CMP: Rs 94 Target: Rs 172 BUY

New product forays and backward integration plans to boost earnings

Rising demand for pipes and tubes, particularly from the oil & gas andconstruction sectors; BTL has raised cumulative capacity from 60,000mtpa to 125,000mtpa in FY06-FY07 to meet demand from both domestic and overseas markets

Foray into auto tubes and high-end 20 diameter tubes, along with backward integration (via set-up of a skelp mill for captive raw material) will ramp up turnover and expand margins

Apollo Metalx, a 100% subsidiary, with a capacity of 24,000mtpa will supply 85% of its production to BTL, and prove EPS-accretive

Technology from Kusakabe, Japan has helped expand product range, scale up production efficiency and enhance quality

Revenue CAGR of 101% expected over FY07-FY09 to Rs 8.4bnwith a PAT CAGR of 125% to Rs 3.5bn; Initiate coverage with Buy with an end-FY08 target price of Rs 172, an appreciation of 83%


Company overview

Bihar Tubes (BTL), a manufacturer of steel pipes and tubes, was established in 1986 in Sikandarabad, Uttar Pradesh. The company initially catered to the steel industry, but has recently increased its product range to cater to various sectors including infrastructure, agriculture, engineering, and most recently automobiles. BTL currently has four tube production mills in Sikandarabad with a combined capacity of 125,000mt, and offers products in higher diameter segments up to 12”. The company has an established customer base both in India and international markets, with exports to over 35 countries like the US, Colombia, Nigeria, Ireland and Germany.

Major clients

Suzlon, Jubilant, L&T, Gammon, Adani, Reliance, AAI-Delhi, Delhi Metro, Bajaj Hindustan, Sintex, Parsvanath Developers

Domestic and overseas demand; in USA (MIG Steel), Colombia, Nigeria, Europe, Ireland (Gibny Steel),Germany (Corom Steel)

BSNL, State Agriculture dept

BIS, DMR, NTPC, Nicco, Electrotherm

Industry overview

The pipe industry in India primarily comprises the manufacture of seamless or welded steel pipes or tubes, and ferrous metal pipe or tube fittings. Total steel production by organised steel players in India stands at ~45mn tonnes, of which 14-15% is consumed by the steel tube and pipe industry. This implies that the total steel tube and pipe industry produces ~6.3 - 6.8mtpa. Considering the demand-supply mismatch and low consumption of tubes and pipes in India, the industry is expected to grow at 30-35% till 2010.

Infrastructure boom to drive growth

The building and construction industries along with the oil & gas sector are the major marketplaces for pipes and tubes. India has the least infrastructure for oil and gas pipelines at less than 16,000km, while France (which is roughly one-sixth the size) has about 170,000km of pipelines and the US has 329,600km. Moreover, with the construction market booming and development of new markets for steel pipes ranging from commercial framing to water pipes, the future of the steel tubing industry looks bright.

Improvement in productivity

Significant consolidation and rationalisation of excess capacity has occurred in some segments of the industry. Also, cost containment and improved quality control measures have led to productivity gains and quality improvements across the entire tubes & pipe industry.
Strong position in export market

The global export market for steel pipes is close to US$ 27bn a year with the US, western Europe, Australia and Japan being the biggest importers. India is one of the major exporting nations apart from Indonesia, Malaysia and Thailand.

Investment rationale

Large-scale capacity expansion

The company has increased its overall capacity of steel pipes and tubes from 60,000mtpa to 125,000mtpa during FY06-FY07 at a capital expenditure of Rs 65mn. With increased capacity it can now generate turnover from Rs 3.5bn to Rs 4bn on the current gross block.


Scaling up the value chain

Foray into high-end automobile tubing products: BTL is now foraying into the automobile sector by creating a capacity of 35,000mtpa in Sikandarabad for boiler tubes, air heated and shock absorber tubes. The project entails a capex of Rs 100mn and will be funded via internal accruals. The land for the project has already been acquired and work is expected to commence from December 2007. The company is in the final stage of talks with automobile companies for the off-take of its products. We expect this division to contributing to revenues from FY09 onwards and boost margin growth.


Manufacture of 20 diameter tubes: BTL currently manufactures tubes up to 12 diameter. The company is now looking to scale further up the value chain via the manufacture of 20-diameter tubes and is currently setting up a tube mill for this purpose. This will enable BTL to compete with companies like SAW Pipes, MAN Industries and Welspun Gujarat.
Backward integration to assure cost-effective input supply Raw material accounts for 80-85% of the cost of the finished goods. With a view to cutting input costs, the company is undertaking backward integration via the set up of a fully integrated 100,000mtpa HR skelp plant at Sikandarabad. The plant will be set up at a cost of Rs 500mn to be partially financed by a warrants issue at Rs70/ share (after bonus), amounting to Rs 450mn.

Approximately 75-80% of the production from the skelp plant is expected to be utilised for captive consumption while the surplus will be sold. The unit will assure BTL of an uninterrupted supply of raw material at a discount to market price, which will strengthen margins. We expect the benefits of this project to flow in from H2FY09 onwards.

BTL’s 100% subsidiary – Apollo Metalx – has a capacity of 24,000mtpa for galvanising sheets. The subsidiary supplies 85% of the production to BTL and sells the balance in the market. Its capacity is booked for the next year and it is also planning to ramp up capacity, going ahead. We expect this subsidiary to add bottomline significantly and prove EPS-accretive for BTL.

Imported Japanese technology has enhanced product range and quality
BTL entered into a technological collaboration with Japanese pipe manufacturer, Kusakabe, in the year 2002, which has helped it expand its product range and applications significantly. The company currently manufactures tubes and pipes from four tube mills, three of which have technology imported from Kusakabe. BTL is one of the few domestic players with the capability to manufacture ½” – 2½” diameter products at a speed of 150mt/minute. This has greatly enhanced production capacity at the mill. The technical know-how for the new auto tube project technology will also be obtained from the Japanese partner.

Margins to expand significantly

We expect the margin both at operating and net levels to improve primarily because of the following –

Cost savings from pre-galvanised pipe manufacture: BTL is one of the few manufacturer of pre-galvanised pipes and tubes in India, and is thus able to command higher prices for its product. This segment has posted a 118% revenue CAGR over FY05-FY07, the highest among the company’s four product segments. Pre-galvanised tubes are cheaper to produce since they have a zinc coating of 80-120gm/mt while that for galvanised tubes is 400gm/mt. However, they offer a comparable lifespan. In order to take advantage of the savings on zinc costs, BTL is raising production of pre-galvanised tubes from 12,000mtpa to 20,000mtpa in FY08, which will lend a fillip to margins. We expect sales of pre-galvanised section to show a CAGR of 55.3% during FY07-FY09E.

Benefits of backward and forward integration: The foray into auto tubes where the margin is higher in comparison to existing products and the planned HR skelp mill for cost-effective raw material procurement will also result in significant margin expansion.
Expansion via inorganic route

In order to meet the rising demand, BTL is looking to expand capacities in existing segments and also enter into higher-specification products (½ to 12) via acquisitions. The acquisition is expected to be in the range of Rs 200mn-250mn. The company is eying players in western India for its inorganic growth plans in order to strengthen its marketing and distribution reach in the region and reduce freight cost.

Extensive network and strong brand name

BTL has a network of 50 distributors throughout the country with a strong presence in North and South India where it markets products under the popular APL Apollo brand name. The companys is working on expanding its footprint in the western states as well. BTL also has a distribution network in overseas market like Colombia, Dubai, Ireland, Germany and France.

BTL exports its products to over 35 countries like the US, Colombia, Nigeria, Ireland, and Germany. Exports currently account for 11% of total revenues, which the company aims to raise to 15% going ahead.