By far the world’s largest H-SAW pipe manufacturer (over 1m tpa at ten places in India), PSL produces 16” to 120” dia. pipes of thicknesses ranging from 5 mm to 25 mm. It started in 1988 as a pipe-coating plant, then integrated backward to start its first pipe-manufacturing plant in Chennai in FY96. All its plants are API approved (capable of producing X 70 grade pipes) and accepted by most of the oil & gas companies, including Shell. Its basic strength lies in its low capital cost due to in-house manufacturing of plant machinery and equipment, providing it with an edge over competition.

Domestic demand is up significantly compared to previous year -- and 80% of PSL’s revenue comes from the home market, contrasting with 20% for its domestic peers. It has consolidated its position at home due to its competitive pricing policy, and is thus favourably poised to capture most of the domestic demand.

Though revenue during FY07, at Rs 15,832m, was almost flat, the margin expanded 90bp, to 9.6%. PAT rose 26.5%, to Rs 622m. With the growth in volumes, margin improvement is expected, leading to a significant growth in the bottom line. At the CMP, the stock trades at 13x FY08E first cut earnings of Rs 25.7.

Healthy order book

PSL’s current order book of Rs 22bn is to be executed over the next nine to twelve months. Besides this, it has submitted bids (along with other manufacturers) worth Rs 30bn and awaits decisions on them.

Future Projects

In June 07, PSL commissioned 75,000 tpa H SAW pipe manufacturing plant at Sharjah,UAE to cater to the Middle East and gulf countries. The plant is expected to get necessary API approval from various oil & gas companies within 6 months.

It has started work on setting up a 300,000 tpa H saw pipe manufacturing plant in USA. This plant would be spread over 156 acres of land and expected to be commissioned by April 2008. The total investment is about US$60 mn. It is a joint venture with 70% stake held by PSL.

Concerns

PSL’s plants (at different places) are relatively small. Lack of sufficient orders may lead to low capacity utilization, affecting margins and earnings. In fact, PSL’s margins are lower than its peers only because of this.

Though revenue and growth are visible, yet, since the business is project-based, lumpy revenues might result due to delay in booking revenue.

Valuation

At the CMP, the stock trades at 13x FY08E first-cut estimates and 6.7x those of FY09E. With mounting investment in oil & gas infrastructure and in water infrastructure in India, the company expects its volumes to rise. We remain positive on the stock.