ValuePickr Forum

Steel pipes industry - big growth expected?

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.

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…

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.

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

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

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.

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.

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)

  1. Ratnamani Metal 4386 (3,948.98)
  2. Mah Seamless 2929 (2,995.22)
  3. APL Apollo 3370 (2,648.25)
  4. Welspun Corp 2974 (2,394.99)
  5. Jindal Saw 2155 (2,383.77)
  6. Surya Roshni 1017 (1,097.97)
  7. Srikalahasthi Pipes 780 (772.86)
  8. RMG Alloy Steel 389 (618.85)
  9. Gandhi Spl Tube 474 (487.80)
  10. Man Industries 230 (327.77)
  11. Good Luck 122 (147.59)
  12. JTL Infra 105 (128.10)
  13. Oil Country 34 (60.32)
  14. Surani Steel Tubes 35 (43.0)
  15. PSL 0.96 8.62 (11.99)
  16. Riddhi Steel and Tube 17.41 (9.95)
  17. Zenith Birla 4.86 (9.45)
  18. Umiya Tubes 8.58 (9.29)
  19. Prakash Steelag 4.20 (5.43)
  20. 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.

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I really wonder why Tata Steel is not seen as a Pipe manufacturer. They themselves have a installed capacity of 5.8 Lakh MT/Annum and after acquisition of Bhushan this has increased to over 12 Lakh MT/Annum.

Tata Steel and Tata Steel-Bhushan control over 80% market share in Precision Tube Market in India.

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I’m not aware of the exact revenue contribution of Tata Steel’s pipe business to their overall revenue. However it is almost certainly not the bulk of their business. This is obvious because, to give you an example, Ridhi Steel and Tube has a capacity of 100,000 MTPA and the market cap is Rs.18 crores. Tata Steel has a 12,00,000 MTPA capacity (as per your post) and the market cap is Rs.46,873 crores. Almost all the companies I have listed have steel pipes as their only or their main business.

The reason I’m picking pure pipe companies is because they could become beneficiaries of GAIL’s Rs.70,000 crores pipeline expansion plan which may be implemented even if there is a slowdown in the economy. If there is a slowdown, Steel producing companies like Tata Steel will get affected whereas pipe manufacturers for GAIL can pass the costs to the government.

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Tata Steel- Tubes Business produced around 5 Lakh MT and logged divisional PAT of around 110 Crores last financial (APL Apollo did ~130 Cr and volume of 16 Lakh MT). Agreed that the tubes business is minuscule as compared to overall Tata Steel Business. I feel that Tata Steel is relevant because amongst all the companies listed above, only Tata Steel is backward integrated player with very deep pockets.

Prima facie I can tell you that Jindal Saw, Srikalahasthi Pipes, RMG Alloy Steel do not make pipes which are used for transporting Gas. I don’t have idea about the others.

Tubes business is very highly capital intensive with little value addition in tube rolling process. It is very difficult for any company to build specifc “MOAT”.

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Tata Steel can be separately evaluated as a possible buy but it does not fit the criteria of a company that will meaningfully benefit from GAIL’s expansion plan because its steel business is the major business.

Here’s a news story about how Jindal Saw will benefit from orders from ONGC and GAIL.

If you go to the website of RMG Alloy Steel (http://www.rmgalloysteel.com/) you will find this:

“We are currently producing Alloy & Special steels, mainly for Auto, Engineering, Oil and Gas, Energy, Defense and Railway applications etc as per IS, BS, AISI/SAE, DIN, JIS, GOST specifications or as per customer’s specific requirements.”

At another place they have specifically mentioned Oil India and ONGC as customers.

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Regardinl APL Aplollo capacity : Six direct forming technology lines were
commissioned in FY 2018 across existing
facilities at Raipur in Chhattisgarh, Hosur
in Tamil Nadu and Murbad in Maharashtra.
Another two lines are to be set across existing facilities at Sikandarabad in Uttar Pradesh
and Hosur. These are likely to come on
stream in H1 of FY 2019. The total
installed capacity will go up to two mtpa.Source- Capital Market

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Some people believe that that the steel tube business is a capital intensive business, there is little value addition and there is no moat.

Yes, it is a capital intensive business. Applying for tenders requires a company to demonstrate 1) Net worth 2) Working capital 3) Turnover.

Once a company starts getting accepted by the major customers, it seem to become easier to get bigger orders. Getting approved by major companies is not easy unless you have the size and execution ability. This is why companies which have been able to manage this have created huge wealth over time. APL Apollo Tubes was Rs.50 in 2009. It touched 2487 in January 2018. That’s a 50 fold return in less than a decade. Ratnamani Metals was Rs.35 in 2009. In touch 1095 in January 2018. That’s a 30 fold return in less than a decade. All companies in an industry are not going to be multibaggers. But if we can find well run companies with honest managements which know how to execute, expand and manage cash flow, those who have vision, big money can be made.

The time to invest in an industry is when huge demand is expected and GAIL’s expansion will create that demand. At least 2-3 companies from that list will be multibaggers in the next decade. The question is which ones?

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No one commenting about Man Industries.?

It is a leading manufacturer and exporter of large diameter Carbon Steel Line Pipes for various high pressure transmission applications for Gas, Crude Oil, Petrochemical Products and Potable Water. The Company has state-of-the-art manufacturing facilities for LSAW & HSAW Line Pipes and also for various types of Anti-Corrosion Coating Systems.

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