Steel pipes industry - big growth expected?

Investing Strategies
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I read last October that the steel pipes industry in India is going to benefit very much from a $10 billion expected spend on expansion of natural gas network. What do you think?

Also read this:

I have been researching online about the industry and about companies of all sizes which are in this industry. Has this been discussed in some other thread? If not, I will share the information I have gathered and the experts here can share their views and information.

Steel Pipe Companies:

Company name | Market cap (Crores)

  1. Ratnamani Metal 3,948.98
  2. Mah Seamless 2,995.22
  3. APL Apollo 2,648.25
  4. Welspun Corp 2,394.99
  5. Jindal Saw 2,383.77
  6. Surya Roshni 1,097.97
  7. Srikalahasthi Pipes 772.86
  8. RMG Alloy Steel 618.85
  9. Gandhi Spl Tube 487.80
  10. Man Industries 327.77
  11. Good Luck 147.59
  12. JTL Infra 128.10
  13. Oil Country 60.32
  14. Surani Steel Tubes 43.0
  15. PSL 0.96 11.99
  16. Riddhi Steel and Tube 9.95
  17. Zenith Birla 9.45
  18. Umiya Tubes 9.29
  19. Prakash Steelag 5.43
  20. Rama Steel Tubes Rs.194 crores.

Ratnamani Metal

Excerpt from annual report:
Ratnamani Metals is the largest manufacturer of Stainless Steel Seamless and
Welded Pipes & Tubes in India. It is also India’s largest manufacturer of Nickel Alloy Pipes &
Tubes and Titanium Welded Tubes.

With fresh capacity expansion of 20,000 MT in Stainless Steel
Seamless, the total capacity will go up to 48,000 MT

Carbon Steel Pipes
L-SAW 40,000
H-SAW / Spiral - 1,80,000
ERW - 70,000
Circumferential Seam 60,000
Sub Total 3,50,000
3 Layer PE and FBE Coating 2.5 mln sq. mt.

Stainless Steel Seamless 8,000 MT
Stainless Steel Welded 20,000 MT

Surani Steel Ltd

Came out with an IPO recently. Current market cap is Rs.43 crores. Makes ERW pipes. Current capacity is 25,000 MT. Based on this, the market cap is about 1.75 crores per 1000 metric ton capacity. https://www.chittorgarh.com/ipo_review/surani-steel-ipo/2754/
IPO price was Rs.51-52. Currently at same price. Listed on NSE.

Umiya Tubes
Installed capacity of plant is 3000 MTPA. Mcap is 9.51 crores. So, about Rs.3.17 crores per 1000 MT. FY18 sales were Rs.45 crores. Been making losses for last few years. Promoter shareholding is 62%.

Riddhi Steel and Tube
Came out with IPO in September 2016 at Rs.38 per share. Current market price. Rs.12.60. Mcap is 9.95 crores. Capacity of ERW pipes is 100,000 MTPA. So about Rs.10 lakhs per 1000 MT.


Sales were Rs.270 crores in FY18. HY sales as of September 2018 were Rs.186 crores (Up from 101 crores in Sept 2017).

Jindal Saw
Total Capacity: More than 1 Million Metric Tons per Annum. Jindal Saw had sales of 7,334.91 and NP of Rs.386 crores in FY18. NPM is 5.26%. This rose from 1,123.30 crores and Rs.55.70 crores in FY04. Total networth was Rs.400 crores in FY04. This increased to 5,913 crores in FY18. This is a 15 fold increase in 14 years. In September 2000, the stock was at Rs.3.63. In September 2004, this was at Rs.37.50. Today it is at Rs.81.45. This company has had a complex history which required a whole thread to analyze.

Zenith Birla
This is a penny stock quoted at less than one rupee of a company that is making losses. So I’m not analyzing it.

APL Apollo Tubes

APL Apollo Tubes is estimated to have a market share of 14% to 15% in the ERW segment, ahead of DP Jindal Group (7%), Tata Steel (6%) and Surya Roshni (6%).

As of April, 2018 the company had an installed capacity of 2 million tonnes per annum. Mcap of 2,767.96 crores at CMP of Rs.1166. So per 1000 MT, the valuation is Rs.13.85 crores. The NPM for FY18 was 2.54%…

The top line and bottom line are now at 4,193.02 crores and Rs.112.69 crores in FY18. This was Rs.125 crores and Rs.1.68 crores in FY05. The networth in FY18 was 905.59 crores up from Rs.6.86 crores in FY05. This is a 130X jump approximately but their IPO came only in 2011. it listed at Rs.145. It touched a peak of Rs.2528.80 in January 2018 and is now at Rs.1166.

From the IPO DRHP

IN 1993 the Company initially setup a plant to manufacture ERW Black Pipes with an installed capacity of 6000 MT/Annum at Sikandarabad, Distt. Bulandsahar in the state of Uttar Pradesh. The plant started operations in October 1987. After achieving full utilization of the installed capacity, the Company subsequently expended its ERW Black Pipes manufacturing capacity to 24000 MT/Annum in the year 1989. After that Galvanized Plant was commissioned in March 1994 with an installed capacity of 16000 MT/Annum. Thereafter, the Company has achieved the following milestones by adding further to its manufacturing facilities to reach 4,90,000 in 2011. Now it is at 2 million tonnes.

Promoter stake has been declining. It was 40.64% in 2016 and is 37.25% as of December 2018. This needs to be looked into.

Man Industries

One of the largest manufacturers and exporters of LSAW and HSAW pipes in India. Capacity of 1,000,000 MT.

3 LPE/FBE coating capacity of 6.4 Million sq mt.
Cement wet coating capacity of 1.25 lakh cubic metres.

In the year 2000 their capacity was 100,000 MT.

Source
http://www.mangroup.com/pdf/Man%20Industries%20(India)%20Ltd-%20Investor%20Presentation-%20August%202018.pdf

https://www.moneycontrol.com/company-facts/manindustriesindia/history/MII#MII

There was an ownership dispute within the family that controls this company from 2009 to 2016. Apparently that is now resolved. That had to do with demerger.

Mcap is 333.20 crores.
Sales (FY18) 1572 Crores.

Mcap per 1000 MT is Rs.33 lakhs approx.
Last five years growth has been mediocre.
2014 sales were 1005 crores.

This was at Rs.3.88 in June 2005. Reached Rs.224 in October 2012. Now at Rs.58.

Networth has grown from 78.63 crores in March 2004 to 653.35 crores in FY18.

RMG Alloy Steel
Been making losses for last 4 years. Seems very overvalued at mcap of Rs.627 crores and 200,000 MT capacity. Not analyzing this.
https://www.bseindia.com/stock-share-price/financials/results/500365/#!#equity

Good luck India

Sales as of FY18 are 1303 crores, PAT is Rs.14.75 crores. Sales as of 2014 were Rs.1001 crores with PAT Rs.17.71 crores. Interest costs have gone from Rs.36 crores to Rs.56 crores in the same period. There seems to be some capacity expansion happening. The increase debt and depreciation also points to it. They are increasing capacity from 230,000 MTPA to 302,000 MTPA.
The proposed manufacturing facility is coming up at company’s already owned land in Gujarat with the total investment of Rs 74 crore which will met by debt and internal accruals/promoters contribution. The plant is expected to be commissioned by April 2018, the company said.

At mcap of Rs.152 crores, the mcap per 1000 MTPA is Rs.50 lakhs (Including proposed capacity addition).

Oil Country Tubular

There was a lockout in FY16 in February 2016. This was lifted in August 2016.

The Company lost major orders for Drill Pipe, Casing and Tubing during the period for which the Tenders are floated in the previous year.The Company was not able to effectively participate in the Tenders, as the delivery is critical and time bound with provision of liquidated damages for default on deliveries.With the commencement of the Operations from September, 2016 the Company submitted its bids for the Tenders floated which normally take four to six months for the techno-commercial evaluation and placement of Orders. The Company expects placement of Orders against these Tenders during the year 2017-18.

Sales were around Rs.11 crores in FY18 and Rs.7 crores in FY17 and mcap of Rs.66 crores.
It has current liabilities far exceeding current assets. I’m not going into an in-depth analysis of this company.

Welspun Corp

Flagship Company of the US$ 2.3 billion Welspun Group
Incorporated in 1995
Total pipe capacity of 2.425 million tonnes per annum (MTPA)
Total plate coil capacity of 1.5 million MTPA
2nd Largest Line Pipe Company in the World
Manufacturing Locations
- Anjar and Dahej in Gujarat, India
- Mandya in Karnataka, India
- Little Rock in Arkanasas, USA
- Damman in Saudi Arabia (one of the largest spiral pipe manufacturing facilities in the region)

Partner of Choice for more than 50 Oil & Gas Giants across the globe with a geographically diverse client base including Chevron, Exxon Mobil (Golden Pass Pipeline), Saudi Aramco, British Gas, Trans Canada
Anjar and Dahej Units officially certified with the SA 8000:2008 standards of Social Accountability

http://www.welspun.com/pipes.asp

This is one of the market leaders. At 2.45 million MTPA and mcap of 2,992 crores, the per 1000 MTPA valuation seems to be around Rs.1.20 crores.

FY18 sales were 5,259.89 crores. Mcap to sales is 0.55X approx.

Maharashtra Seamless

Mcap is Rs.3290 crores.
FY18 sales were Rs.2160 crores.
OPM was 16.89%
PAT was Rs.198.42 crores.

Seamless pipes have higher profit margins than ERW pipes.

Current PE is 15-16.

March FY04 sales were Rs.555.29 crores and PAT was Rs.71.46 crores.

For last ten years sales have been about Rs.1500-2000 crores every year. Stagnant.

Promoter stake is 61.78%

MaharashtraSeamlessLtd(MSL) Seamless pipes capacity is 550,000 MTPA
and ERW pipes capacity is 200,000 MTPA

http://www.jindal.com/msl/pdf/Initiating-Coverage-on-MSL-by-India-Nivesh.pdf

I am not researching this company further given its stagnant growth in the last decade.

PSL

This has a capacity of 1 million MTPA. That is huge.
However the mcap is only Rs.13 crores.
It is a penny stock trading at about 1 rupee per share of face value Rs.10.

From FY15 it started making losses and its networth is -2400 crores now.
I’m not researching this further.

Srikalahasthi Pipes

Mcap of Rs.848 crores.
FY18 sales of Rs.1506 crores. PAT of Rs.147 crores.

They are also into cement. They seem to have good liquidity.
Requires detailed analysis.

*Rama Steel Tubes

FY18 sales were Rs.340 crores. FY19 9 months sales have been Rs.290 crores. If the same trend is maintained can expect full year sales to be around Rs.400 crores with net profit around Rs.6 crores. This is a net profit margin of about 2%. EPS will be around Rs.2.76. PE is around 40. Growth in sales and profits has been poor so far. FY16 sales were Rs.243 crores with net profit of Rs.6 crores. This points to sliding margins. EBIDTA was Rs.24.4 crores in FY16, Rs.17.7 crores in FY18 and Rs.12.5 crores in 9 months this year. Interest costs have gone up sharply in December 18 quarter probably because of loans taken for expansion. Company is expanding capacity.

I will keep editing this post with more information about each company’s existing capacity, expansion, leverage etc. Feel free to contribute.

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Thanks for starting this thread … I am also observing the recent numbers of some of these top players to be fantastic
However , I am still not fully convinced due to :

  1. Is there any moat with any of these players , or can anyone start a new plant
  2. I thought there are only 5 or 6 players but if I look at your list then the number is huge . Do all the above players produce pipes ?
  3. Ultimately my biggest worry here is that there will be no purchasing power , it might become a revenue growth story and no solid eps growth ?

I am also learning about the sector . Will share my views as we evolve the story

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Ratnamani Metals has gone from Rs.40 crore shareholder funds in FY04 to Rs.1308 crores shareholder funds in FY18, a 14 year period. Their sales have gone from 134 crore and PAT from Rs.4 crores to 1800 crores and Rs.152 crores PAT in the same period. In December 2011, it was at Rs.94 and in 2017 it crossed Rs.1000 a share. IN 1991 it had a capacity of only 3000 MT (On three shift basis). Today it is among the leaders. Over a period of time, with a sound business model and good management, companies without a huge moat may also multiply wealth. That said these factors give companies an edge:

  • Acceptability of product among the major buyers like GAIL, NHPC etc.
  • Distribution network.
  • Economies of scale.
  • Some ERW pipe manufacturers manufacture pipes only upto a certain thickness and so are unable to cater to some sectors which are otherwise very lucrative. Everything else being equal, the wider the range of pipes being manufactured, the better.
  • This is a working capital intensive industry. A few wrong moves and a company can end up in trouble with banks. So, a company having a better credit rating is advantageous.

I’m looking for a company which is cheap in terms of mcap, with good management capable of executing multi-fold expansion and expansion plans in place, making a wide range of pipes and without too much debt.

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Here’s an excerpt from the Surya Roshni 2018 AR which needs a post for itself.

Steel tubes and pipes

India is amongst the fastest growing steel tubes and pipe manufacturers globally with production estimated at about 10 million tons a year. Over the years, India has emerged as the global pipe manufacturing hub owing to its best quality offerings at lower cost and geographical advantages. The global accreditations and certifications owned by the Indian companies have further made them preferred suppliers for many leading oil and gas companies in the world and particularly those in the Middle East, North America and Europe. The steel pipes demand has been increasing on a steady basis owing to requirements from the sectors like water transportation, agriculture, boring, fire-fighting and most importantly infrastructure for oil and gas. It is interesting to note that India is currently under-invested in the pipeline infrastructure with only 1/3rd of the petroleum products moving through the pipeline which is the most efficient mode of transport for fluids. The Government has ambitious plans to improve network of oil and gas pipelines across the nation. Recently, tenders for construction of over 12,000 kms of pipelines have been floated by several oil and gas companies for the mammoth expansion plans over the next five years. Besides, rapid industrialisation in the country and real estate demand from affordable housing and ‘Housing for All’ schemes will lead to increasing investments in building and construction activities. This will necessitate strong requirements of steel tubes and pipes.River water transportation system is another key area of growth. Several areas in India either suffer from drought or excessive flooding owing to uneven distribution of river water. Around 5 lakh tonnes of large diameter pipes were required for connecting rivers for water transportation in the State of Gujarat alone. The same model is anticipated to be deployed across other states in India, which will necessitate the demand for large diameter pipes. And lastly, but most importantly, is the demand from the rural segment. With the Government’s rural-centric policies in the recent budget, lots of activities in the areas of irrigation and construction will be driving the demand for steel tubes and pipes going ahead.

Gas transmission

India at present, has a network of about 13,000 km of natural gas transmission pipelines with a design capacity of around 337 MMSCMD. The natural gas demand has increased significantly owing to its higher availability, development of transmission and distribution infrastructure, the savings from the usage of natural gas in place of alternate fuels, the environment friendly characteristics of natural gas as a fuel and the overall favourable economics of supplying gas at reasonable prices to end consumers. India has six major regional natural gas markets namely Northern, Western, Central, Southern, Eastern and North-Eastern market, out of which the Western and Northern markets currently have the highest consumption due to better pipeline connectivity. However, with the increasing coverage and reach of natural gas infrastructure in India, this regional imbalance is expected to get corrected. Gong ahead, the pipeline network is expected to expand to around 32,000 Kms with a total design capacity of around 815 MMSCMD by 2030, putting in place most of the National Gas Grid that would connect all major demand and supply centre in India.

Planned additions to the pipeline infrastructure

Existing till 2012 - 12144 kms

Expected addition in the 12th plan - 15928 kms

Expected addition in the 13th plan - 3360 kms

Capacity addition MBBVPL/MBPL/Surat Paradip/pipelines beyond 13th plan and till 2030 - 1295 kms

4. City gas distribution

In India, the Petroleum and Natural Gas Regulatory Board (PNGRB) is the regulatory body for City Gas Distribution (CGD), responsible for authorising new areas to set up infrastructure amongst interested players. India’s CGD sector has seen rapid growth in recent years and consumes approx.13.6 MMSCMD of natural gas. There are 15.22 lakh domestic connections, 10,631commercial customers and 2,974 industrial customers at present in India.The Government’s intent to establish a gas-based economy is a good strategic move and hence the CGD segment appears to be positive for its future prospects. To align with the goal of reducing the carbon footprints the Government has set a target of connecting 1 Crore households with PNG by 2019, the introduction of stringent emission levels for vehicles and the proposal to develop green corridors. Surya Roshni is evenly poised to respond to the industrial opportunities stated above through its best-in-class quality offerings in its steel pipes and strips segment. The Company is geared up to achieve its business goals through adoption of latest technology, achieving operational efficiencies, providing excellent customer services and launching innovative and diversified products and retain its prominent position in the Indian steel pipes Industry.


(Pg 30-31)

This report is also worth reading. It will give you information about the possible growth in the steel pipes industry.

‘Vision 2030’, Natural Gas Infrastructure in India, Report by Industry Group For Petroleum & Natural Gas Regulatory Board:

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Riddhi Steel and Tube

https://www.bseindia.com/stock-share-price/riddhi-steel-and-tube-ltd/rstl/540082/#!#equity

I find this very interesting. The mcap is about Rs.10 crores and the capacity is 100,000 MTPA on single shift basis and 300,000 MTPA on multiple shift basis. The networth of the company is Rs.38 crores. Need opinions.

Draft red herring prospectus (DRHP) during IPO in September 2016
http://www.cmlinks.com/pub/dp/dp68660.pdf
Shares were issued at Rs.38. Right now the stock price is Rs.12.

From the DRHP:

“We produced 31750.00MT in the financial year 2015-16 whereas we have an installed capacity of 60,000 MT per annum. The manufacturing unit is located at 83/84, Village-Kamod,Piplaj, Pirana Road, Aslali, Ahmedabad-382 427.”

In FY16, the turnover was Rs.236 crores.

Now if you see pg 31 of this DRHP, which explains ‘past production figures’

in FY11, the capacity utilization was 16775.90 MT versus capacity of 12,000

MT. This is explained with an asterisk which says ‘Working in multiple shifts’. This indicates that the capacity figures provided by the company are for single shift (traditionally 8 hours). If this is the case, the current capacity of 100,000 MTPA means a capacity of upto 300,000 MTPA on triple-
shift basis.

Sales in FY16 were Rs235.20 crores when capacity utlized was 31750.00 MTPA.
(53% of single shift capacity)

Sales in FY18 were Rs.270 crores. There seems to be scope to increase sales without increasing fixed assets and capital investment.

Let’s analyze their profit margins. On sales of Rs.270 crores, net profit was Rs.3.14 crores. NPM is barely 1.16%. However, if we consider the EBIDTA (Earnings before interest, depreciation, taxes and amortization) it was Rs.16.64 crores. Interest was Rs.8.53 crores while tax was Rs.1.69 crores. Cash profit was Rs.6.42 crores. The market cap currently is around Rs.10 crores.

In FY16 their net cash flow from operating activities was Rs.2.48 crores.

They bought fixed assets worth Rs.4.29 crores by borrowing funds.
In FY17, their net cash flow from operating activities was Rs.3.34 crores and they bought assets by borrowing a further Rs.58 lakhs.

In FY18, their net cash flow from operating activities was Rs.12.27 crores. They repaid loans worth Rs.6.32 crores to promoters. The company has taken lots of loan from the promoters. I do not know the terms of these loans.

Loans from banks are guaranteed with real estate in the name of promoters and their personal guarantee.

As of March 31, 2018 they had Rs.34,706,513 Capital Work in Progress. So there’s some expansion/modernization/addition happening.

https://www.bseindia.com/xml-data/corpfiling/CorpAttachment//2018/11/1bb44734-b083-4186-b456-
80d5a474b88a.pdf

Total current assets as of September 30, 2018. Rs.134 crores.
Total current liabilities as of September 30, 2018. Rs.68.35 crores.
Non current liabilities are Rs.58.34 crores.
Networth of the company is Rs.38.83 crores.

The promoter stake is 65%. The promoters have been increasing their stake with open market acquisition. They have bought 60,000 shares over the last year and a half, some purchases are at Rs.30-35 per share.
https://www.bseindia.com/stock-share-price/disclosures/sast/540082/

Catalog of products:
http://riddhitubes.com/riddhi catelogue_pdf.pdf

Client list:
http://www.riddhitubes.com/clients.php

Concerns:

  • Family run company. Promoter, his wife are on board. Promoters give loans to company. Have 69% stake.
  • Small company.
  • Micro cap stock and risks associated with it.
  • Closely held company. Public shareholding also closely held except for 5-10% stock.
  • Poor liquidity. Need to purchase minimum 3000 shares as it is an SME.
  • May not have pricing power.
  • ERW pipes have lower margins compared to seamless pipes.
  • Whether they can scale up operations is not known.
  • Working capital intensive industry. A few wrong moves or failures can become disastrous.
  • Depends on infrastructure spending by government.

Members may please share their opinions. I may have missed some information.

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In an election year, steel pipe companies usually do not receive as many orders. So demand may be muted. However lower raw material prices and higher volume growth drove up margin for most of the steel pipemakers for the quarter ended December. The price of hot-rolled coil—a key raw material used in manufacturing of steel pipes—has been on a downtrend since November 2018, aiding the cost efficiency of most of steel pipe producers.

Read more at: https://www.bloombergquint.com/business/why-pipemakers-have-a-muted-outlook-despite-rising-margin#gs.LX0xrD32

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Here’s a report on ‘Steel pipes in oil and gas industry’ by Edelweiss Investment Research. It gives information about the type and size of pipes and their application in various industry and for various purposes. It is a 55 pages long report. This is from June 2017.

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Looking back at the last time a huge expansion in pipeline infrastructure led to increased demand for steel pipes. In August 2004, there was this article in The Hindu about steel makers adding capacity to meet rising demand. It mentions rising price of crude, expansion plans of companies and investment in gas infrastructure including Gail (India)'s expansion of 7900 km of trunk lines.
https://www.thehindubusinessline.com/2004/08/09/stories/2004080901090300.htm

Welspun Gujarat, Man Industries and Saw Pipes Ltd are mentioned.

Man Industries had sales of Rs.504 crores in 2005, 856 crores in FY06, 1133 crores in FY07, 1,454.55 in FY08 and 1,894.80 crores in FY09. Almost 4X in four years.

Welspun Gujarat, now known as Welspun Corp had sales of 893.75 crores in FY05, 1045 crores in FY06, 2852 crores in FY07, 4173 crores in FY08.

Saw Pipes (renamed as Jindal Saw) had sales of 1123 crores in FY04, 2392 crores in FY05, 4061 crores in FY06, 7071 crores in FY07 (15 month period) and 5161 crores in FY08.

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Rama Steel Tubes

FY18 sales were Rs.340 crores. FY19 9 months sales have been Rs.290 crores. If the same trend is maintained can expect full year sales to be around Rs.400 crores with net profit around Rs.6 crores. This is a net profit margin of about 2%. EPS will be around Rs.2.76. PE is around 40. Growth in sales and profits has been poor so far. FY16 sales were Rs.243 crores with net profit of Rs.6 crores. This points to sliding margins. EBIDTA (consolidated) was Rs.27.27 crores in FY18 vs 23.70 in FY17. Interest costs have gone up sharply in December 18 quarter probably because of loans taken for expansion. Company is expanding capacity. In their latest FY18 annual repport (AR), the company mentions capacity as under on page 5.

Capacities are as below. (From AR)

Sahibabad UP 60,000 MTPA
Anantpur UP 36,000 MTPA
Khopoli, Maharashtra 72,000 MTPA

Total capacity 168,000 MTPA
and 60% Capacity utilization.

In FY18 production was 79,175.93 MTPA as against 61,108.44 MTPA in FY17, according to the FY18 AR.
The Company plans to expand it by 70,000 MTPA in FY2018-19. (Source FY18 AR).
The company has 300 employees.

if Post expansion capacity is assumed to be 238,000 MTPA, the market cap of Rs.194 crores seems rather high because per 1000 MTPA it comes to Rs.85 lakhs.

Some news stories about their expansion from 2016 and 2018:

Expanding capacity at Khopoli from 72,000 tpa to 1,32,000 tpa.
https://www.projectstoday.com/News/Rama-Steel-Tubes-begins-expansion-project-at-Khopoli
(June 2018)

Rama Steel Tubes has a total production capacity of 99,000 tonnes which the company plans to increase to 340,000 tonnes by 2019-20 at an investment of Rs 50 crore

(excluding land value).


(May 18, 2016)
This article mentions possibility of margin expansion. However margins have been declining and sales growth has been slow.

Rama Steel Tubes and Riddhi Steel Tubes are quite similar in terms of their size and financials. Both seem to be family run companies. Rama Steel Tubes have Naresh Kumar Bansal as the Chairman and MD and Richi Bansal (Son of Naresh Kumar Bansal) as the CEO. That apart, they have several decades of related experience.

Rama Steel Tubes FY18 annual report:

From their annual report:

It is one of the leading manufacturers of Steel Pipes & Tubes, G.I. Pipes in India. The product portfolio spans across pipes and tubes including galvanized tubes, ERW black steel pipes & tubes, scaffolding pipes & tubes, structural steel products and hollow sections. Its MS ERW black pipes vary from 15mm to 200mm in diameter and confirm to IS: 1239, IS:1161, IS:3589, IS:3601, & IS:4270.The Company’s G.I. Pipes range from 15mm to 150mm NB in light, medium and heavy sizes. Its product range effectively caters to the ever growing needs of different sectors including automobiles, infrastructure, real estate and furniture.

At the end of March 31, 2018, the Company’s balance sheet position was robust with 50% increase in networth at 78.74 crores. The Company’s total debt stood at Rs.60.24

crore with debt/equity ratio of 0.76 times. The working capital stood at Rs.51.28 crore with working capital cycle days of 48 days as against 45 days in the previous year.

Equity dilution:

The Company has issued 7,60,000 Equity Shares of `5/- each
pursuant to Conversion of 7,60,000 fully convertible warrants
issued preferential basis to the persons belonging to promoter
category.

Consequently the issued, subscribed and paid-up equity share
capital has increased from 8,01,70,000 divided into 1,60,34,000 Equity shares of5/- each to 8,39,70,000 divided into 1,67,94,000 Equity shares of5/- each.

FULLY CONVERTIBLE WARRANTS
The Company has issued 15,00,000 fully convertible warrants on
preferential basis to the persons belonging to promoter category
in year 2016-17, out of them 7,60,000 fully convertible warrants
were converted into equivalent number of equity Equity shares
of `5/- each in 2017-18.

During the Financial year 2017-18, Company has issued 7,60,000 equity shares of `5 each to persons belonging to Promoters Category pursuant to conversion of 7,60,000 Fully Convertible Warrants out of 15,00,000 Fully Convertible. Warrants issued and allotted during the year 2016-17.

This seems a good sign because the price for conversion was Rs.122 per share.

The company’s net foreign exchange outgo was about Rs.40 crores in FY18.

The top ten shareholders list saw an a change in shareholding of these names in FY18.

PRINCIPAL TRUSTEE COMPANY PVT LTD
A/C PRINCIPAL MUTUAL FUND - PRINCIPAL
FOCUSED MULTICAP FUND
144,000 shares added.

BHARTI AXA LIFE INSURANCE COMPANYLTD
118000 shares added

AXIS BANK LIMITED
109941 shares held.

MOTILAL OSWAL SECURITIES LTD
Reduced holding from 135729 to 61784 shares.

See AR for complete list.

Cash flow (Consolidated)

Rs. 9.05 crores was cash generated from operations with PBT being Rs.18.44 crores in FY18.
FY17 had a negative cash flow. (Rs.6.98 crores) with PBT being Rs.13.12 crores.
Company has been investing in expansion by selling investment property and issuing warrants to promoters for last two years.

They have taken loans from Richi Bansal and M/s Advance Hightech Agro Products Pvt. Ltd. adding up to close to Rs.1 crore. Mr. Naresh Kumar Bansal, his wife Kumud Bansal received rent of Rs.18 lakhs from the company.

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I suggest we look at Rama Steel Tubes and Riddhi Steel and Tube.

These two companies are very similar in capacity and financials. However Rama Steel Tubes has a market cap of Rs.194 crores while Riddhi Steel and Tube has a market cap of Rs.12 crores. Views are invited.

Both are family run, have taken loans (guaranteed by promoters), make similar products. Promoters have stakes beyond 60%.

Riddhi Steel and Tube

Rama Steel Tubes

Product range

http://ramasteel.com/cms/profile
Excerpt:
“We make some of the best steel tube products in India. Our range includes MS ERW black pipes from 15mm to 200mm diameter pipes confirming to IS: 1239, IS:1161, IS:3589, IS:3601, & IS:4270 and G.I. Pipes from 15mm to 150mm NB in light, medium and heavy sizes.”

http://riddhitubes.com/riddhi%20catelogue_pdf.pdf

http://www.riddhitubes.com/MSERW_black_Galvanised.php

ERW Mild Steel Black Pipes from 15NB (”) to 300 NB (12”)
ERW Mild Steel Galvanized Pipes from 15NB (”) to 200 NB (8”)

Square / Rectangular Hollow Sections:
20 x 20 to 220 x 22030 x 20 to 250 x 200

Mild Steel ERW O.D. Pipes
63.5 mm to 219.10 mm

Pre-Galvanized
15NB (”) to 150 NB (6”)

Rama Steel had a net worth of Rs.72 crores as of March 31, 2018.
Promoter shareholder is 60.28%.

Riddhi Steel Tube had a net worth of Rs.37 crores as of March 31, 2018.
Promoter shareholder is 68.62%,

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India has notified to the World Trade Organization (WTO) its intention to bring more steel and stainless steel items under its quality control order. Stainless steel pipes and tubes will need to be made from stainless steel products. This move will check low quality imports from China and other countries and boost the prospects of organized local manufacturers.

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L& T has got a large contract for gas pipelines from Kuwait. The amount is not known but is put at between Rs.2500 and 5000 crores. This shows that Indian pipe manufacturers are competitive globally. There was some concern because the govt had imposed anti-dumping duties on Chinese imports.

HPCL is all set to extend its gas pipeline from Hassan in Karnataka to Cherlapally in Hyderabad with an investment of Rs.2,166 crore for 680 kms of pipeline. This will begin in June.

The reason governments are pouring money into this is because once it is in place, they can supply gas and generate a lot of revenue on an ongoing basis. It’s more like the toll bridge analogy. So, whatever the shape of the economy, I think investment in gas infrastructure will continue. It may be a little muted if the economic growth slips.

The other analogy that comes to mind is of the Gold rush. Despite not striking gold, the entrepreneurs made profitable a lot of companies dealing in pots, pans and spades. Similarly, steel pipe companies, especially the well managed ones which have a proven history of scaling up operations well, will benefit from the expansion of gas infrastructure…

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GAIl expansion currently underway
http://gailonline.com/BV-NarutalGas.html

GAIL operates 11,000-km of pipeline network and markets two-thirds of all natural gas sold in the country.

Based on their website ( see link above), each km of pipe costs about Rs.2 crores. So GAIL itself is about a Rs.11,000 crore opportunity for the steel pipes industry.

Investments of as much as 1.1 trillion is expected in building city gas distribution networks over the next decade

This article by three writers, associated with Amarchand Mangladas, a legal firm gives a lot of information about recent bidding for gas distribution.
http://www.mondaq.com/india/x/791276/

You can read about the 10th Round of the City Gas Distribution here.


Going by this, they are estimating the new pipelines to be 58,177 kms by 2027. The figures are there in this PDF file. Twelve companies including Adani Gas Ltd, GAIL, Gujarat Gas etc have been allotted Geographical areas.

Based on GAIL’s website, if we assume Rs.2 crore per km, this is a Rs.1,16,000 crore opportunity for steel pipe companies. This is on the same lines as the Live Mint article above.

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APL Apollo Tubes has just bought a unit of Shankara Building Products (BSE Listed).
This unit had a capacity of 200,000 MTPA tube manufacturing and has been acquired in an all cash deal for Rs.70 crores. This unit had annual sales of Rs.700 crores.


In this video, the MD of APL APollo Tubes mentions that pre-galvanized pipes have higher margins.

As per accounting standards, installed capacity is calculated at 330 days, 24 hours period.

So this is paying Rs.35 lakhs per 1000 Tonnes per annum.

In 2010, APl Apollo Tubes had acquired Lloyds Line Pipes for Rs.40 crores. They had a capacity of 90,000 MTPA.

Out of curiosity I searched for valuation of steel pipe companies outside India.

Tenaris acquired the Saudi Steel Pipe Company in September 2018.

They bought 47.79% of the shares of Saudi Steel Pipe Company (“SSP”), a welded steel pipes producer listed on the Saudi stock market, for an aggregate price of US$144 million.

This makes the overall valuation about $300 million or Rs.2100 crores. This is for a capacity of 360,000 tons per year. This is about Rs.6 crores per 1000 MTPA approximately.

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Not sure whether it is 12 times the valuations due to higher quality, stronger brand or because the Indian market is undervalued

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Sometimes how a company has expanded over time helps us imagine how another company can attain the same growth and create investor wealth. I’m analyzing APl Apollo Tubes here and I think Riddhi Steel Tube Ltd has the potential to grow on those lines over the next 5-10 years.

APL Apollo Tubes had a capacity of 80,000 MTPA in 2007 and expanded this to 400,000 MTPA by 2010. This company was earlier known as Bihar Tubes. They have also been buying companies as I mentioned in an earlier post. Now, after their recent acquisition, their capacity is 2.3 million MTPA.

Here are some threads which you can read:

I invite other members especially those who disagree with me to join this discussion.

We need to take into consideration several factors for this:

Macro factors

Micro factors as below:
Range of pipes
Profitability
Customers - acceptability among
Distribution network
Capacity - utilization, expansion plans, ability to expand
Access to funds and cost of capital. This is a capital intensive industry
Management quality
Cash flow
Valuation - I’m considering valuation per 1000 MTPA as the yardstick. Divide the total capacity by 1000. Take the answer and use it to divide the market cap to arrive at the final figure. For example Riddhi Steel is at Rs.16 crores valuation for 100,000 MTPA (on single shift basis). This is about Rs.16 lakhs per 1000 MTPA.

I think it may be better if Riddhi Steel Tube continues to grow organically by increasing capacities. Acquisitions are exciting but come at a high price. Look at the recent acquisition of Taurus by APl Apollo. They paid Rs.70 crores for 200,000 MTPA. This seems slightly higher than average but may be worthwhile for them because they have economies of scale. Especially if the acquiring company takes on debt for acquisitions, it may not be a good idea. I don’t know if that was the case here.

Please join the discussion.

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The Steel Pipe Industry Story is ripe and lot of tailwind going in for the sector. I have done a detailed analysis and am happy to share the details for the feedback of this group.

A. Top three India focussed Pipeline Manufactures : Ratnamani, Maharashtra, Goodluck – Last Eight Quarters Cumulative Results

image
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  • Revenue and NP almost doubled in last eight Quarters – indicates a strong momentum on the numbers.

  • Discounted - Man, Apollo Tube, Welspun and Jindal Saw due to their Overseas exposure , balance sheet or low Margins

B. Valuation Comparison

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  • Goodluck Expansion is a brownfield one so will discount that
  • Maharashtra Seamless is capacity acquired through NCLAT acquisition + Capex so not reflective of actual cost
  • The actual replacement cost can be around 3Cr per 1000 MT looking at Ratnamani
  • Ratnamani is a good company but expensive. Goodluck is available cheap but the balance sheet of MSL is better and Orderbook Scenario of MSL is far robust
  • MSL looks the best bet based on the above parameters

C. Further Upside in MSL - Its Production is still at 55% @ 104 T as per Q3-19 with their current capacity so a long runway available for growth

D. MSL Immediate Future Order Book

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  • Orderbook has almost doubled in 7 qtrs. like the Revenue
  • Q3 Orderbook at 1300 Cr and the story is evolving and Markets should reward sooner than later
  • Assuming 95% Revenue Contribution from Pipes the Blended Realization are

image
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  • This shows a very decent growth in Realization per ton and the Order Book further provides some cushion

Strong Order Book , Current PE of 8.5 and EV / Ton of 3.4 Cr at Near Replacement Cost minimizes the risk in favor of Investor

Disclaimer : I am already invested and views my be biased. Pls do your own research before any action

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What a shocker of a result from MSL in Q4 … Exceptional Item loss of 145.98 Cr on Standalone and 210 Cr on Consol basis.

I think minority Shareholders are taken for a ride (unless proven otherwise)

My bad should have looked at the Balance sheet more closely . As per 2018 - Standalone (last year), I can see a very high Contingent Liability of 1873 Cr primarily due to Guarantees and Letter of Credit. Additionally they have declared Current Asset of 434 Cr in Sh. Term Loans & Adv . Which means 15% of their Networth of 2971 Cr itself is on shaky ground.

Plus the some of their subsidiary are not even able to pay the interest on loans. So in hindsight it looks easy to point out there was a risk. Anyways, will add this to my checklist of Risk and better later than never.

The only saving grace here atleast my Revenue Forecast of Q4 was close : Against 972 Cr forecast they made 964 Cr . I am very convinces on the Sectoral Tailwind and looks like I will have to switch to a basket approach of couple of companies maybe.

All alternate views are welcome, seniors pls comment as it will help us all

Disclaimer : I have already exited the company and my views may be biased

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