop solutions company for all pipe related requirements providing an exhaustive size and product range of pipes. It is a leading pipe manufacturer in the country, which caters to the global requirement of Submerged Arc Welded (SAW) pipes both spiral as well as longitudinal pipes and the Electric Arc Welded (ERW) pipes.

The company has its production facilities at Anjar and Dahej in Gujarat. Further the manufacturing facilities are in close proximity to the major ports of the western coast of India thereby minimizing transportation costs of the company. WGSRL incorporates the best technology from Mannemann Demag, Germany & the Capello Group, Italy for LSAW & HSAW pipe applications respectively.

WGSRL is the only domestic company & amongst the few in the world to successfully manufacture & deliver high thickness large diameter pipes for critical oil and gas applications across continents. Apart from the pipes segment, the company has also commissioned its state of art plate mill in the last fiscal while its coil mill is expected to start commercial operations soon.

Industry Pointer



WGSRL has embarked upon on an expansion plan whereby it is expected to add another 0.6 million capacity to its current capacity of 1.5 million linepipe per annum

Product Profile

Product Portfolio Outer Diameter Thickness

LSAW – India 15” to 60” Upto 65 mm

HSAW – India 18” to 100” Upto 15 mm

HSAW – USA 24” to 60” Upto 25 mm

ERW – India 0.5” to 16” Upto 13 mm

Plates Upto 4.5 meters Upto 140 mm

Coils Upto 2.8 meters Upto 25 mm

Capacity Additions to fuel growth

With the increasing global demand for HSAW pipes, the company in the last fiscal i.e. in Feb’09 commissioned its 350,000 MTPA HSAW facility at Little Rock, Arkanas, USA at a cost of $150 million.

Product Portfolio Dahej Anjar US Facility Total

HSAW 50,000 500,000 350,000 900,000

LSAW 350,000 - - 350,000

ERW - 250,000 - 250,000

Total 400,000 750,000 350,000 1,500,000

Further the company has embarked upon on an expansion plan whereby it is expected to add another 0.6 million capacity to its current capacity of 1.5 million linepipe per annum. The management is keen on adding 300,000 MTPA of LSAW pipes at its existing facility in Anjar, Gujarat while it is likely to add another 300,000 MTPA of HSAW pipes in South East India, possibly Vizag. (Still not decided on the location).

Products Current Additions Post Expansion

HSAW 900,000 300,000 1,200,000

LSAW 350,000 300,000 650,000

ERW 250,000 - 250,000

Total 1,500,000 600,000 2,100,000

These expansions are likely to get materialized by Dec’10. This would enhance WSGRL’s pipe making capacity from the current 1.5 MTPA to 2.1 MTPA by FY11, which would catapult the company into one of the top global manufacturers of large diameter pipes.

Industry Pointer



We expect the volume to gain further traction with production for FY10 pegged at 850,000 MTPA, a YoY growth of nearly 16%. (FY09 volume growth was at 10% over FY08 with volumes of 734,352 MTPA) Backward Integration in the form of manufacturing high-grade steel plates would mitigate the risk of availability & high price sensitiveness of steel plates

Higher volume growth amidst capacity additions

With the production ramp up to take place at its US facility which commenced its operations only in Feb’09, we expect the volume to gain further traction with production for FY10 pegged at 850,000 MTPA, a YoY growth of nearly 16%. (FY09 volume growth was at 10% over FY08 with volumes of 734,352 MTPA). Further with the incremental demand for the linepipe likely to increase over the next few years on account of various projects announced worldwide, we expect the volume growth for FY11 to be at 18% at 1 million tons.

Installed Capacity & Production details

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

FY07 FY08 FY09 FY10 FY11-10.020.030.040.050.060.070.080.0

Installed Capacity Production Cap Utiln (%)

As per the chart above, the Capacity utilization is expected to improve from 49% in FY09 to 57% in FY10. However the utilization level is expected to come down in FY11 as the additional capacity of 0.6 million tons would have come into play only by Q3FY11. Thus we expect the company to reap the benefit of these expansions only from FY12 onwards where the utilizations are expected to improve to near 60-65% levels.

Backward Integration

WGSRL used to imports 80% of its steel requirements in the form of steel plates from Europe & CIS region. LSAW pipes require 1,270 to 4,500 mm wide plates, whereas the maximum width available in India is 3,200 mm. On account of increasing pipeline projects being undertaken all over the world along with gradual pick up of demand from ship builders (which was largely hit in the current slowdown resulting in correction of plate prices by 40-45%) & boiler manufacturers, there is still a shortage in supply of high-grade steel plates resulting in procurement at higher prices. To mitigate this, the company has recently set up a backward integration project in the form of setting up first of its kind in India, a plate cum coil mill at Anjar with a capacity of 1.5 MTPA at a capex of Rs 18 billion. The project was funded through a combination of preferential warrants, FCCB’s, debt & internal accruals. While the plate mill has stabilized after the initial teething problems, the coil mill has got delayed & is expected to commence commercial production soon.

Industry Pointer



By manufacturing steel plates, the company would saving nearly US$ 125 per ton excluding the depreciation & interest cost incurred on putting up the facility The current order book of ~70 billion, at 1.2x its FY09 turnover; will be executed over 9 to 12 months.

In the first year of its operation i.e. in FY09, the plate mill produced 192,569 MT of which 112,043 MT were captively used while 42,073 were sold outright & the balance being held as closing stock. The management has guided for producing nearly 400,000 MT of plates for the current fiscal of which 100,000 MT would be commercial grades which are usually sold outright. The remaining 300,000 MT would be API grade plates, of which 135,000 MT (for which the company has existing orders) would be sold & balance being captively consumed. The timely raw material supplies & the savings in cost of steel plates (cost of manufacturing over the cost of procurement) have resulted in not only meet the short gestation orders but also in expansion of margins.

Steel plates are manufactured from slabs, which unlike the former are widely produced in India, Ukraine, Brazil & China and are also less sensitive to pricing. Savings on account of manufacturing vis-à-vis procurement of steel plates is as under:

Current Procurement of Steel Plates (A) US$ 800 / ton

Estimated Cost of Producing Steel Plates (B) = (i) + (ii) US$ 675 / ton

Cost of slab (i) US$ 550 / ton

Conversion cost including wastage (ii) US$ 125 / ton

Savings (A) – (B) US$ 125 / ton

Thus by manufacturing steel plates, the company would saving nearly US$ 125 per ton excluding the depreciation & interest cost incurred on putting up the facility.

Strong Order Book Provides Earnings Visibility

At present, WGSRL has a healthy order book worth Rs 6,975 crore. The exports constitute nearly 80% of the order book whereas the domestic orders contribute the balance. While Linepipe along with coating constitutes 90% of the order book, the balance comes from steel plates. Of the linepipe orders, HSAW constitutes 59% while LSAW & ERW pipes contribute 23% and 3% respectively to the order book. The orders are expected to be executed within the next 9 to 12 months.

Break up of Order Book product-wise

Order Book Tonnage Amount (In million $)

Amount (Rs in crore) Mix (%)

HSAW Pipes 450,000 820 4,100 59.0

LSAW Pipes 210,000 320 1,600 23.0

ERW Pipes 35,000 45 225 3.0

Plates 135,000 140 700 10.0

Coating Services - 70 350 5.0

Total….. 830,000 1,395 6,975 100.0

Considering the robust demand for pipes in the view of increasing pipeline projects across the globe & the company creating a niche for critical oil & gas applications, we expect the order book to sustain on the back of continued order flows.

Industry Pointer



Top 10 Clients - Order-wise

Global Footprint & Pre-approved with Oil & Gas Majors

The company has been approved (as a vendor) by more than 40 Oil & Gas majors across the globe including TOTAL; France, PGN; Indonesia, British Gas; UAE, Marathon; USA to name a few. With the company being bestowed with various accreditations / certifications, it is technically more than competent to take almost all international niche projects in the critical high pressure Oil & Gas segment. The company maintains unflinching quality standards and implements advanced technologies, which is testimony to being amongst the most preferred and elite group of suppliers for deep water off-shore critical projects in the global market. The company has already made successful inroads globally with some of the key pipe supplies in recent past, which also include pipes supplied for World's Deepest Gas Pipeline in Gulf of Mexico, US, where the project required the pipes to be laid over 3,000 meters under the sea. The following is the vast list of large global players which have approved WGSRL as its vendor:

AGIP NTPC BECHTEL ONGC BRITISH GAS PETRO CHINA BRITISH PETROLEUM PETRONAS, MALAYSIA CHINA NATIONAL PETROLEUM CORP PDO, OMAN CPMEC, CHINA PGN, INDONESIA CHEVRON QATAR PETROLEUM DOW RELIANCE INDUSTRIES LIMITED RUBY (ELPASO) SAIPEM, SNAM EGYPTIAN GENERAL PETROLEUM CORP SAUDI ARAMCO ENTERPRISE SHELL EXXON-MOBIL STOLT OFFSHORE – ACERGY GAIL SONATRACH GASCO, ABUDHABI TOTAL GASCO, EGYPT TECHNIP GAZPROM TRANSCANADA KINDER MORGAN UNOCAL MOGE, MYANMER PERU LNG N.A.O.C. - NIGERIA VIETSOPETRO

Ruby – El Paso USA Enterprise – Teppco (TOPS) USA Transcanada Pipe Line Ltd Canada GAIL India Sonatrach Algeria PD Oman Middle East Punj Lloyd India Saudi Aramco Middle East Adani India GWSSB – Gandhinagar India

Order Book - Geographic Wise

63%

11%6%

20%

Domestic

North America

M iddle East

Africa

Industry Pointer



Going forward, we expect profits to grow at a CAGR of 62%, from FY09 to FY11.

Financial Performance

The company’s net sales for Q1FY10 jumped by 72.4% to Rs 1,879.8 crore from Rs 1,090.4 crore in Q1FY09 on higher plate sales & 50% growth in pipe volumes from 144,450 MT to 217,117 MT. Its PAT for the quarter went up by 94.3% to Rs 138.2 crore from Rs 71.2 crore. However after excluding extraordinary income of Rs 37.5 crore by way of reversal of foreign exchange provisions, PAT still showed an impressive rise of 41.5% to Rs 100.7 crore. EPS for Q1FY10 excluding extraordinary income stands at Rs 5.4.

For FY09, the company reported 44% rise in its revenues at Rs 5,739.5 crore. PAT on the other hand was down 37.3% to Rs 213.5 crore from Rs 340.8 crore mainly due to foreign exchange provision to the tune of Rs 131.4 crore due to sharp fluctuation & volatility of foreign exchange rates. EPS for FY09 too was down 40.3% to Rs 11.4 from Rs 19.2 in FY08.

Financial Outlook

We expect the company’s net revenues to touch Rs 7,400 crore in FY10 & Rs 8,500 crore in FY11 on the back of higher volume growth in line pipes as well as plates. Further higher output from the plate mill will result in gradual increase in savings which would increase the OPM margins from 11.1% in FY09 to 14.9% in FY11. PAT is expected to exhibit a CAGR of ~62% over the next two years from Rs 213.5 crore in FY09 to Rs 559 crore in FY11. EPS for FY10 & FY11 is pegged at Rs 23.8 & Rs 30 respectively.

Key Concerns

• Any delay in further ramping up the production at its plate mill would have an adverse impact on the financials of the company.

• Since majority of the revenues come from exports, wide fluctuations in foreign exchange will impact the financials of the company. However the company mitigates the risk by conservatively entering into forward contracts in case of its import & export transactions.


The increasing oil and gas demand should benefit pipe industry as more and more new pipe lines project are being announced. The Company today is accredited by almost all oil and gas majors and thus is automatically qualified to bid for most of the projects. These approvals, coupled with experience & expertise of successfully supplying pipes for most challenging projects and establishing itself as a niche player globally in the high-pressure oil and gas segment, shall enable the Company to reap the robust demand prevalent over the next 5 years.

At the CMP of Rs 262, the stock is trading at 11.0x its FY10e earnings of Rs 23.8 & 8.7x its FY11e earnings of Rs 30. With the company expected to witness strong volume growth coupled with its strong order book & the robust demand likely to prevail over the next three to five years, we recommend a BUY on the stock at the CMP with a price target of Rs 360, an upside of 37% from the current levels for 9 to 12 months horizon.

Industry Pointer




Profit & Loss Statement Key Ratios Y/E March, Fig in Rs. Cr FY2009 FY2010e FY2011e Net Sales 5,739.5 7,400.0 8,500.0 % Chg 43.7 28.9 14.9 Total Expenditure 5,104.8 6,330.0 7,235.0 % Chg 52.9 24.0 14.3 EBDITA 634.8 1,070.0 1,265.0 EBDITA Margin % 11.1 14.5 14.9 Other Income 18.7 18.0 24.0 PBDIT 653.5 1,088.0 1,289.0 Depreciation 143.3 155.0 175.0 Interest 176.6 250.0 265.0 PBT 333.6 683.0 849.0 Tax Provisions 120.0 240.0 290.0 Reported PAT 213.5 443.0 559.0 PAT Margin (%) 3.7 6.0 6.6 Raw Materials / Sales (%) 69.7 68.9 68.5 Employee Exp / Sales (%) 1.9 1.8 1.9 Other Mfr. Exp / Sales (%) 17.3 14.9 14.7 Tax Rate (%) 36.0 35.1 34.2

Y/E March, Fig in Rs. Cr FY2009 FY2010e FY2011e Per Share Data (Rs) EPS 11.4 23.8 30.0 Cash EPS 19.1 32.1 39.4 DPS 1.5 1.5 1.5 Book Value 83.9 105.9 134.2 Capital, Liquidity, Returns Ratio Debt / Equity (x) 1.7 1.2 0.9 Current Ratio (x) 1.2 1.1 1.1 ROE (%) 13.7 25.1 25.0 ROCE (%) 11.4 20.2 22.5 Dividend Yield (%) 0.6 0.6 0.6 Valuation Ratio (x) P/E 23.0 11.0 8.7 P/BV 3.1 2.5 2.0 EV/Sales 1.1 0.8 0.7 EV/EBIDTA 10.4 5.5 4.4 Efficiency Ratio (x) Inventory (days) 178 158 103 Debtors (days) 38 36 48 Creditors (days) 257 290 273


Y/E March, Fig in Rs. Cr FY2009 FY2010e FY2011e Share Capital (incl. warrants) 93.2 93.2 93.2 Reserves & Surplus 1,466.4 1,876.7 2,403.0 Total Loans 2,653.8 2,410.7 2,210.7 Deferred Tax Liability 248.8 248.8 248.8 Total Liabilities 4,462.3 4,629.4 4,955.7 Gross Block 3,484.4 3,750.0 4,500.0 Less: Acc. Depreciation 384.7 539.7 714.7 Net Block 3,099.6 3,210.3 3,785.3 Capital Work in Progress 583.9 450.0 350.0 Investments 114.0 414.0 514.0 Net Current Assets 664.8 555.2 306.5 Misc. Expd not w/o 0.0 0.0 0.0 Total Assets 4,462.3 4,629.4 4,955.7

Y/E March, Fig in Rs. Cr FY2009 FY2010e FY2011e Profit After Tax 213.5 443.0 559.0 Depreciation & W/o 143.3 155.0 175.0 Working Capital Changes 814.9 508.5 427.0 Others -113.1 0.0 -0.1 Operating Cash Flow 1,058.6 1,106.5 1,160.9 Capital Expenditure -1146.9 -131.8 -650.0 Change in Investment 211.0 -300.0 -100.0 Cash Flow from Investing -935.9 -431.8 -750.0 Proceeds from equity issue 0.5 0.0 0.0 Inc/(Dec) in Debt 586.1 -243.2 -200.0 Dividend Paid -32.6 -32.7 -32.6 Cash Flow from Financing 554.0 -275.9 -232.6 Net Change in Cash 676.7 398.9 178.3 Opening Cash Balance 270.3 947.0 1345.9 Closing Cash Balance 947.0 1345.9 1524.2

Industry Pointer



Jindal Saw Ltd. CMP: Rs 765.0 P/E 9.3x FY11e BUY ON DIPS


Index Details Sensex 17,135 Nifty 5,083 BSE MID CAP 6,302


Scrip Details

Mkt Cap (Rs in crores) 3,987.4 Book Value (Rs) 542.7 Eq Shares O/s (Cr) 5.2 Avg Vol 190,100 52 Week H/L 779 / 135 Dividend Yield (%) 0.7 Face Value (Rs) 10.0 BSE Code 500378 NSE Code JINDALSAW


Jindal Saw Vs Sensex

Jindal Saw Ltd (JSL), a part of $10 billion O.P. Jindal group is one of the largest pipe manufacturing companies in India with strong global presence, offering total pipe solutions including high grade Submerged Arc Welded (SAW) pipes, Ductile Iron (DI) pipes and seamless pipes.


Diversified business model: Balanced approach JSL has a diversified product range having presence in value as well as volume driven product lines. While SAW pipe is more of a volume driven product having decent margins, DI pipes & Seamless pipes are high profitable segments having better realization & margins.

Capacity expansion to fuel growth JSL is ramping up its seamless pipes capacity from 100,000 MTPA to 250,000 MTPA which is expected to be completed by Sep’09. It is also expanding its HSAW capacity at Bellary by 110,000 tons with a capex of Rs 50 crore. It also plans to double its ductile pipe capacity from 200,000 MTPA to 400,000 MTPA by Aug’11 at a capex of Rs 350 crore.

Strong Order Book provides earnings visibility Currently JSL has an order book worth close to Rs 4,000 crore, which is executable over a period of 9 months. While Saw pipes contribute 68%, Ductile pipes & Seamless pipes contribute 20% & 12% respectively.

Diversification into allied / unrelated activities After having divested its US subsidiaries, JSL has created Jindal ITF, its infrastructure arm which has initiated setting up businesses in activities viz water transportation infrastructure, inland & costal waterways transportation and power generation from solid waste. Though these activities are in the nascent stage they could drive revenues going forward.

Valuation & Recommendation At the CMP of Rs 765, the stock is trading at 8.7x its FY11e earnings of Rs 82.4. With the company consolidating its position through capacity expansion across all the pipe products coupled with the fairly strong order book & positive industry outlook, we recommend the investors to BUY the stock on DIPS at around 650 levels with a price target of Rs 825 for 12 to 15 months horizon.

Key Financials:

Y/E March, (Rs in crore) CY08 *FY10e FY11e Net Revenues 5,356.7 6,500.0 5,985 EBIDTA 706.6 1,028.0 950.0

PAT 326.3 497.8 485.0

EPS (Rs.) 60.9 90.8 82.4

EPS Growth (%) -62.7 22.0 17.4

ROCE 15.0 18.9 16.6

RONW 12.5 15.7 12.6

P/E (x) 12.6 8.4 9.3

EV/EBIDTA (x) 7.4 4.9 5.3

*FY10e – 15 months

Industry Pointer



JSL is one of the largest manufacturers of pipes in the country both in terms of revenues & capacity.

JSL has a balanced approach with presence in value as well as volume driven product lines

Company Background

Jindal Saw Ltd (JSL), formerly known as Saw Pipes Ltd & a part of the $10 billion Jindal Group, is one of the largest pipe manufacturing company in India, offering ‘Total Pipes Solutions’ including Submerged Arc Welded (SAW) pipes both spiral as well as longitudinal pipes widely used in the energy sector for transportation of oil & gas, Ductile Iron Pipes (DI) for water & sewage transportation and Seamless tubes & pipes for Exploration & Production (E&P) activities and industrial applications. JSL has effectively established itself as a market leader and a global major in providing ‘Total Pipe Solutions’ to the industry.

The company has its production facilities at Kosi Kalan in UP, two units at Mundra and one unit at Nashik.

Facilities Pipe Products

Kosi-Kalan, UP LSAW

Mundra, Gujarat LSAW & HSAW

Bellary, Karnataka HSAW

Nashik, Maharashtra Seamless The company which was having its US subsidiaries catering to production of LSAW pipes & plates (used for manufacturing of LSAW pipes) have already been divested & the proceeds of the same have been deployed for expansion of its core activities & diversification into other business initiatives.

Business Model

The core business operations of JSL are structured into three Strategic Business Units (SBUs) which include Saw pipes, Seamless Tubes & Pipes and Ductile Iron (DI) Pipes. Thus the company has a diversified product range which mitigates the business risks in the form of being diversified across various user segments (energy transportation sector, E&P activities & industrial applications and water & sewage transportation).

JSL has presence in value as well as volume driven product lines. While SAW pipe is more of a volume driven product having decent margins, DI pipes & Seamless pipes are high profitable segments having better realization & margins.

Product Profile

Product Portfolio Outer Diameter Thickness Application

LSAW 16” to 48” up to 38 mm High Pressure as compared to HSAW – Critical Oil & Gas

HSAW 20” to 84” up to 18 mm High Pressure – Oil & Gas / Water

Seamless 6 mm to 177.7 mm 1 mm to 25 mm E&P activities & industrial applications

DI 0.5” to 16” up to 13 mm Water projects & sewage Transportation

Industry Pointer



JSL’s greater emphasis on Seamless & DI pipes would enable the company to improve their margins going forward

Product Mix: To focus more on higher margin products

Although majority of the revenues would continue to generate from the SAW pipe segment in the coming years, JSL’s focus on higher margin products viz. DI pipes & Seamless pipes would result in expansion of margins & de-risking its business. While JSL is close to commissioning its recently added Seamless Pipe capacity of 150,000 MTPA, it is also planning to double its in DI pipes capacity from 200,000 MTPA to 400,000 MTPA in next couple of years.

Though we expect the majority of the revenues to continue to be contributed by SAW pipe segment in the near future, we expect the revenues from Seamless & DI pipes (especially from FY12 where the DI Pipe facility is expected to double) to increase gradually in the coming years. Further with the company making their presence felt in the water infrastructure projects & other areas, the contributions from these diversified businesses are also expected to increase going forward. The following chart depicts the likely product mix in terms of revenues from the period CY08 to FY11

CY08

Seamless

HSAW

DI

Pig Iron

LSAW

OthersLSAW

HSAW

Seamless

DI

Pig Iron

Others

FY10e Others

LSAW

Pig Iron

DI

HSAWSeamles

s

LSAW

HSAW

Seamless

DI

Pig Iron

Others

FY11e

Seamless

HSAW

DI

Pig Iron

LSAW

OthersLSAW

HSAW

Seamless

DI

Pig Iron

Others

We expect the revenue share from seamless pipe segment to improve from 8% in CY08 to 15.7% in FY11. The increase in volumes in this segment would not only generate more revenues but would also result in increasing JSL’s blended EBIDTA margin in the next two years as the margins in the seamless pipes segments are much higher than in the other pipe segments.

Industry Pointer



JSL is currently expanding its DI pipe & HSAW pipe capacity to take advantage of the demand coming from increased investments in the Pipeline as well as the Water projects JSL has recently added 150,000 MTPA capacity of seamless pipes by installing a Precision Quality Finishing (PFQ) mill at its Nashik’s facility thereby increasing its yield & resultantly the margins

Capital Expenditure to fuel growth

JSL after having divested its US subsidiaries has been on an expansion drive to make up for the volumes at its US facilities. Post divestment, the company has already expanded its LSAW pipe capacity by 200,000 MTPA to current 1,000,000 MTPA & HSAW pipe capacity by 240,000 MTPA to 390,000 MTPA. The total pipe capacity for JSL currently stands at 1,690,000 MTPA.

Facilities Kosi Kalan Mundra Bellary Nashik

LSaw HSaw LSaw DI HSAW SeamlessCurrent Capacity 250,000 350,000 750,000 200,000 40,000 100,000

Expansion - - - 200,000 110,000 150,000 Completion time - - - Aug’11 Dec’09 Sep’09

Capex (Rs) - - - 350 Cr 50 Cr

Proposed Capacity 250,000 350,000 750,000 400,000 150,000 250,000

As slated in the table above, JSL is currently expanding under various segments viz HSAW, DI & Seamless pipe segments.

HSAW Pipes: Considering the huge demand potential for HSAW pipes, JSL after having added 240,000 MTPA in the last year, is further adding 110,000 MTPA at its Bellary facility in Karnataka. This incremental capacity which is expected to start commercial operations by Dec’09 would take the HSAW capacity at its Bellary plant to 150,000 MTPA & the total HSAW capacity to 500,000 MTPA.

Seamless Pipes: With the crude reserves depleting & the prices expected to surge

in the long run, JSL has recently added 150,000 MTPA of capacity in seamless pipes by installing a Precision Quality Finishing (PFQ) mill at its Nashik’s facility. This will take its total capacity of seamless pipes to 250,000 MTPA. Currently the trail runs are on & the plant is expected to commence commercial operations soon.

In addition to the volume growth, JSL is expected to improve on its margins significantly in the seamless pipe segment as the PFQ mill would generate higher yield (85%) as compared to the present yield of 75%. This will result in higher EBIDTA margin for the segment by 600 bps from the current 12% to 18%.

DI Pipes: With the increasing water pipe demand, JSL is planning to set up an additional DI pipe facility having a capacity of 200,000 MTPA at its existing facility in Gujarat. Capex for the same is estimated at Rs 350 crore which is to be funded through available cash funds & internal accruals. The plant is likely to get operational by August 2011.

Industry Pointer



JSL’s order book of Rs 3,900 crore includes Rs 2,625 crore for line pipes & balance for Seamless & DI pipes

Order Book Provides Earnings Visibility

At present, JSL has an order book worth approx. $780 million (~Rs 39 billion), a YoY de-growth of 28.4%. The decline in order book is attributed to lower order inflow on account of lower crude prices. With the recovery in crude prices, order book position is expected to improve. The current order book includes export orders of approx 40% totaling to around $312 million. The major export destinations are Middle East, Gulf region & South East Asia. The orders are expected to be executed within the next 9 months.

Break up of Order Book product-wise

Order Book Tonnage Amount (In million $)

Amount (Rs in crore) Mix (%)

LSAW Pipes 200,000 325 1,625 42.0HSAW Pipes 200,000 200 1,000 25.0Seamless Pipes 40,000 160 800 21.0DI Pipes 160,000 95 475 12.0Total….. 600,000 780 3,900 100.0

Considering the robust demand for pipes in view of increasing pipeline projects across the globe we expect the order book position to improve. Further the company has bid for various projects for which the approvals are pending.

Diversification: Another Avenue for Growth

JSL is tapping opportunities in water as well as waste management as future areas of growth. Thus JSL has created a 100% subsidiary Jindal ITF Ltd (JITF) with the main object to carry out infrastructure-related businesses in India. It is presently engaged in the business of water management, waste management and waterborne transportation. These businesses are being carried out through various companies created below JITF.

Industry Pointer



For the nine months ended December 2008, JWIL posted revenue of Rs 191.9 crore with an EBIDTA of Rs 6.3 crore & PAT of Rs 3.4 crore JWL with a fleet of six ships has recorded a turnover of Rs 44.9 crore with a net loss of Rs 15 crore

Jindal Water Infrastructure Ltd (JWIL): Water is one of gravest resource challenge of the humanity. Its better management would ensure sustainable growth of agriculture, industry or any other economic and social activity. JWIL is one of the major participants in India's nascent market for private and public-private water and waste-water management systems. JWIL works in various verticals namely in industrial management of water, water reuse markets, BOOT projects and desalination.

For the nine months ended December 2008, JWIL posted revenue of Rs 191.9 crore. JWIL posted an EBIDTA of Rs 6.3 crore & a PAT of Rs 3.4 crore. It has an outstanding order book to the tune of Rs 650 crore. It has also participated in various tenders related to water projects and expects to get few more projects in the near future. The management has given a guidance of having an order book of close to Rs 1,000 crore by Dec’09. Jindal Waterways Limited (JWL): Nearly 20% of all carbon footprints are generated by automobiles. It provides a great challenge to a country like India which needs to have an effective transportation infrastructure backbone but still be aware of environmental concerns. India with its longest coast line has a tremendous potential to move cargo by ships. JWL with a fleet of six ships is the largest operator today on Indian coast as well as inland water. JSL is focused on developing this business in a profitable and sustainable way. JWL has recorded a turnover of Rs 44.9 crore with a net loss of Rs 15 crore. The business at this stage is not cash positive, primarily on account of economic slowdown & also due to internal issues with regard to timing of shifts. These issues are now well vested with & the company expects that this September onwards, it should be EBIDTA positive & PAT should turn positive by this December. With a run rate of Rs 19 – 20 crore per month, JWL revenues are expected to be at around Rs 240 crore for this fiscal.

Industry Pointer



JUIL is setting up a waste to energy conversion power plant at Okhla, Delhi at an investment of Rs 150 crore JSL has an edge over its competitors as the company already has been approved by many Oil & Gas majors across the globe including Shell Global Solutions, Saudi Aramco, to name a few

Jindal Urban Infrastructure Limited (JUIL): A substantial increase in waste generation is expected due to rapid urbanization. JUIL is implementing a project with the theme of waste to power. It is setting up a waste to energy conversion power plant at Okhla, Delhi at an investment of Rs 150 crore. It will be processing 2,000 tonne of waste per day and generating 16-20 MW of power. The power generation is going to increase substantially in five years as quantity and calorific value of waste will rise. This project is slated to be implemented by the third quarter of 2010. The company has also contracted for CERs at € 13.5 per tonne. Jindal Shipyards Limited The company has procured about 300 acres of land for setting up a shipyard in Gujarat. A total amount of Rs 15.5 crore has been spent for land procurement. However, due to disproportionate correction in the world economy, the project has been put on hold. Jindal Rail Infrastructure Limited The main object of this company is to set up a manufacturing facility for wagon/metro coaches/ EMU and other rolling stocks. However due to the sudden economic slowdown, the project is moving slowly. An area of 120 acres near Bharuch, Gujarat has been acquired and regulatory permissions are being obtained. The expected outlay for the project is estimated at Rs 150 crore.

Accreditations: One of the Key Entry Barriers in the Industry

The approval from Oil & Gas global majors is a key entry barrier in the industry in which JSL operates. This prequalification process could take nearly 3 to 5 years to establish itself as one of the approved vendors of pipelines.

JSL has an edge over its competitors as the company already has been approved by many Oil & Gas majors across the globe including Shell Global Solutions, Saudi Aramco, AGIP, Pemex & Bechtel to name a few. With the company being bestowed with various accreditations & certifications (including American Petroleum Institute certifications), it is technically qualified to handle majority of the projects which would come on stream over the next five years.

Impressive Financial Performance

The company’s net sales for the first six months of the current fiscal jumped by 50.6% to Rs 2,966.5 crore from Rs 1,969.7 crore in the corresponding period of the previous fiscal. Its PAT for the same period went up by 48.8% to Rs 231.6 crore from Rs 155.6 crore. The EPS jumped significantly, to Rs 44.4 from Rs 29.9.

Q2 Results (quarter ended Jun’09) were even more impressive with revenues growing 47.5% to Rs 1,501.1 crore while PAT grew by impressive 94% to Rs 136 crore. Blended EBIDTA / MT grew by an impressive 44.5% from Rs 8,664 (US$ 178) to Rs 12,517 (US$ 258). The spurt in EBIDTA/ton is attributable to better pricing of the orders executed in the current quarter especially in the large diameter & seamless pipe segments.

Industry Pointer



Going forward, we expect revenues and profits to grow at a CAGR of 12% and 28%, respectively, from CY09 to FY11.

Financial Outlook

We expect the company’s net revenues to touch Rs 6,500 crore in FY10 (15 months period on account of proposed change in accounting period from December to March). Further the revenues are expected to grow 12.1% (variance considering prorate period of 12 months in FY10) in FY11 to Rs 5,985 crore on the back of higher volume growth.

PAT on the other hand is expected to exhibit a CAGR of 28% from Rs 437.7 crore in CY08 to Rs 720 crore in FY11. We also expect the operating margins to improve by 270 bps from 13.2% in CY08 to 15.9% in FY11 on account of various cost efficiency measures carried out by the company & greater emphasis on higher margin seamless & DI pipes.

Equity Dilution

2,730,000 9.5% Unsecured Compulsory Convertible Debentures (CCDs) of Rs 819 each would be converted into 2,730,000 equity shares of Rs 10 each upto 20th September, 2009.

During FY06, JSL had issued JPY 9,090 million FCCB’s with a conversion price of Rs 675/- convertible into equity shares of Rs 10 each with a tenure of 5 years. We expect the same to be converted into equity by FY11.

With the aforesaid conversions, the equity capital would increase from Rs 52.1 crore in CY08 to Rs 58.8 crore in FY11. It may be noted that the 2,600,000 warrants allotted @ Rs 819, which were due for conversion into equity shares in this fiscal have been cancelled.

Key Concerns

• JSL’s foray into unrelated businesses of infrastructure, transportation & energy to waste power projects may lack the required expertise & bandwidth. However in case of water infrastructure projects, we believe it’s a forward integration for the company which makes them move up the value chain & offer complete end to end solutions to its customers (right from supplying pipes to building the infrastructure and to operation & maintenance).

• Since sizeable proportion of the revenues (40-45%) comes from exports, wide fluctuations in foreign exchange will impact the financials of the company. However the company mitigates the risk by conservatively entering into forward contracts in case of its import & export transactions.


The burgeoning oil and gas demand should benefit the pipe industry as more and more new pipe lines projects are announced. JSL today is accredited by almost all oil and gas majors and thus is automatically qualified to bid for most of the projects. These approvals, along with its diversified business model, shall enable the Company to reap the benefits of the robust demand prevalent over the next 5 years.

At the CMP of Rs 765, the stock is trading at 8.7x its FY11e earnings of Rs 82.4. With the company consolidating its position through capacity expansion across all the pipe products coupled with the fairly strong order book & positive industry outlook, we recommend the investors to BUY the stock on DIPS at around 650 levels with a price target of Rs 825 for 12 to 15 months horizon.

Industry Pointer



Note: After having divested its US Subsidiaries, JSL now intends to change its financial year from December ending to March ending. Accordingly FY2010 has been extended till March, taking the total number of months at 15 months. Thus the variances (% change) of FY10 over CY08 & FY11 over FY10 has been computed on pro rata basis (i.e. figures for FY10 are considered for 12 months instead of 15 months for comparison with the figures of CY08 & FY11 respectively).


Profit & Loss Statement Key Ratios

Y/E September, Fig in Rs. Cr CY2008 FY2010e FY2011e Net Sales 5,356.7 6,500.0 5,985.0 % Chg -21.1 -2.9 12.1 Total Expenditure 4,650.1 5,472.0 5,035.0 % Chg -22.2 -5.9 12.0 EBDITA 706.6 1,028.0 950.0 EBDITA Margin % 13.2 15.8 15.9 Other Income 13.0 10.0 10.0 PBDIT 719.6 1,038.0 960.0 Depreciation 84.0 105.0 90.0 Interest 197.9 190.0 150.0 PBT 437.7 743.0 720.0 Tax Provisions 111.3 245.2 235.0 Reported PAT 326.3 497.8 485.0 PAT Margin (%) 6.1 7.7 8.1 Raw Materials / Sales (%) 69.1 68.5 68.5 Employee Exp / Sales (%) 3.0 2.5 2.3 Other Mfr. Exp / Sales (%) 14.7 13.3 13.4 Tax Rate (%) 25.4 33.0 32.6

Y/E September, Fig in Rs. Cr CY2008 FY2010e FY2011e Per Share Data (Rs) EPS 60.9 90.8 82.4 Cash EPS 78.7 109.9 97.7 DPS 5.0 5.0 6.0 Book Value 542.7 641.7 713.9 Capital, Liquidity, Returns Ratio Debt / Equity (x) 0.6 0.4 0.2 Current Ratio (x) 2.6 2.5 2.3 ROE (%) 12.5 15.7 12.6 ROCE (%) 15.0 18.9 16.6 Dividend Yield (%) 0.7 0.7 0.8 Valuation Ratio (x) P/E 12.6 8.4 9.3 P/BV 1.4 1.2 1.1 EV/Sales 1.0 0.8 0.8 EV/EBIDTA 7.4 4.9 5.3 Efficiency Ratio (x) Inventory (days) 140 154 205 Debtors (days) 81 78 101 Creditors (days) 112 130 180


Y/E September, Fig in Rs. Cr CY2008 FY2010e FY2011e Share Capital 52.1 54.8 58.8 Share warrants 21.3 0.0 0.0 Reserves & Surplus 2,655.4 3,363.4 4,071.2 Total Loans 1,924.1 1,625.5 1,086.1 Deferred Tax Liability & MI 93.6 94.6 99.6 Total Liabilities 4,746.6 5,138.3 5,315.7 Gross Block 1,866.3 2,685.3 2,800.0 Less: Acc. Depreciation 412.1 517.1 607.1 Net Block 1,454.1 2,168.1 2,192.9 Capital Work in Progress 819.2 0.0 0.0 Investments 79.1 79.1 79.1 Net Current Assets 2,394.1 2,891.0 3,043.7 Misc. Expd not w/o 0.0 0.0 0.0 Total Assets 4,746.6 5,138.3 5,315.7

Y/E September, Fig in Rs. Cr CY2008 FY2010e FY2011e Profit After Tax 326.3 497.8 485.0 Depreciation & W/o 84.0 105.0 90.0 Working Capital Changes -321.1 -372.2 -318.8 Others 0.0 1.5 5.0 Operating Cash Flow 89.2 232.1 261.3 Capital Expenditure -878.3 0.2 -114.7 Change in Investment 130.2 0.0 0.0 Cash Flow from Investing -748.1 0.2 -114.7 Proceeds from equity issue 21.3 223.6 268.1 Inc/(Dec) in Debt 578.5 -298.6 -539.4 Dividend Paid -33.1 -32.6 -41.3 Others 0.0 0.0 0.0 Cash Flow from Financing 566.7 -107.6 -312.6 Net Change in Cash -92.2 124.7 -166.1 Opening Cash Balance 658.6 566.4 691.1 Closing Cash Balance 566.4 691.1 525.0

Industry Pointer



GLOSSARY

Pipes: Types, applications, size, raw materials & key differentiators

Seamless Pipes

Spiral / Helical SAW

Pipes Longitudinal SAW Pipes

Electric Resistance

Welded (ERW)

Ductile Iron / Cast Iron

Pipes

Raw Material used/Process

Made by piercing steel billets

Made by spirally welding HR Coils

Made by longitudinally

submerged arc welding of steel

plates

Made from HR Coils using Electrical

Resistance welding process

Made from Iron Ore & Coking Coal

Applications

• Petroleum Exploration

• General Engineering

• Boilers and Automotives

• Oil and Gas Transportation

• Water Transportation

• Sewage disposal

• Oil and Gas Transportation

• Suited for Offshore pipeline due to higher wall thickness

• Oil and Gas distribution

• Water distribution

• Water Transportation

• Sewage disposal

Size 0.5" to 14" 18"to 120" 16" to 56" 0.5" to 22" 3" to 39"

Indian Manufacturers

• Maharashtra Seamless

• ISMT • Jindal Saw

• Welspun Gujarat• PSL • Jindal Saw • Man Industries

• Welspun Gujarat• Man Industries • Jindal Saw

• Welspun Gujarat• Maharashtra

Seamless • Ratnamani

Metals

• Jindal Saw • Electrosteel

Casting • Tata Mettalics • Electrotherm

India

Industry Pointer



Seamless Pipes

Spiral / Helical SAW

Pipes Longitudinal SAW Pipes

Electric Resistance

Welded (ERW)

Ductile Iron / Cast Iron

Pipes

Key Differentiators

• Find application

in trunk lines

• Uses lighter

equipment which can be re-located to project site

• Can go upto

120” in diameter • Offshore use

limited due to limitation of wall thickness beyond 25 mm


in trunk lines

• Uses heavy machinery and hence not re-locatable

• Limited diameter

due to plate width

• Suited for

offshore pipeline due to higher wall thickness


in trunk lines

• Limitation on size, thickness & grade

• Ductile Iron pipes are rapidly replacing cast iron pipes

Industry Pointer



Appendix Appendix 1: World Gross Domestic Product (GDP) by Region, 1990-2030 (Billion Dollars)

History Projections CAGR Region/Country

1990 2005 2006 2010 2015 2020 2025 2030 (%)

OECD

North America 9,338 14,403 14,825 15,523 18,124 20,544 23,338 26,693 2.5

United States 8,040 12,422 12,768 13,315 15,538 17,548 19,885 22,737 2.4

Canada 750 1,133 1,168 1,238 1,410 1,582 1,769 1,975 2.2

Mexico 548 847 889 969 1,176 1,415 1,684 1,981 3.5

Europe 10,349 14,560 15,031 15,762 17,555 19,480 21,495 23,628 2.0

Asia 4,644 6,170 6,342 6,738 7,518 8,079 8,592 9,139 1.6

Japan 3,791 4,558 4,668 4,831 5,223 5,415 5,517 5,617 0.8

South Korea 351 791 832 977 1,203 1,401 1,609 1,821 3.4

Australia/New Zealand 502 821 843 930 1,092 1,263 1,467 1,701 3.0

Total OECD 24,332 35,133 36,198 38,023 43,197 48,103 53,425 59,460 2.1

Non-OECD

Europe and Eurasia 1,342 1,320 1,426 1,785 2,208 2,616 3,022 3,457 3.9

Russia 843 764 820 1,044 1,283 1,508 1,728 1,965 3.9

Others 498 556 606 741 925 1,109 1,294 1,492 4.0

Asia 1,704 4,738 5,177 6,929 9,518 12,738 16,305 20,245 6.0

China 525 2,236 2,496 3,604 5,106 7,118 9,324 11,675 6.8

India 340 812 891 1,166 1,626 2,157 2,722 3,378 5.9

Others 840 1,690 1,791 2,159 2,785 3,463 4,259 5,192 4.6

Middle East 581 1,071 1,150 1,400 1,701 2,035 2,422 2,876 4.0

Africa 615 965 1,021 1,244 1,576 1,962 2,416 2,908 4.5

Central and South America 1,250 1,934 2,041 2,432 2,940 3,523 4,196 4,977 3.9

Brazil 601 882 915 1,089 1,320 1,583 1,892 2,255 3.8

Others 649 1,052 1,127 1,343 1,620 1,940 2,304 2,722 3.9

Total Non-OECD 5,492 10,028 10,816 13,789 17,943 22,874 28,362 34,461 5.1

Total World 29,823 45,161 47,014 51,812 61,140 70,977 81,787 93,922 3.0


Industry Pointer



Appendix 2: World Liquid/Oil Consumption by Region, 1990-2030 (Million Barrels Per Day)


1990 2005 2006 2010 2015 2020 2025 2030 (%)

OECD

North America 20.5 25.2 25.1 23.5 24.1 24.4 25.2 26.2 0.2

United States 17.0 20.8 20.7 19.6 20.2 20.2 20.8 21.7 0.2

Canada 1.7 2.3 2.3 2.3 2.3 2.3 2.4 2.5 0.3

Mexico 1.8 2.1 2.1 1.5 1.7 1.9 2.0 2.1 0.0

Europe 13.7 15.7 15.7 14.5 14.5 14.9 15.0 15.0 -0.2

Asia 7.2 8.6 8.5 8.4 8.6 8.8 8.8 8.7 0.1

Japan 5.3 5.3 5.2 4.6 4.8 5.0 4.8 4.7 -0.4

South Korea 1.0 2.2 2.2 2.8 2.7 2.6 2.7 2.8 1.0

Australia/New Zealand 0.8 1.1 1.1 1.0 1.1 1.2 1.2 1.3 0.6

Total OECD 41.4 49.5 49.2 46.3 47.2 48.1 48.9 50.0 0.1

Non-OECD

Europe & Eurasia 9.4 4.9 5.0 5.1 5.2 5.4 5.4 5.5 0.4

Russia 5.4 2.8 2.8 2.7 2.8 2.9 2.8 2.7 -0.1

Other 3.9 2.1 2.1 2.4 2.4 2.5 2.6 2.7 1.0

Asia 6.6 15.3 16.0 17.8 20.6 24.2 27.3 30.2 2.7

China 2.3 6.7 7.2 8.5 10.0 12.1 13.8 15.3 3.2

India 1.2 2.5 2.7 2.4 3.1 3.9 4.3 4.7 2.4

Others 3.1 6.1 6.1 6.9 7.5 8.2 9.1 10.2 2.1

Middle East 3.5 5.8 6.1 7.0 7.4 7.9 8.5 9.4 1.8

Africa 2.1 3.0 3.0 3.5 3.6 3.7 3.8 3.9 1.2

Central and South America 3.8 5.5 5.7 6.6 6.6 6.8 7.1 7.6 1.2

Brazil 1.5 2.2 2.3 2.5 2.8 3.0 3.4 3.7 2.1

Others 2.3 3.3 3.4 4.0 3.8 3.7 3.8 3.9 0.5

Total Non-OECD 25.3 34.5 35.8 40.0 43.4 47.8 52.2 56.6 1.9

Total World 66.7 84.0 85.0 86.3 90.6 95.9 101.1 106.6 0.9


Industry Pointer



Appendix 3: World Natural Gas Consumption by Region, 1990-2030 (Trillion Cubic Feet)


1990 2005 2006 2010 2015 2020 2025 2030 (%)

OECD North America 22.5 27.1 27.2 28.4 29.4 30.8 32.8 33.3 0.8

United States 19.2 22.0 21.7 22.6 22.8 23.4 24.7 24.4 0.5

Canada 2.4 3.4 3.3 3.4 3.9 4.2 4.5 4.7 1.5

Mexico 0.9 1.8 2.2 2.4 2.8 3.2 3.7 4.2 2.7

Europe 11.6 19.3 19.2 20.4 21.5 22.6 23.5 24.1 1.0

Asia 2.9 5.2 5.5 5.9 6.5 6.8 6.9 7.0 1.0

Japan 2.0 3.1 3.2 3.3 3.6 3.7 3.7 3.7 0.5

South Korea 0.1 1.1 1.1 1.3 1.5 1.6 1.7 1.7 1.8

Australia/New Zealand 0.8 1.1 1.2 1.3 1.4 1.5 1.5 1.6 1.3

Total OECD 37.0 51.7 51.9 54.7 57.4 60.3 63.3 64.3 0.9

Non-OECD Europe & Eurasia 26.7 25.3 25.4 27.5 29.9 31.3 32.1 32.8 1.1

Russia 17.3 16.2 16.6 18.0 19.1 19.9 20.3 20.8 0.9

Other 9.5 9.1 8.8 9.6 10.8 11.4 11.8 12.0 1.3

Asia 2.9 9.3 9.4 11.4 15.2 18.7 21.8 24.5 4.1

China 0.5 1.7 2.0 2.6 3.8 4.9 5.9 6.8 5.2

India 0.4 1.3 1.4 1.8 2.4 3.0 3.4 3.7 4.2

Others 2.0 6.4 6.0 7.0 9.0 10.9 12.5 14.1 3.6

Middle East 3.6 9.8 10.3 11.9 13.5 14.4 15.3 16.6 2.0

Africa 1.4 3.0 2.9 3.4 4.3 5.1 5.8 6.2 3.2

Central and South America 2.0 4.4 4.5 5.5 6.3 7.0 7.7 8.1 2.4

Brazil 0.1 0.7 0.7 1.0 1.2 1.4 1.7 1.8 4.1

Others 1.9 3.7 3.8 4.5 5.1 5.6 6.0 6.3 2.1

Total Non-OECD 36.5 51.8 52.5 59.8 69.1 76.5 82.7 88.2 2.2

Total World 73.5 103.4 104.4 114.4 126.5 136.8 146.0 152.5 1.6


Ventura Securities Limited Corporate Office: C-112/116, Bldg No. 1, Kailash Industrial Complex, Park Site, Vikhroli (W), Mumbai – 400079 This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their articles. Neither Ventura Securities Limited nor any of the contributors accepts any liability arising out of the above information/articles. Reproduction in whole or in part without written permission is prohibited. This report is for private circulation.

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