- Initiating Coverage PSL Limited (PSLHOL) Report by ICICI Direct

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Initiating Coverage PSL Limited (PSLHOL) Report by ICICI Direct

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Initiating Coverage PSL Limited (PSLHOL) Report by ICICI Direct

Saturday, 15 September 2007

PSL Limited is the largest HSAW pipe manufacturer in India, accounting for about 60% of the domestic capacity.
HSAW pipes are cost-effective and are preferred in the domestic market. LSAW pipes are preferred in Middle East. HSAW pipes are used for both water transportation and sewage. We expect the top line to grow at a CAGR of 22% over FY07-09E while bottom line at 46.07% driven by increased capacity utilization.

Healthy order book of Rs 2,400 crore against the sales of Rs 1,583 crore

PSL has healthy order book position of Rs 2,400 crore to be executed in the 12- 15 months. Robust order flow from domestic users gives higher visibility to its top & bottom line growth.

Valuation PSL Limited

With the flow of orders and preference of HSAW over LSAW pipes by domestic players, we believe capacity utilization would increase leading to better margins. We expect operating margin to increase from 9.65% in FY07 to 12.53% in F09E.

We expect top line to grow at a CAGR of 27% over FY07-09E to Rs 2551.95 crore and bottom line at CAGR of 62% to Rs 163.13 crore. The stock currently trades at 7.79x the FY09E EPS. Our base case DCF valuation gives us a fair value of Rs 388.

Company Background PSL Limited

PSL Limited is the flagship company of PSL group. The company has ten pipe mills at coast-based locations in Chennai, Kandla and Daman. It produces pipes in different size varying from 16 inches diameter to 120 inches with wall thickness from 5 mm to 25 mm.

It manufactures and supplies HSAW for oil & gas and water transmission as well as structural and piling applications. The company’s activities include protective coatings for steel pipes, epoxy coatings for reinforcement bars, manufacture of epoxy powder paint and galvalum range of aluminum sacrificial anodes and the processing of iron ore.

The company has technical collaborations with Commercial Resins, US, Lilly Powder Coating, US, Oronzio De Nora, Switzerland and Abbey Resources, UK. To cater to the Reliance Petroleum’s refinery project, the company has set up a new coating facility at Jamnagar and sourced new and diverse technologies to meet the RPL project's specifications.

During 2000-02, it doubled its pipe mill capacity to 5.25 lakh million tonnes tpa, which is now ramped upto 11 lakh TPA. The company has various orders for GAIL’s pipeline project. In FY06, the company established Two-Step Pipe Mill at Varsana in Gujarat.

The pipe mill enhanced the total annual production capacity of the company from 7.50 lakh tonnes to 11 lakh tonnes. The company’s production capacity of spiral arc welded pipes expanded from 10.25 lakh tonnes to 11 lakh tonnes.

Healthy order book of Rs 2,400 crore

PSL has healthy order book position of Rs 2,400 crore to be executed in the 12-15 months. The domestic market accounts for about 80% of its order book. Under the National Gas Grid plan, GAIL is putting up around 5000 km of pipeline.

We believe the pipeline will require mostly HSAW pipes, which throws huge opportunity for the company. Robust order flow from domestic users would give higher visibility to its top and bottom line.

Lower capacity utilization leaves room for revenue scalability

Out of the total demand for 11.84 million tonne of expected SAW pipe required in domestic market for next five years, 65% is expected to of HSAW pipe.

The company has capacity to manufacture 1.1 million tonne per annum of HSAW pipe and is operating at a utilization of around 25%. Lower utilization leaves a lot of room for utilization scalability. Recently, PSL expanded its manufacturing capacity.

Increased capacity to start fetching revenue

The company increased its HSWA capacity from 6.75 lakh tonne to 11.00 lakh tonne during FY05 and FY06. We believe the increased capacity would start fetching revenue now as the demand for HSAW pipe is increasing due to its cost effectiveness and lower supply of LSAW pipe.

LSAW pipes are produced from steel plates, which are in limited supply and are priced at 29% premium to that of the raw material of HSAW pipes, HR coil. API grade steel plates manufacturing capacity in India is limited and most of the demand is met through imports from European players while API grade HR coil is available in domestic market.

Valuation PSL Limited

PSL has healthy order book position of Rs 2,400 crore to be executed in the 12-15 months. With the flow of orders and preference of HSAW pipes over LSAW pipes by domestic players, we believe that the capacity utilization would rise leading to better margins as well as top & bottom line.

We expect the operating margin to increase from 9.65% in FY07 to 12.53% in FY09E. The top line is expected to grow at a CAGR of 27% to Rs 2551.95 crore in FY09E while the bottom line to grow at a CAGR of 62% to Rs 163.13 crore in FY09E during FY07-09E. The stock currently trades at 7.79x the FY09E EPS. Our base case DCF valuation fetches a fair value of Rs 388.

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The stock has traded most of the time at around the PE of 12x one year forward earnings. Applying PE of 12x the FY09E EPS, give a price of 497. Factoring in the HSAW capacity coming into the industry and a threat from the LSAW, when the price will decline, into our DCF valuation method, we calculate the fair value of Rs 388.

Source : ICICI Direct

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