jan 17, 2020 pick of the month vol-6, no-02 srikalahasthi...

Industry Overview: Water and Pipe Water is the universal solvent used as cleansing agent across different industries like Power, Paper, Pulp, Textiles to mention a few. India, known as the groundwater economy is indeed the highest user and extractor of groundwater (~24% of the total extracted globally) and ahead of extraction done by China and US combined. According to metrics of being defined as „Water Stressed‟, as per the Indian Council for Agricultural Research (ICAR); the per capita availability of water is estimated to decline further to 1,465m3 by 2025 and 1,235m3 by 2050. If it declines further to around 1,000-1,100m3, then India could be declared as a water-stressed country. This is well supported by the World Ranking Institute estimates which states the countries prone to water stress risk are ranked on certain underlying indicators and the one bearing a higher score is exposed to greater risk to water stress. Accordingly, as per the global ranking, India‟s is positioned at 31 in 2020 being at a greater risk as compared to Nepal (69th position) and little less vulnerable than Pakistan having a 18th position.

With limited water storage, purification and distribution infrastructure; India faces a daunting task to enable water transportation to the door step of billions. Thus, providing for accountable, efficient water and sanitation services along with sustainable and affordable access to safe water is one of the biggest challenges. To add to it further, with the economic upliftment, rapid urbanization and increasing need to cater to the industrial and agrarian parts of the economy; the demand for water has further compounded at a higher pace in the past few decades. One of the key solutions for well managed Water Distribution System (WDS) is enabling piped water supply in a usable form, actually which is the need of the hour.

CMP: Rs.205 TARGET PRICE: Rs.250 TIME : 12 months

SNAPSHOT

52 week H / L Mcap (INR mn)

261/138 9,583

Face value: 10

BSE Code NSE CODE

513605 SRIPIPES

Annual Performance

(Rs mn) FY17 FY18 FY19 FY20E

Total Revenue 11,779 15,868 15,588 16,604

EBITDA 2,369 2,422 1,870 2,540

EBITDA (%) 20.1 15.3 12.0 15.3

Other Income 305 371 506 404

Interest 393 430 405 439

Depreciation 369 354 370 414

PBT 1,912 2,009 1,600 2,092

PAT 1,402 1,474 1,175 1,489

Equity ( Rs mn) 398 467 467 467

EPS (INR) 35.3 31.6 25.2 31.9

Ratio Analysis

Parameters (Rs mn) FY17 FY18 FY19 FY20E

EV/EBITDA (x) 5.7 4.8 5.6 4.1

EV/Net Sales (x) 1.2 0.7 0.7 0.6

M Cap/Sales (x) 0.8 0.6 0.6 0.6

M Cap/EBITDA (x) 4.0 4.0 5.1 3.8

Debt/Equity (x) 0.8 0.5 0.4 0.4

ROCE (%) 24 21 14 15

Price/Book Value (x) 1.0 0.8 0.8 0.7

P/E (x) TTM 7.2 11.2 6.7 7.0

Shareholding Pattern as on 31st Dec, 2019

Parameters No of Shares %

Promoters 22,468,513 48.11

Institutions 6,845,873 14.66

Public 17,384,021 37.23

TOTAL 46,698,407 100.00

Quarterly Performance

Parameters (Rs mn) Dec-18 Mar-19 Jun-19 Sep-19

Sales (Net) 3,974 4,087 3,608 4,574

EBITDA 648 507 572 626

EBITDA (%) 16.3 12.4 15.9 13.7

Other Income 124 129 124 174

Interest 228 70 94 125

Depreciation 93 92 99 103

PAT 312 355 333 359

Equity ( Rs mn) 467 467 467 467

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Srikalahasthi Pipes Limited

Jan 17, 2020 PICK OF THE MONTH VOL-6, NO-02

Please Turn Over

BUY

Source: Annual Report

Note: All the data is calculated as per Market Price on 16th Jan, 2020

Exhibit 1: Annual Per Capita Water Availability

Exhibit 2: Water Stressed Countries: World Ranking

Source:https://www.thehindubusinessline.com

Source: http://www.wri.org

https://www.thehindubusinessline.com

Pipes and its Classifications: A water pipe is any pipe/tube designed to transport treated drinking water to consumers. Pipes find varied industrial applications in transportation of fluids such as Oil, Gas and Water. Materials commonly used to construct water pipes include Cast Iron (CI), Polyvinyl Chloride (PVC), Copper, Steel or Concrete. What are Ductile Iron Pipes? Ductile Iron (DI) Pipes (also known as Spheroidal Graphite Iron or Nodular Cast Iron) are made of ductile cast iron commonly used for potable water transmission and distribution. This type of pipe is a direct development of earlier Cast Iron pipe, which it has superseded. As a protection layer to inhibit corrosion; there are standard internal linings (mainly Cement mortar) and external coatings (bonded zinc, Asphalt or water-based paint) that are often applied to these pipes. (Data as per Wikipedia)

Preference of DI Pipes over Cast Iron: To design an appropriate WDS, the most crucial decision is the choice of selecting the pipe material which invariably depends on numerous specifications: pipe diameter, industry application, durability, reliability of joints, costs, time required for construction, life horizon etc. The users are now becoming increasingly aware of the importance of considering Life Cycle Cost (LCC) rather than any initial capital cost. This development is further assisting choice of DI Pipes over other pipe materials and is considered the preferred choice of water system designers. (SPL’s Annual Report 2019)

Demand and Growth Drivers for DI Pipes: Owing to the increasing investments in water development infrastructure, increasing awareness on water conservation and with the aim to become 100% open defecation free nation, improving sanitation facilities and increasing awareness on using good quality pipes, the DI pipes market is likely to have a strong linkage associated with these investments under various Central and State sponsored projects viz; Jal Shakti Abhiyan, Swachh Bharat Mission, Atal Mission for Rejuvenation and Urban Transformation (AMRUT), Smart Cities Mission and Namami Gange. Thus, the DI market is estimated to register a positive CAGR in the next 3 to 4 years on account of future investments in Swachh Bharat Mission and Housing for all by 2022. (As per Annual Report 2019).

Jal Jeevan Mission (JJM): Access to Piped water by 2024 According to the data published by various reports, about half of the country‟s households are refrained from getting access to piped water supply. Further considering the urgency of water conservation, the government announced the JJM working under the Department of Drinking Water and Sanitation with an allocated budget of Rs3.35lkcr.

Initiatives to be undertaken:

Focus on rainwater harvesting and water conservation in 256 districts

Renovation of traditional water bodies and tanks

Ensure Har Ghar Jal by 2024

Plan to offer 43-55 litres of water per person per day

Fund named: Jal Jeevan Kosh- attract investments in the field of water and sanitation

If the above initiatives are well in line and fructify as expected then the immense future demand for DI pipes is clearly visible.

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Srikalahasthi Pipes Limited BUY


Exhibit 3: Classification of Pipes

Source: Progressive Research

Source: Progressive Research

Exhibit 5: Jal Jeevan Mission

Source: The Public Health Engineering Department

Characteristics Ductile Iron (DI) Cast Iron (CI)

Composition Iron, Carbon, Silicon, Manganese, Magnesium, Phosphorus and Sulphur Mainly consists of Carbon and Silicon

Flexibility Malleable Non Malleable

Corrosion Non-corrosive Corrosive

Industry Application Mainly in Automobile Mainly in Construction

Ductility Strong Zero

Resistance Impact Impressive Mediocre

Life Span 70-90 years 30-35 years (commercial application)

Exhibit 4: DI v/s CI

https://www.thehindubusinessline.com/economy/agri-business/indias-per-capita-water-availability-to-decline-further-icar/article29342714.ece

https://www.thehindubusinessline.com/economy/agri-business/indias-per-capita-water-availability-to-decline-further-icar/article29342714.ece

Global Demand: As per various market reports, globally utility of DI pipes can be bifurcated (i) Based on Application: It can be bifurcated for drinking water distribution, wastewater, irrigation, mining and others (that includes pump stations and process treatment works). Considering the latest focus being on water conservation and Irrigation (contributing ~70% of water usage), DI pipes find their most common application in water distribution. China, India and South Africa are the prime agrarian focused countries; thereby accounting for a greater demand for DI pipes. (ii) Based on Region: Based on the geography, globally DI pipes market has been classified as those related to North America, Europe, Asia Pacific (holds a larger share), Middle East & Africa and Latin America

According to Market Research Consulting, the DI Pipe market was at USD4600mn in 2017 and is anticipated to reach USD9428mn by 2026, at a CAGR of 8.3% during the same period. The Asia Pacific market is anticipated to expand at a faster pace during the forecast period due to rise in demand for water supply and irrigation mainly in India and China. The well-known players in the market include Saint-Gobain PAM, Xinxing Ductile Iron Pipes Co., Ltd., Jindal SAW Ltd., McWane, Inc., Kubota Corporation, Tata Metaliks and others. With the help of various strategic decisions viz; capacity expansions, M&A, etc. these global manufactures‟ are trying to get a hold in the market and thus lead to a boost in the demand of DI pipes. About the Company: Srikalahasthi Pipes Limited (SPL), formerly known as Lanco Industries Ltd (LIL) was established in 1991 by Lanco group of companies to manufacture Pig Iron. The company has adopted its name from the area of its manufacturing facility which is located in Rachagunneri, Srikalahasti Mandal, Tirupati. SPL is currently engaged in manufacturing and supply of DI pipes. In addition to DI pipes, it is also engaged in manufacturing and selling Slag Cement and producing Pig Iron through the Mini Blast Furnace route. The company has its state-of-the-art manufacturing facility in the Chittoor District of Andhra Pradesh, India spread across a sprawling 300 acres. Some of the marquee clients include Larsen & Toubro, Nagarjuna Construction Corporation, Indian Hume Pipes Ltd, VA Tech Wabag Ltd, Sriram EPC Ltd etc. The company has Mr. Mayank Kejriwal as its Managing Director.

INVESTMENT RATIONALE: (A) Product Profile:

a. DI Flanged Pipes: A pipe flange is a disc, collar or ring that attaches to a pipe with the purpose of providing increased support for strength, blocking off a pipeline or implementing the attachment of more items. They are usually welded or screwed to the pipe end and are connected with bolts. (As per Wikipedia).

DI flanged pipes have many applications for Restrained joints, Ideal for vertical pipelines, Pump house connections, Short length connections, Over ground and exposed installations, Disengagement requirements or temporary installations etc.

b. DI Socket & Spigot Pipes: By the virtue of the company‟s core business of manufacture and supply of DI pipes (contributing ~86% of its total revenue in FY19); SPL is being categorized as Public Utility Services Industry engaged in Water Infrastructure Development in the country. DI Socket & Spigot Pipes are joined using rubber gaskets. These consist of a barrel with a socket at one end. The other end, which is plain, is called a Spigot. These pipes are mainly used in the transmission of raw and potable water, distribution of potable, transmission of domestic and industrial effluents, fire fighting systems, piling, ash-slurry handling systems. SPL manufactures and markets DI pipes under its brand name “SRIPIPES” and the product ranges from 100mm to 1100mm.





Source: Annual Report 2019

Milestone

Exhibit 6: Revenue Mix


INVESTMENT RATIONALE (contd.): c. Cement: In order to utilize the slag generated from the company's Mini Blast Furnace (MBF), a mini cement plant was installed in the year 1995 with a capacity of 99,000TPA, with cement under the brand name SPL GOLD. The plant produces superior quality Portland slag cement. d. Coke: SPL is amongst the largest manufacturers of Low Ash Metallurgical Coke (LAMCOKE) in the country. The company has established a strong foothold in the LAMCOKE market by offering one of the best quality coke. e. Pig Iron: SPL manufactures basic and foundry grade Pig Iron ideal for specialized applications such as engine blocks, crankshafts, steel mills, pump housing, machine tools etc. The company caters to specific customer requirement of precision products manufacturers and is one of the low cost Pig iron manufacturers with almost total backward integration.

(B) DI Pipes - Future Business Driver: As mentioned earlier, the demand for these pipes bears a direct correlation with the investments and initiatives undertaken by the Government for water and sanitation infrastructure. In the last 4 years, SPL has witnessed an increase in the production of DI pipes to 298514MT in FY19 from 169500MT in FY15; CAGR of 15%. On the supply side, the company was able to grow at a CAGR of 14% in the same period. Considering these factors, in Q1FY20, the company has increased the capacity of its DI plant from the current 300,000MT to 500,000MT per annum. Subsequently, the demand for DI pipe will continue to drive growth in India on account of huge water infrastructure investments, improving sanitation facilities and increasing awareness of good quality pipes; well supported by a survey done by Transparency Markets Research that estimates the demand for DI pipes in sewage water applications has witnessed an upward trend owing to the rise in migration of the population towards urban areas.

(C) In-house Advantages: The below mentioned parameters are competitive operational advantages of SPL over other players.





Exhibit 8: Production/Sales Growth (in MT)

Exhibit 7: Product Mix

DI socket & Spigot Pipes DI Flanged Pipes

Coke

SPL Cement

Pig Iron



Source: Company’s Press Release, Progressive Research

Parameters Applications

Railway Siding Aids in procurement of RM and thereby dispatching the finished goods

Port Krishnapatnam, Chennai and Ennore Ports are situated within a vicinity of 150kms

Water Long term arrangement with Tirupati Municipal Corporation (TMC) for supply of sewage water for industrial use

Power 14.5MW captive power plant

Material Handling Own internal transport handling division

Limestone Mines Long term leased Limestone mines

Exhibit 9: Strategic Advantages

INVESTMENT RATIONALE (contd.):

(D) Association with Electrosteel Castings (ECL): Electrosteel Castings (ECL) is India's largest and one of the few manufacturers in the world to make DI Pipes, DI Fittings and CI Pipes, having its facilities in Khardah & Haldia in West Bengal and Elavur in Tamil Nadu. In March 2002, ECL entered into a strategic alliance with LIL and Lanco Kalahasthi Castings (LKCL) by acquiring 46.43% and 48.89% stake in the companies, respectively. ECL had infused Rs22cr by way of equity in order to strengthen equity base of the company and restructured the equity capital accordingly. Subsequently LKCL was merged in March 2003 and was renamed as Srikalahasthi Pipes in 2014. SPL is one of the top players in the DI pipe industry in India and commands around 15% market share across India with ~70% dominated in South which it primarily caters to. Collectively, the Electrosteel Group commands around 40% market share of the Indian DI Pipes market. (E) Capacity Expansions: Considering the expected demand to come in future and the current capacity constraint being faced by the company, there is a well-planned capex structured by SPL.

SPL has chalked capex of ~Rs400cr (out of which Rs145cr is already sanctioned), to expand capacity of its DI pipe plant to 500,000 tonnes from 300,000 tonnes by end of March 2021. To achieve the enhanced capacity, the company has proposed to install an additional Sinter Plant, increase furnace blowing system, additional hot blast stove, oxygen enrichment and all auxiliaries along with higher furnace volume. The entire investment requirement would be met through the available funds and internal accruals.

SPL has been working towards its backward integration plans with cost reduction measures and a constant effort to achieve the self-reliant stature in sourcing of essential raw materials. Capex of Rs55cr is been undertaken for the Ferro Alloys project to meet the requirement of Ferro Silicon, Silico Manganese and Ferro Manganese in domestic and overseas markets, besides catering to the captive requirement of the company. We expect the contributions from the project from FY21E for higher revenue generation through sale of excess quantity of Ferro Silicon and entire production of Silico Manganese in the domestic and export markets.

Capex of ~Rs70cr towards installation of additional annealing furnace and suitable modifications in finishing line and spinning machines to produce DI Pipes upto 1200mm dia are in progress and these projects are expected to be in place by June, 2020. On successful completion of these projects, the capacity of DI Pipe Plant shall increase from 300,000TPA to 350,000TPA.

SPL further plans of setting up new blast furnace of 380meter cube with necessary modification to all auxiliary systems like Sinter plant, raw material handling systems etc., entailing an investment of about Rs75cr. The new blast furnace is expected to be in place by Q2FY21, leading to enhanced capacity of blast furnace from 275,000TPA to 350,000TPA.

Financials: Review: DI pipes have been the major contributing source of revenues for SPL (~86% of the total revenues). Out of the entire product mix, DI pipes contribution to the total revenues has been increasing over the past 3-4 years. In FY19, the company produced 298,514MT of DI pipes as compared to 275,047MT in FY18. Considering the various investments and increasing demand for providing sanitation and piped water to each and every household, it is expected that the demand for DI pipes would increase even further and augur well for SPL in terms of revenues and thus increase in market share.

Fluctuations in the Ebitda margins is attributed to variations in the raw materials costs mainly coking coal and iron ore, evident through 23.3% in FY16 boosted by lower iron ore prices/tonne. On the other hand, FY19 margins stood at 12% when iron ore prices were riding high. With regard to profits, FY19 saw the PAT decline by 20%; at Rs1,175mn as compared to Rs1,474mn in FY18, majorly impacted by the lower operating margins coupled with the impact of depreciation of rupee against dollar that led to lower realization on account of old orders being executed.





Exhibit 10: Synergy Advantage

Source: Company’s PPT, Progressive Research

Exhibit 11: Sales and Ebitda Margins Exhibit 12: PAT Trend

Source: Annual Report Source: Annual Report

Financials (contd.): Strong D/E and improving Interest Coverage Ratio (ICR): The continued surplus cash generation improved the fund availability of the company resulting in lower dependency on borrowings. With the QIP issue at a decent premium and the improved internal accruals, SPL is comfortably placed to fund its future capital expenditure for expansions and diversification. Also, going forward, with plans of reducing the debt and utilising the internal accruals for capex funding, SPL can have a better ICR.

Risks and Concerns: Raw Material Price Fluctuations: Considering that raw material constitutes a major chunk of the total variable cost for SPL, any fluctuations; especially key ones like iron ore would have a direct impact on the profitability and thus the operational efficiency of the company. Economy Slowdown: Slowdown in the economy would lead to slowing down of orders and further execution. Increasing Competition: Increased competition in the domestic market may have an adverse impact over the order position and affect the profitability of the company. Receivables Risks: The customer base being on turnkey contracts and Govt. bodies, it is required to extend to its customers a line of credit, whereby there is always a risk associated on timely collection and recovery of payments from the customers; thereby impacting the cash conversion cycle. Outlook and Recommendations: With the government impetus for providing piped water to each household by 2024, huge investments in drinking water and sanitation projects, we feel that SPL is well placed in terms of augmenting its DI pipe capacity to meet the user demand. Conservation of water being the need of the hour and the immediate supplier being that of pipes, we feel SPL should benefit from the same. Also, further SPL is trying to cut down on its debt and thereby meet its future plans via internal accruals is another positive point for improving it‟s gearing ratio and thereby be in a comfortable position on cash generation levels. Considering all these factors in mind and betting on the positioning of the company with regard to the customer base, order book and sense of catering to demand, we would recommend a BUY on the stock with a target price of Rs250 for a horizon of 12months.

Page No 6




Exhibit 13: Year-wise D/E Ratio Exhibit 14: ICR Trend

Source: Annual Report Source: Annual Report

Exhibit 15: Price v/s Nifty

Source: Ace Equity

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jan 17, 2020 pick of the month vol-6, no-02 srikalahasthi...

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