The company s current order book stands at Rs16.00 billion, which will get executed within this financial year.

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EQUITY RESEARCH INDIA Market Cap Rs.8798.16 mn Steel-Tubes/Pipes CMP: Rs.168.00 (As on 26 th Dec, 2009

1 EQUITY RESEARCH INDIA Market Cap Rs mn Steel-Tubes/Pipes CMP: Rs (As on 26 th Dec, 2009) 26 th December, 2009 BUY Target price: Rs (For Medium to Long term) PSL Limited We initiated the coverage of Time PSL Ltd and set a target price of Rs It is one of the largest HSAW pipe manufacturers in India with the installed capacity of MTPA of pipes. The company s current order book stands at Rs16.00 billion, which will get executed within this financial year. One-year comparative graph with BSE U. Janakirao Analyst Equity Research Desk Janakirao@firstobjectindia.com BCBBB V.S.R Sastry Vice president Equity Research Desk vsrsastry@firstcallindiaequity.com Recently PSL has raised Rs mn worth of fresh funds via Qualified Institutional Placement (QIP). PSL is likely to diversify into development of special economic zones (SEZs). PSL is setting up additional capacities of 450,000 TPA of pipe manufacturing which include 225,000 TPA HSAW pipe mill at Sharjah, UAE and another 225,000 PTA spiral pipe mill project at Vishakhapatnam. The top line and bottom-line of the company are expected to grow at a CAGR of 13.41% and 8.99% respectively over FY08 to FY11E. PSL BSE SENSEX Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com _ 1 Firstcall India Equity Advisors Pvt. Ltd Key Financials FY08 FY09 FY10E FY11E Key Data Face Value Net Sales(mn) (Rs.) NAGAR CONST Shares BSE SENSEX EBITDA(Rs.mn) Outstanding EBITDA 52 wk. Margin (%) 10.51% 8.01% 10.99% 10.30% High/Low Net Profit Volume (Rs.Mn) (2wk.Avg.) Net profit Margin (%) 3.82% 2.42% 3.78% 3.39% BSE Code mn Rs /

2 Table of Contents Page no 1. Peer group Comparisons Company Updates Company s profile Business Area SWOT analysis Financials Valuation Industry overview 17 Firstcall India Equity Advisors Pvt. Ltd 2

3 Peer Group Comparison Name of the Company 52 wk High / Low(Rs.) C.M.P(Rs.) E.P.S(Rs.) P/E(x) PSL / Welspun Gujarat Stahl Roh / Man Industries 60.90/ Jindal Saw / Updates of the Company Results Update (Q2 FY10) For the quarter ended on September 30, 2009 (Standalone) the company has registered a 5.83 % (YOY) degrowth in the net sales and stood at Rs mn from Rs mn of the corresponding period of the previous year. The operating profit for the quarter stood at Rs mn from Rs mn, for the same quarter of last year. The operating profit margins for the quarter stood at 11.30%. During Q2FY10 the net profit of the company stood at Rs mn. NPM stood at 3.56%. EPS for the quarter stood at Rs.4.12 per equity share of Rs Quarterly Results Standalone(Rs in mn) As at Q2FY09 Q2FY10 %Change Net Sales (5.83) Net Profit (0.14) Basic EPS(Rs)* (18.90) Firstcall India Equity Advisors Pvt. Ltd 3

4 Margins (%): Operating Profit Margins (OPM %) Net Profit Margins (NPM %) Firstcall India Equity Advisors Pvt. Ltd 4

5 PSL accumulates Rs mn via QIP route PSL has successfully raised Rs mn worth of fresh funds via Qualified Institutional Placement (QIP). The company has allotted 10,750,000 equity shares of Rs 10 each at a price of Rs per share to 20 Qualified Institutional Buyers (QIB's) under this issue. The price band for the issue has been fixed at Rs to Rs 160 per share. PSL to raise capacity at Vizag, Dubai units PSL is setting up additional capacities of 450,000 TPA of pipe manufacturing which include 225,000 TPA HSAW pipe mill at Sharjah, UAE and another 225,000 PTA spiral pipe mill project at Vishakhapatnam. Current capacities at these two sites are 75,000 TPA each. Both the mills are expected to be completed by the end of Q1 FY11. The total estimated cost of the project is Rs 2.3 bn. PSL s total pipe manufacturing capacity will enhance to 1,925,000 TPA after the expansion. Currently it is 1,475,000 TPA. US market opportunities: More than one mn miles of gas pipelines out of 1.5 mn miles in US have to be replaced as these pipelines were laid prior to PSL has recently set up a plant in Mississippi, USA with the total project cost of USD 103 mn with the capacity of 300,000 MTPA, to tap these opportunities. Strong Order book PSL has the strong order book position of Rs 16 bn, executable within 12 months, of which 70%, 25% and 5% are the orders for pipes, pipe coating and ancellary products and services respectively. The company hoping for additional orders from the gas grid component, which will come to maturity this year and at least a part of those orders, will get executed. PSL bags orders worth Rs 7 bn from GAIL PSL has received another prestigious contact from Gail India valuing over Rs 2100 mn. The company had already bagged an order valuing approximately Rs 5000 mn from Gail India for supplying pipes for their Dahej-Vijaipur pipeline upgradation project (DVPL-II).The company has received contract for providing pipe coating services for the entire Dahej-Vijaipur Pipeline upgradation project (DVPL-II). The company has thus been successful in procuring a total order aggregating to over Rs 7000mn comprising of two parts, one for supplying of pipes valuing approximately Rs 5000mn and now the other for providing quality external coating valuing over Rs 2100mn. Firstcall India Equity Advisors Pvt. Ltd 5

6 Dividend declared For the the financial year the company has declared a dividend of 50% (Re.5 per share) on the face value of equity share Rs each. PSL to diversify into SEZ development PSL is likely to diversify into development of special economic zones (SEZ), with the company getting the stage-1 approval from the Centre to set up an exclusive SEZ for alternative energy and energy ancillaries at Pipavav in Gujarat. The SEZ will be dedicated to alternative energy products like bio-diesel, solar, ethanol and wind generation, with units producing equipment needed for such businesses also to be invited to set up their manufacturing facilities in the zone. This will mark PSL`s first diversification initiative from its core business of producing cross-country, large-diameter pipelines for transportation of hydrocarbon and water products. Company Profile PSL Ltd (PSL) is one of the largest HSAW pipe manufacturers with the installed capacity of MTPA of pipes. The company has 13 HSAW pipe mills, 11 of which are located in five locations geographically spread throughout India and one each at UAE and USA. PSL also provide pipe coating and other ancillary products and services related to pipe industry. About 98% of the revenues of the company are derived from domestic market. Business Areas Firstcall India Equity Advisors Pvt. Ltd 6

7 HSAW Pipes: PSL manufactures HSAW pipes, which are used in long distance transportation of Oil & Gas and water. Pipes manufactured by PSL are certified to American Petroleum Institute (API) standards for oil & gas and water transportation. PSL have the strong hold in the domestic market with the mammoth market share of 70-80% in HSAW segment. Domestic sales contributed 98% to the topline in FY09.Pipe contributed in excess of 81% to the topline of the company in FY09 Pipe Coatings: PSL also provides pipe coating services which includes pipe corrosion protection. There are different types of coatings such as three layer polyethylene/fusion bonded epoxy coating, coal tar enamel coating, concrete weight coating, internal coating etc. PSL undertakes both internal and external coatings. Ancillary Products and Services PSL also provides various ancillary products and services, which are related to pipe industry such as Induction Bending: It is the process wherein pipes are bent as per the requirement using Induction-heating process. Firstcall India Equity Advisors Pvt. Ltd 7

8 Sacrificial Anodes: Basic Function: The basic function of sacrificial anode is to sacrifice itself to protect the offshore pipeline of offshore platform structures. These are made of aluminium alloy or zinc. Location and capacity: PSL have state of the art plant in Kandla with the annual capacity if 1,500,000 MT. Reinforcement bar (Rebar) Coating: PSL provides rebar coating services and have executed contracts for various infrastructure and construction players. Manufacturing of Turnkey HSAW Plant and machinery: PSL have expertise in the design, manufacture, supply, erection and commissioning of plant, machinery and equipments catering to pipeline industry. Subsidiaries: I. PSL Corrosion Control Services Ltd II. Pipeline Systems Ltd III. PSL FZE UAE IV. PSL USA INC. Firstcall India Equity Advisors Pvt. Ltd 8

9 PSL Corrosion Control Services Limited This Company is a wholly owned subsidiary of the Company, it is presently engaged in Rebar Coating and providing Anti-corrosive treatment. In order to focus on the Company s main activities of Pipe Manufacturing and providing Anti-corrosive Coating, the Board has accorded its in principle approval to dispose off, subject to an approval from Members of the Company (which is being sought through Postal Ballot), its Rebar Plants at Chennai and Vizag to its Subsidiary. Pipeline Systems Limited This Company was incorporated in May, 2006 at Mauritius as a wholly owned subsidiary Company of your Company. Subsequently, another Company namely PSL FZE was established at Sharjah in UAE as a wholly owned subsidiary of Pipeline Systems Limited. PSL USA INC. & PSL NORTH AMERICA LLC PSL USA INC was incorporated on 4th December, 2006 under laws of State of Delaware, USA primarily to bag contracts for manufacture of pipes, keeping in view the upsurge in the pipe laying activity in North America. This Company holds 78% shareholding in a Joint Venture Company (also incorporated under the laws of State of Delaware) 12% held by HSAW Solutions LLC and the balance 10% by Lloyd Systems Inc. Major Clients: Oil India ONGC RIL Hindustan Petroleum ESSAR Oman Oil Company Firstcall India Equity Advisors Pvt. Ltd 9

10 SWOT Analysis Strengths Weakness Strong Management Strong client base Innovative Technology Falling earnings High Debt. Market leadership Strong product portfolio Geographically located plants Opportunities Threats Demand for the line pipes in the US is strong, especially in the large diameter pipes. Simdex data suggests that nearly 23% of the total demand over is set to emerge from the pipeline projects in North America. Global Economic Slowdown Rupee dollar fluctuation Price Volatility of HR coils Raising Steel Prices The pipeline network in India is approximately 12,200 km, which is much below global standards and is on a rapid growth stage. Transportation of oil & gas through pipeline is also being encouraged globally. A recent entrant to the growth drivers of pipes is the demand arising from the replacement of old pipelines. More than one mn miles of gas pipelines out of 1.5 mn miles in US were laid prior to1975. Firstcall India Equity Advisors Pvt. Ltd 10

11 Financials Result Updates Quarterly Ended Profit & Loss Account (Standalone) Value(Rs. in million) 31-Mar June Sep Dec-09E Description 3m 3m 3m 3m Net sales 12, , , , Other income Total income Expenditure -11, , , Operating profit Interest Gross profit Depreciation PBT Tax PAT Net profit Equity capital EPS Face Value (Rs) Total No. of Shares Firstcall India Equity Advisors Pvt. Ltd 11

12 Profit & Loss Account 12 Months Ended on March 31st (Standalone) Value(Rs. in million) FY08 FY09 FY10E FY11E Description 12m 12m 12m 12m Net sales Other income Total income Expenditure Operating profit Interest Gross profit Depreciation PBT Tax Net profit Equity capital Reserves EPS Face value(rs) Total No. of Shares A=Actual E=Estimated Firstcall India Equity Advisors Pvt. Ltd 12

13 Key Ratios Particulars FY09 FY10E FY11E Equity Capital (Rs.mn.) EBDITA Margin (%) 8.01% 10.99% 10.30% Net Profit Margin (%) 2.42% 3.78% 3.39% P/E (x) ROE (%) 13.67% 14.29% 12.84% ROCE (%) 18.04% 17.12% 16.32% EV/EBDITA(x) Book Value (Rs.) P/BV (x) Debt-Equity ratio(x) Firstcall India Equity Advisors Pvt. Ltd 13

14 Charts A) Net sales & PAT Chart B) EV/EBITDA chart Firstcall India Equity Advisors Pvt. Ltd 14

15 C) P/E Chart D) Debt- Equity ratio chart Firstcall India Equity Advisors Pvt. Ltd 15

16 Valuation At the current market price of the stock Rs.168, the stock trades at a P/E of 8.32 x and 8.02 x for FY10E and FY11E respectively. The EPS of the stock is expected to be at Rs and Rs for the earnings of FY10E and FY11E respectively. The topline and bottom-line of the company are expected to growth a CAGR of 13.41% and 8.99% respectively over FY08 to FY11E. Price to Book Value of the stock is expected to be at 1.16x for FY10E and 1.01 x for FY11E. PSL has successfully raised Rs mn worth of fresh funds via Qualified Institutional Placement (QIP). PSL is likely to diversify into development of special economic zones (SEZ), with the company getting the stage-1 approval from the Centre to set up an exclusive SEZ for alternative energy and energy ancillaries at Pipavav in Gujarat. PSL is setting up additional capacities of 450,000 TPA of pipe manufacturing which include 225,000 TPA HSAW pipe mill at Sharjah, UAE and another 225,000 PTA spiral pipe mill project at Vishakhapatnam. PSL is likely to diversify into development of special economic zones (SEZ), with the company getting the stage-1 approval from the Centre to set up an exclusive SEZ for alternative energy and energy ancillaries at Pipavav in Gujarat. Demand for the line pipes in the US is strong, especially in the large diameter pipes. Simdex data suggests that nearly 23% of the total demand over is set to emerge from the pipeline projects in North America We recommend HOLD in this particular scrip with a target price of Rs for Medium to Long term investment. Firstcall India Equity Advisors Pvt. Ltd 16

17 Industry overview The pipe industry is very much dependent on Oil & Gas industry, globally. In the past few years, global demand for oil and gas continued to rise reflecting the importance of oil and gas in the energy matrix. Rising crude prices Increasing E&P activities: Encouraged by the continuous rising oil prices, Oil & Gas companies in most region of the world continued to increase their level of spending and drilling activities to offset declining rate of production from the mature oil & gas fields and to develop new reserves at the most challenging depths and as well as inaccessible and dense region. Government of India introduced New Exploration and Licensing Policy (NELP) in 1999 to boost E&P activities in India. The Government has announced eight rounds of NELPs so far. The Government has announced eight rounds of NELPs so far. Inter-regional gas supply to boost pipes demand: The inter-regional gas supply is also expected to be robust. As per the EIA forecast inter-regional gas trade will expand faster than output and main gas consuming regions will become increasingly dependent on import. This will result in tight supply of SAW pipes, globally. The Energy Information Administration (EIA) forecasts natural gas to form 24% of total energy usage by 2030 with the share of oil falling to 34%. Increased use of natural gas would require building the infrastructure needed to transport the gas from the point of production to the end users resulting in construction of large diameter pipelines benefiting pipe manufacturers. The city gas distribution (CGD) in India is poised to grow with the extension of the project to thirty cities in different states by 2009 besides Mumbai and Delhi. Currently CGD is operational in Mumbai and Delhi and several cities in Gujarat. CGD projects are under implementation in more than half a dozen states including Uttar Pradesh, Rajesthan, Madhya Pradesh, Maharashtra, Karnataka, Kerala, Andhara Pradesh and West Bangal. As of now CGD accounts for just 5-6% of the total gas consumption at 5-6 mmscmd, which is likely to grow to 20 mmscmd in next four years. Replacement demand USA: The replacement of the old pipelines in USA is another growth driver. 1.5 mn miles of pipeline is layed in USA of which more than 1 mn miles pipelines were layed during 1960 s and 1970 s. Considering that the annual production of pipes have been over mn tones, globally, the replacement of pipelines would take around 25 years. India is set to benefit from this demand supply imbalance. Majority of the growth in the pipe industry is expected to come from growth in large diameter pipes. Firstcall India Equity Advisors Pvt. Ltd 17

18 Indian pipe Industry: Indian pipe industry is among the world s top three manufacturing hub after Japan and Europe with the size of over Rs 165 bn (USD 3.37 bn). The Industry is highly capital intensive. Demand scenario for domestic market is expected to remain firm in the years to come. India has a relatively under developed gas pipeline infrastructure which is rapidly scaling up in tandem with the burgeoning demand of pipelines. Oil and gas transportation through pipelines in India is 30% as against 60% in USA and 65% in France. Currently the country s gas requirement is fulfilled by pipeline network of GAIL supported by some pipelines of other PSU s such as ONGC and GSPL. Recently RIL has also joined the party. The industry have the business potential of over USD 3.1 bn (USD 80 bn globally) Outlook: Increased economic activities have led to higher demand of energy resources. According to the International Energy Outlook for 2007 world demand for primary energy will increase by an average of 2.3% p.a. for the period 2004 to Demand of steel pipes is expected to be higher in the medium term on account of increased exploration activities and thrust to set infrastructure for transportation of oil and gas. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but we do not represent that it is accurate or complete and it should not be relied on as such.firstcall India Equity Advisors Pvt.Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Firstcall India Equity Advisors Pvt. Ltd 18

19 Firstcall India Equity Research: B. Harikrishna Banking B. Prathap IT A. Rajesh Babu FMCG C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods E. Swethalatha Oil & Gas D. Ashakirankumar Automobile Rachna Twari Diversified Kavita Singh Diversified Nimesh Gada Diversified Priya Shetty Diversified Tarang Pawar Diversified Neelam Dubey Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO s, QIP s, F.P.O s, Takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions (domestic and cross-border), divestitures, spin-offs, valuation of business, corporate Restructuring-Capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and Other international stock exchanges. For Further Details Contact: 3rd Floor, Sankalp, The Bureau, Dr.R.C.Marg, Chembur, Mumbai Tel.: / / Telefax: info@firstcallindiaequity.com Firstcall India Equity Advisors Pvt. Ltd 19

Apollo Tyres Limited BUY. V.S.R. Sastry Vice President Equity Research Desk

Apollo Tyres Limited BUY. V.S.R. Sastry Vice President Equity Research Desk Apollo Tyres Limited BUY CMP: Rs.54.80 Date: February 15, 2010 Target Price: Rs.65.00 Market Cap. : Rs.27624.13mn. Key Ratios: Particulars FY09 (12 m) FY10E (12 m) FY11E (12 m) OPM (%) 8 16 16 NPM (%)