We met with the management of PSL. Following are the key takeaways: Management's view on industry 1. Domestic gas pipeline demand remains buoyant – medium term driver − There have been no delays witnessed so far in order flows/tenders. Further, pipeline projects typically form the last leg of any project, making its delay less likely. − Three large tenders (two already out) by Mar-09 are likely to create incremental requirement for 700,000-800, 000 MT of pipes. − RIL could explore options with domestic pipe manufacturers. This is likely to expand opportunities for players like PSL. − PSL' regional capacity is a key competitive advantage, as tenders are for delivered pipes at a select location. Transport costs are typically 20-25% of the cost of the pipe. For example, for the southern projects (Kakinada to Bangalore, Bangalore to Cochin & Chennai to Vizag), PSL is likely to incur 1/3 the freight cost than other players. 2. US pipeline demand – PSL has location advantage − PSL's US mill (located in southern region) can benefit from its location advantage. − PSL's US mill for firm orders for 12-15 months of production (till Mar-10). Customer has also procured the steel, ensuring the sanctity of order book. 3. Competition from Chinese players - Despite plunge in freight costs, logistics management (as customers insist on delivery to location) is likely to be a deterrent. Capacity expansion 1. PSL has a domestic pipeline capacity of 1.1 MMT. Their large capacity in HSAW is favorable, as they can be eligible for bidding 100% capacity in many tenders. Additionally, their domestic capacity is spread regionally (near pipeline construction points), imparting freight advantage. 2. The company is setting up an incremental 150,000 MT capacity in US. The HSAW plant in the US has been completed and is awaiting API approval (likely by Feb-09). 3. Sharjah capacity expansion plans have been put on hold, until the company gets firm orders. Existing capacity is 75,000 MT. Order book details 1. PSL's total order book aggregates INR 6,000 crores, out of which INR 4,000 crore is for Indian operations (executable by Mar-10). Approximately, INR 2,000 crores order book is from GAIL. 2. EBITDA for order book ranges from INR 125-200/MT. Conversion costs range between INR 110-180/MT. Upcoming tenders – status 1. Three major tenders are expected to create incremental requirement for 700,000- 800,000 MT of pipes through Mar-09.. |
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