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Firstcall India Equity Advisors Pvt. Ltd
1
Steel-Tubes/Pipes
INDIA
Market Cap
Rs.8798.16 mn
26th December, 2009
BCBBB
NAGAR CONST BSE SENSEX
CMP: Rs.168.00 (As on 26th Dec, 2009)
EQUITY RESEARCH
PSL Limited
• We initiated the coverage of Time PSL Ltd and set a target price of Rs.200.00. It is one of the largest HSAW pipe manufacturers in India with the installed capacity of 1.475 MTPA of pipes.
• The company’s current order book stands at Rs16.00 billion, which will get executed within this financial year.
• Recently PSL has raised Rs 1493.2mn 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.
One-year comparative graph with BSE
PSL BSE SENSEX
Key Financials
FY08
FY09
FY10E
FY11E
Key Data
Net Sales(mn) 22188.50 35499.5 28145.23 32367.0 Face Value (Rs.)
10.00
EBITDA(Rs.mn) 2332.10 2845.20 3093.16 3333.80 Shares Outstanding
52.37 mn
EBITDA Margin (%) 10.51% 8.01% 10.99% 10.30%
52 wk. High/Low
Rs.188.0/59.50
Net Profit (Rs.Mn) 847.70 859.30 1064.37 1097.49
Volume (2wk.Avg.)
311991
Net profit Margin (%) 3.82% 2.42% 3.78% 3.39% BSE Code
526801
U. Janakirao Analyst Equity Research Desk [email protected]
V.S.R Sastry Vice president Equity Research Desk 91-22-25276077 [email protected]
Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer [email protected]
BUY Target price: Rs.200.00 (For Medium to Long term)
PSL Ltd-26th December, 2009
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Firstcall India Equity Advisors Pvt. Ltd 2
Table of Contents Page no
1. Peer group Comparisons 03
2. Company Updates 03
3. Company’s profile 06
5. Business Area 06
6. SWOT analysis 10
7. Financials 11
8. Valuation 16
9. Industry overview 17
PSL Ltd-26th December, 2009
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Firstcall India Equity Advisors Pvt. Ltd 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 188.00/59.50 168.45 20.18 8.34
Welspun Gujarat Stahl Roh 296.35/48.50 267.05 20.10 13.29
Man Industries 60.90/21.50 50.30 5.27 9.54
Jindal Saw 198.70/27.00 187.65 16.90 11.10
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.6062.20 mn from Rs.6437.800 mn of the corresponding period
of the previous year. The operating profit for the quarter stood at Rs.684.90 mn from Rs.662.50 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.215.80 mn. NPM stood at 3.56%. EPS for the quarter
stood at Rs.4.12 per equity share of Rs.10.00.
Quarterly Results –Standalone(Rs in mn)
As at Q2FY09 Q2FY10 %Change
Net Sales 6437.80 6062.20 (5.83)
Net Profit 216.10 215.80 (0.14)
Basic EPS(Rs)* 5.08 4.12 (18.90)
PSL Ltd-26th December, 2009
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Firstcall India Equity Advisors Pvt. Ltd 4
• Margins (%):
Operating Profit Margins (OPM %)
Net Profit Margins (NPM %)
PSL Ltd-26th December, 2009
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Firstcall India Equity Advisors Pvt. Ltd 5
• PSL accumulates Rs.1493.2mn via QIP route
PSL has successfully raised Rs 1493.2mn 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 138.90 per share to 20
Qualified Institutional Buyers (QIB's) under this issue. The price band for the issue has been fixed at Rs
138.88 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 1975. 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.
PSL Ltd-26th December, 2009
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Firstcall India Equity Advisors Pvt. Ltd 6
• Dividend declared
For the the financial year 2008-09 the company has declared a dividend of 50% (Re.5 per share) on the
face value of equity share Rs.10.00 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 1.475 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
PSL Ltd-26th December, 2009
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Firstcall India Equity Advisors Pvt. Ltd 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.
PSL Ltd-26th December, 2009
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Firstcall India Equity Advisors Pvt. Ltd 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.
PSL Ltd-26th December, 2009
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Firstcall India Equity Advisors Pvt. Ltd 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
PSL Ltd-26th December, 2009
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Firstcall India Equity Advisors Pvt. Ltd 10
SWOT Analysis
Strengths Weakness
• Strong Management
• Strong client base
• Innovative Technology
• Market leadership
• Strong product portfolio
• Geographically located plants
• Falling earnings • High Debt.
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 2007-2011 is set to emerge
from the pipeline projects in North America.
• 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.
• Global Economic Slowdown • Rupee – dollar fluctuation • Price Volatility of HR coils • Raising Steel Prices
PSL Ltd-26th December, 2009
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Firstcall India Equity Advisors Pvt. Ltd 11
Financials Result Updates Quarterly Ended Profit & Loss Account (Standalone)
Value(Rs. in million) 31-Mar-09 31-June-09 30-Sep-09 31-Dec-09E
Description 3m 3m 3m 3m
Net sales 12,310.30 6,332.80 6,062.20 6,668.42
Other income - - - -
Total income 12310.30 6332.80 6062.20 6668.42
Expenditure -11,686.00 -5,589.70 -5,377.30 -5928.22
Operating profit 624.30 743.10 684.90 740.19
Interest -296.6 -230.3 -185.8 -199.23
Gross profit 327.70 512.80 499.10 540.96
Depreciation -138.7 -180.3 -180.9 -183.23
PBT 189.00 332.50 318.20 357.73
Tax -53.00 -107.00 -102.4 -118.05
PAT 136.00 225.50 215.80 239.68
Net profit 136.00 225.50 215.80 239.68
Equity capital 425.8 425.8 523.7 523.7
EPS 3.19 5.30 4.12 4.58
Face Value (Rs) 10.00 10.00 10.00 10.00
Total No. of Shares 42.58 42.58 52.37 52.37
PSL Ltd-26th December, 2009
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Firstcall India Equity Advisors Pvt. Ltd 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 22188.50 35499.50 28145.23 32367.01
Other income 429.20 - - -
Total income 22617.70 35499.50 28145.23 32367.01
Expenditure -20285.60 -32654.30 -25052.07 -29033.21
Operating profit 2332.10 2845.20 3093.16 3333.80
Interest -578.60 -1007.20 -900.14 -1029.30
Gross profit 1753.50 1838.00 2193.02 2304.50
Depreciation -511.90 -570.70 -627.77 -690.55
PBT 1241.60 1267.30 1565.25 1613.96
Tax -393.90 -408.00 -500.88 -516.47
Net profit 847.70 859.30 1064.37 1097.49
Equity capital 425.80 425.80 523.70 523.70
Reserves 5229.80 5859.30 6923.67 8021.16
EPS 19.91 20.18 20.20 20.96
Face value(Rs) 10.00 10.00 10.00 10.00
Total No. of Shares 42.58 42.58 52.37 52.37
A=Actual E=Estimated
PSL Ltd-26th December, 2009
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Firstcall India Equity Advisors Pvt. Ltd 13
Key Ratios
Particulars FY09 FY10E FY11E
Equity Capital (Rs.mn.) 425.80 523.70 523.70
EBDITA Margin (%) 8.01% 10.99% 10.30%
Net Profit Margin (%) 2.42% 3.78% 3.39%
P/E (x) 4.29 8.32 8.02
ROE (%) 13.67% 14.29% 12.84%
ROCE (%) 18.04% 17.12% 16.32%
EV/EBDITA(x) 1.30 2.79 2.59
Book Value (Rs.) 147.60 142.20 163.16
P/BV (x) 0.59 1.18 1.03
Debt-Equity ratio(x) 1.01 0.93 0.90
PSL Ltd-26th December, 2009
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Firstcall India Equity Advisors Pvt. Ltd 14
Charts A) Net sales & PAT Chart
B) EV/EBITDA chart
PSL Ltd-26th December, 2009
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Firstcall India Equity Advisors Pvt. Ltd 15
C) P/E Chart
D) Debt- Equity ratio chart
PSL Ltd-26th December, 2009
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Firstcall India Equity Advisors Pvt. Ltd 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.20.20 and Rs.20.96 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 1493.2mn 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 2007-2011 is set to emerge from the pipeline projects
in North America
• We recommend ‘HOLD’ in this particular scrip with a target price of Rs.200.00 for Medium to Long term
investment.
PSL Ltd-26th December, 2009
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Firstcall India Equity Advisors Pvt. Ltd 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 16-17 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.
PSL Ltd-26th December, 2009
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Firstcall India Equity Advisors Pvt. Ltd 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 2010.
• 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.
PSL Ltd-26th December, 2009
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Firstcall India Equity Advisors Pvt. Ltd 19
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