PSL – Pipes Order Pour from Middle East and America

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( 15 Oct 10 )
( 19 Aug 11 )
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Q1 not good

PSL has not produced good results for the quarter ended 30.06.11 when compared to the quarter ended 31.03.11. Revenue has dropped from Rs.765.07 crore to Rs.527.92 crore. Revenue for the whole year 2010-11 was at Rs.2669.89 crore. Net profit dropped from Rs.14.48 crore to Rs.20.41 crore. Net profit for the whole year 2010-11 was at Rs.75.71 crore. Operating margin increased from 12.10% to 17.74%. Net profit margin marginally increased from 2.67% to 2.74%. The company is operating in construction and engineering sector. The shares of PSL are traded in the Indian stock markets at Rs.58.75 now (Bombay Stock Exchange 16.11.11). The highest price of the company’s shares in the last one year was at Rs.122 (15.10.10) and the lowest price was at Rs.55.10 (19.08.11). In other words, the present share price of PSL is close to its lowest price in the last one year. This gives a temptation to the investors to buy the shares of PSL at the current price level. Is this temptation justified? Let us analyse.

Rs.750 crore order from GAIL

PSL produces steel pipes. It has bagged an order worth Rs.750 crore from Gas Authority of India Ltd (GAIL). This single order is worth about 35% of the total order book of the company. PSL’s order book was worth Rs.2200 crore as on 31.03.11. The order from GAIL requires PSL to deliver welded pipes with large diameter for gas transmission. GAIL will be using these pipes for gas transmission.

Erosion of margins

PSL is suffering from high input costs that erode its margins. Unlike Pennar Industries, it is not able to keep its margins at a safe level. The GAIL order will not increase the margins greatly, though it will add to the topline of the company. Even though the company is procuring steel from multiple steel companies, the recent hike in the cost of steel has not spared the company. PSL is not able to pass on the hike in the input prices to its clients fully. For the financial year 2010-11, sales turnover was down by 21% to Rs.3100 crore. Net profit dropped by a whopping 55% to Rs.55 crore. Net profit margins also slipped during the period from 3% to 2%. This shows that the company is not able to manage its finances efficiently and is suffering because of the hike in the input commodity prices. The only satisfaction the company can derive is that other pipe manufacturers like SAW, Jindal, Man Industries and Welspun Corp also are suffering from erosion of their margins.

GAIL’s expansion will come handy for PSL

The industry as a whole is suffering. Times are not good for the pipe manufacturers. The industry is upset with inflow of lower orders, overcapacity, and input price hike mainly steel. But there is some silver lining in the murky cloud. GAIL is planning to spend over Rs.25000 crore to expand its pipeline network in the next two years. This will help companies like PSL to secure orders though at low margins. Firming of oil price will also help the pipe industry.

Dividend yield at 5.25%

PSL is one of India’s largest pipe manufacturers with a production capacity of one million tonnes per annum. It caters to the demands of water transportation, oil and gas industries. The company pays dividend regularly. The yield works out to around 5.2%. The company is a cash rich company and so it is able to take care of its expansion plans through its internal accrual. The slowdown in European and US economies because of financial crisis and debt crisis has affected pipe industry also. PSL has reserves and surplus amounting to Rs.785 crore as on last year.

Sharjah subsidiary bags big contract from Saudi government

The company’s Sharjah-based subsidiary PSL FZE Hamriyah has secured a $80 million order from The Saline Water Conversion Corporation (SWCC) of the Kingdom of Saudi Arabia. The project consists of construction of a water transmission system from Ras Azour in the Eastern Province to Hafr-Al-Batan in the Central System consisting of API 5L Grade X-65, 44-inch diameter pipes. The total length involved is 350 km. With this order, the installed capacity of the company’s Sharjah subsidiary will be fully utilised till May 2012. The company is also adding a second capacity of 75000 million tonnes per annum at PSL FZE, Hamriyah. The total capacity will double to 150000 million tonnes per annum. The second mill is in an advanced stage of completion. The company has submitted another project of value $200 million for water transmission pipeline project over 600 km and is under active consideration of the Saudi Government. The company’s Sharjah subsidiary serves it well to execute these projects and scout for more projects as it is near the action front because of its proximity to water, energy and infrastructure centres. The company’s Sharjah subsidiary was established in 2007. The subsidiary’s production plant provides coating services and pipe supply for offshore and onshore applications in nearby Middle East nations like Saudi Arabia, United Arab Emirates, Qatar, Oman, Kuwait and other countries in West Asia.

Why not foray into high margin pipe laying?

Ashok Punj is the Managing Director of PSL. There has been a news report that the company was looking for foraying into the high margin pipe laying industry. For this, PSL is scouting for opportunities to acquire an existing company. The news item regarding this appeared sometime back. But the company subsequently denied the report. Nevertheless, it is a good idea and the company should consider it seriously to improve its margins. It will also be a forward integration for the company and a value added business.

US subsidiary bags big contract

The company’s US subsidiary and Mississippi-based company PSL North America (PSLNA) has bagged Rs.270 crore orders from large American pipeline operators for shale gas transmission projects. The company manufacturers pipes for transporting water products, hydrocarbon products and structural steel applications. The company will be supplying large diameter API-certified pipes totalling 105 miles of length. These pipes have anti corrosion coating on the special steel from which they are made and are used in shale gas pipeline projects. These pipes are developed in North Eastern and Southern parts of USA. Increased shale gas expansion activities spell well for pipeline companies like PSL. The company’s US subsidiary will play a big role in the progress of this project.

Notwithstanding unsatisfactory results, the shares are worth investing

At the current market price of Rs.58.75, one can invest in the company’s shares for medium to long term holding for the following reasons:

  • The company’s share price is close to its lowest price in the last one year
  • The company has a good management
  • The company has overseas subsidiaries that are operating well
  • The company secures foreign projects from countries in the Middle East as well as from USA
  • The company has an option to enter into the high margin pipe laying business if it can acquire a suitable company for it

The company is a profit making dividend paying company

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