Krc Pipe 20nov04[1] | Pipe (Fluid Conveyance) | Natural Gas

Nov 20th, 2004

Pipe Industry- Future wealth lies in the pipe line Pipelines in one form or another have been used since the early days of civilization for transportation of liquid elements. This is mainly because of its Introduction economical mode of transportation compared to any other modes of transportation, especially for liquid and gaseous elements. Transportation through steel pipes is a one time high investment cost which serves the civilization for long years with regular maintenance. Today pipes have been used for transportation of various liquid and gaseous elements like water/sewerage, Oil and Gas over long distances. With rising domestic and global demand for transportation of petroleum products through pipelines, we expect the golden era for the pipe industry to be at the onset. Types of Pipes: Pipes in the industry are classified according to the production process used for manufacturing the same. The pipes are accordingly classified as HSaw (Helically submerged arc welded) and LSaw (Longitudinally submerged arc welded) pipes. However, both these pipes have their own processing and application limitations. Longitutional pipes: LSaw pipes are manufactured using HR steel plates, not available in India. These plates are imported into India leading to higher raw material cost. Use of HR plates helps prepare pipes with thickness of more than 25 millimetres which becomes difficult to manufacture using HR coils. Further setting up an LSaw mill requires huge capital investment as it requires moulds and dies of a specific grade based on the grade i.e diameter and thickness of the pipe to be manufactured. Manufacturing of LSaw pipes with diameter more than 56 inches becomes impossible as no steel mill in the world is capable of producing steel plates of such large size. However, LSaw pipes have an edge over HSaw pipes mainly where the application requires them to be of thickness more than 25 millimetres. The offshore pipe segment is where pipes with thickness above 25 millimetres are required as it needs to face both kinds of pressure i.e oil/gas running within the pipes and water pressure above. The demand for offshore pipes is just a fraction of the total demand for steel pipes in India. Helically spiral welded pipes: HSaw pipes are manufactured from HR coils which are available in the domestic market easily and hence need not be imported. Normally the HSaw pipes are of a thickness of 25 millimetres maximum. These spiral pipes if manufactured from a specific quality of steel and of a specific thickness could easily bear the oil or gas pressure equivalent to the LSaw pipes. Hence, a false understanding that Hsaw pipes couldnot bear oil or gas pressure equivalent to HSaw has been put to rest. Moreover, the HSaw pipes are flexible in terms of manufacturing pipes of



The recent upsurge in crude prices to levels above $ 50 per barrel has led to an improvement in refining margins.000 7. Over the next 5 years ONGC. We expect similar such projects to be implemented by other state governments in the coming years.Dist. Growth Segments Water segment: Increased government spending on setting up infrastructure facilities such as water transportation. irrigation etc has been on a rise. which is endorsing the India – Bangladesh natural gas pipeline are all expected to lay pipelines of approx 21. an annual average addition of 4. Gail India alone has the biggest capex plan for setting up 7900 Km of new trunk lines over the next 5 years. Company ONGC GAIL GSPL Reliance Unocal Others Total over next 5 years Annual average demand Pipe Kms 1. 2004 varying diameter.250 1.WEEKENDER Nov 20th.218 We feel that even if some of the projects are delayed by 2 -3 years and some are shelved. Export Market: Countries in the Middle East followed by Russia and India are the major demand areas.000 21.900 1. This in turn led to an overall improvement in cash flow position of global refiners and oil majors (especially in the middle east) prompting them to make investments in KRC RESEARCH 2 .090 Km.090 4. which in turn would pull the demand for steel pipes in India.218 km. demand is expected to be in excess of 3000 Km per annum which would be more or less in line with the total domestic capacity (post expansion). Being a low cost technology the HSaw pipes are even viable for use in infrastructures like water transportation which has been gaining pace with increased government focus on infrastructure like irrigation and supply of pure water to the remotest village in the country.740 7. Baherika Naka Project . Oil and Gas: Demand for pipes has cropped up over the last few months as transportation of oil and gas through pipes is considered the most economical way. Major projects like the Tirupur water supply and sewerage project – I in January 2003. Currently only one third of India’s petroleum products are moved through pipe lines. The recent gas finds and increased thrust on LNG imports has resulted in growing demand for gas transportation. GSPL and even Unocal. Rajasamand in June 2003 and the Godavari Lift irrigation Scheme project in March 2004 represent the government initiatives in the implementation of such huge projects. GAIL. Reliance.200 2.

exports could be a major contributor considering the demand from countries like Oman. India’s close proximity to international demand zone i. in the absence of financial liquidity execution of large projects per schedule becomes difficult task. This would even impact the project profitability in the absence of escalation clause. Hence a new player within the industry may have to work at lower capacity utilization in the initial years till it is able to prove its quality and standards in the international market.0 8.9 6. Further.8 0.7 0.7 Saw Pipes* 214. Libya and Saudi Arabia in Middle East which do not have any domestic manufacturers.77 0.48 12.0 10.35 14.17 15. 2004 infrastructure i. Some approvals require performance track record and major projects are not initiated till requisite quantity of pipes are supplied leading to a high working capital requirements.9 WGSR 39. Entry Barriers within the Industry Since oil and gas transportation.7 9.0 0.9 6.72 0.3 0.0 5.9 7.1 15.6 14.8 0.0 0. under high pressure. Risks/Concerns for the industry The major raw material used in manufacture of pipes is steel which has been highly volatile and thereby any upward movement in prices of steel could affect the margins of the company. an economical way to transport oil and gas.9 Man 95.2 2. Since large projects require higher working capital. is hazardous.8 10. Further.2 KRC RESEARCH 3 .7 5.6 7. Iraq.8 0. the company needs to have much better financial liquidity and a credit standing as huge project size involves higher borrowings. Hence.e setting up their own pipelines.e Middle East and benefits of low labour cost has helped domestic manufacturers make inroads into international market giving them a competitive edge against their global counter parts.7 5.45 0.7 7.1 6.67 9.53 0. Qatar. oil companies approve vendors only after stringent quality assessment and audit procedures which can take 2-3 years and most approvals are plant specific. Relative Valuation Particulars Price (Rs) EV/Sales (x) EV/EBIDTA (x) P/E (x) Cash P/E (x) Mcap/Sales (x) Capacity (Mn Tonnes) OPM (Incl OI) (%) NPM (%) PSL Ltd 150.5 0.WEEKENDER Nov 20th.

As a matter of practice.WEEKENDER Nov 20th. 2004 Note: Financials are on ttm basis. KRC Research Reports only provide information updates and analysis. Further. especially in terms of contracts already tendered. Also. Contact us at 5696 5555 or mail to customercare@krchoksey.. ---------------------------------------------------------------- KRC RESEARCH 4 . cooling of metal prices could lead to higher demand for pipes in the country as the cost of projects would come down. Any down turn in steel prices in the future could benefit the pipe manufacturers. All opinion for buying and selling are available to investors when they are registered clients of KRC Investment Advisory Disclaimer: This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. However. As per SEBI requirements it is stated that. and/or individuals thereof may have positions in securities referred herein and may make purchases or sale thereof while this report is in circulation. Kisan Ratilal Choksey Shares & Sec Pvt Ltd. does not bear any responsibility for the authentication of the information contained in the reports and consequently.. seem to be in line with other sectors of the economy. the operating margins of the players have been significantly low as the steel prices have been in an upward trend over the past 18-20 months.krchoksey. KRC refrains from publishing any individual names with its reports. investors are advised to satisfy themselves before making any investments. is not liable for any decisions taken based on the same. While the information contained therein has been obtained from sources believed to be reliable. * Debt figure is as per September-03 balance sheet The valuation of the companies in pipe industry.Kisan Ratilal Choksey Shares & Sec Pvt visit us at www.

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