Steel pipes industry - big growth expected?

manishak · February 26, 2019, 1:21pm

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.

manishak · February 27, 2019, 5:03pm

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

manishak · March 11, 2019, 7:05am

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.

manishak · March 11, 2019, 7:34am

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.

duggu007 · March 30, 2019, 5:49am

manishak · April 4, 2019, 1:50am

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.

manishak · April 4, 2019, 2:11am

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://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%,

manishak · April 5, 2019, 7:57am

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.

manishak · April 12, 2019, 4:07am

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…

manishak · April 13, 2019, 5:46am

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.

manishak · April 16, 2019, 5:18pm

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.

asinha · April 18, 2019, 5:11am

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

manishak · April 19, 2019, 4:58pm

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.

namanman · May 9, 2019, 8:17am

sukhlani1 · May 12, 2019, 12:08pm

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

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

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

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

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

sukhlani1 · May 30, 2019, 8:24am

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

manishak · June 5, 2019, 8:28am

GAIL is planning a capex of Rs.54,000 crores in 2-3 years and will list Gail Gas soon.

manishak · June 19, 2019, 11:02am

Riddhi Steel and Tube Ltd’s (RSTL) results are out.

March 2019 quarter net profit is Rs.3.38 crores. This includes ‘other income’ of Rs.1.82 crores (pre-tax). Quarterly EPS is Rs.4.07 per share. Full year net profit is Rs.4.98 crores. Full year EPS is Rs.6 per share. The current stock price is Rs.16 and market cap is Rs.13.26 crores.

Their statutory auditor resigned recently. I would see this as a red flag. Many small companies have seen their auditors resigning recently after the IL&FS and DHFL news stories.

RSTL has ‘capital work in progress’ of Rs.3.47 crores which seems to be some expansion going on. Short term and long term borrowings and inventories have risen 20-25%. Sales have also risen from Rs.270 crores in FY18 to Rs.377 crores this year.

manishak · July 25, 2019, 10:08am

GAIL’s expansion plan is in progress.

This will give a big boost to the steel pipes industry. They are also planning to spin off the pipeline business. This may make expansion easier because the pipeline company may not be burdened by the economics of the gas supply business.

manishak · July 31, 2019, 6:28pm

Here’s an update on the market cap of the respective companies in the steel pipes industry. In brackets is the market cap as on April 4, 2019. This correction may present a good opportunity to add some of these.

Company name | Market cap (Crores)

Ratnamani Metal 4386 (3,948.98)
Mah Seamless 2929 (2,995.22)
APL Apollo 3370 (2,648.25)
Welspun Corp 2974 (2,394.99)
Jindal Saw 2155 (2,383.77)
Surya Roshni 1017 (1,097.97)
Srikalahasthi Pipes 780 (772.86)
RMG Alloy Steel 389 (618.85)
Gandhi Spl Tube 474 (487.80)
Man Industries 230 (327.77)
Good Luck 122 (147.59)
JTL Infra 105 (128.10)
Oil Country 34 (60.32)
Surani Steel Tubes 35 (43.0)
PSL 0.96 8.62 (11.99)
Riddhi Steel and Tube 17.41 (9.95)
Zenith Birla 4.86 (9.45)
Umiya Tubes 8.58 (9.29)
Prakash Steelag 4.20 (5.43)
Rama Steel Tubes 99.84 (194)

The biggest gainer in market cap in percentage terms has been Riddhi Steel Tube which has risen by 75%, The significant losers in market cap are (in no particular order) Rama Steel Tubes, RMG Alloy Steel and MAN Industries.