Pipes & Tubes’ Sector Man 2008.pdf · HDFC Securities Pipes & Tubes June 20, 2008 Page 4 Executive summary Our top picks in the pipe sector are Welspun Gujarat, Jindal Saw and PSl,

IndiaResearch

HDFC Securities Limited, Trade World, C. Wing, 1st Floor, Kamala Mills Compound, Senapati Bapat Marg,Lower Parel, Mumbai 400 013 Phone: (022) 66611700 Fax: (022) 2496 5066

Sanju VermaExecutive Director& Head - Institutional [email protected] 1859

Mukesh [email protected] 1753

June 20, 2008

Pipes & Tubes’ Sector

Pipes & Tubes’ Sector

Pipes ...Beyond the Hype

COMPANIES COVERED

Welspun Gujarat Stahl Rohren

PSL

Jindal Saw

Man Industries

Maharashtra Seamless

Ratnamani Metals & Tubes

ISMT

Pipes & TubesHDFC Securities

June 20, 2008 Page 2

FOREWORD

Worldwide, about 13 million metric tons of large diameter pipes were produced in 2007. But demand over the next few

years is expected to be about 60 million tons. Most industry observers agree that this is a strong market and will remain so

for the near future. Many mills are sold out through this year and well into the next. Ipsco and Sumitomo are reportedly sold

out through 2009. In fact, some predict that major pipeline projects could be delayed or called off because of high costs and

the difficulty of obtaining material.

So why is the market so strong? It’s not a mystery really. Energy prices are high. The rig count may have leveled off recently,

but it is still strong compared to historical levels. Oil and gas prices may drop from today’s highs. But oil is expected to

remain at or about $80 a barrel for at least the next ten years. Natural gas should hover at least at about $6-7 per million

British thermal units. Strong worldwide GDP growth is expected to support those prices, in the long run. Even if growth trails

off in Europe and North America, it should remain firm in developing and emerging markets. And with energy prices and

demand strong, massive pipeline projects are in the works around the world.

In Russia, for example, projects are underway to connect Siberia to energy markets on the Pacific Coast. China is laying

thousands of miles of pipes to connect natural gas in western provinces to coastal areas like Shanghai. In North America

alone, the Rockies Express pipeline is expected to gobble up almost 1,700 miles of pipe to run natural gas from Wyoming

to Ohio. Billions are also being spent on pipelines to transport crude from the oil sands of Western Canada to the U.S.

Midwest. The U.S. claims to be intent on cutting back dependence on supplies of foreign crude. And if it does, Canada’s oil

sands could be natural replacement. And while projects like the Rockies Express get a lot of attention, there are many

smaller projects underway that taken together will consume a lot of pipe. For example, there are five liquefied natural gas

terminals in the U.S. But there are already five more under construction. And several more will likely be built within the next

twenty years. And all of those projects will mean running steel pipe from local LNG terminals to Interstate pipelines like the

Rockies Express

Then there are also a few wild cards out there to consider. Legislation under consideration in the U.S. calls for the sequestration

of emissions like C02 by 2020. If those new restrictions are put into law, it could create demand for a whole new pipeline

infrastructure. If the laws go into effect in 2020, the pipelines would have to be in place beforehand. It’s a huge potential

market of over & above USD 200 bn approx.

We are confident that the main fundamentals behind the Pipes and Tubes sector remain ¨seamless¨. For the short to

medium term, this is reflected in the sector’s order book, which covers the sectoral activity for close to nine months. For the

longer term, one of the main drivers behind this industry is the development of hydrocarbon reserves; oil reserves represent

around 40 years of consumption and natural gas around 60 years. However, this is not a complete view of the resources: by

adding technical progress which should allow for improvements in recovery rates and discoveries in non explored zones

and non conventional oil and gas as the extra heavy oil from Canada and Venezuela, one can at least double these figures.

The development of these resources will be progressive as the time frame in energy is typically around ten years for

exploration and production projects, but also for transport infrastructure. Hence, the development of these resources will

require very high level of capital expenditure, and also great amounts of pipes and tubes.

Technical innovation is the key for the future of oil and gas development. Hence, supplying high quality and specialised

products will continue to be a differentiating factor in this industry. This is why Indian players will continue to improve their

product mix by introducing new products through ongoing investments allowing them to optimise their integrated production

process. With likely market of USD 100 bn and above for the period 2008-13E, we have raised our estimates for the coming

years based on the strength of the cycle due to ongoing investments in the sector. Along with this, companies are looking

to increase their operating leverage to further fuel growth in the energy cycle by supplying higher value added products

which will lead to higher returns and margins.

By Mukesh Agarwal



Table of Contents

Page No.

Executive Summary .......................................................................................................................................................................... 4

Earnings Watch ................................................................................................................................................................................ 6

Comparative Valuation ..................................................................................................................................................................... 7

Swot Analysis .................................................................................................................................................................................... 8

Industry Matrix ................................................................................................................................................................................... 9

Porter’s Five Forces Model ............................................................................................................................................................. 10

Investment Case ............................................................................................................................................................................. 11

Industry Overview ............................................................................................................................................................................ 14

Overview of Global Capacities ....................................................................................................................................................... 17

Demand for API Pipe ...................................................................................................................................................................... 24

Upcoming Pipeline Investment ...................................................................................................................................................... 30

Key Future Projects ........................................................................................................................................................................ 32

API Mill Capacity ............................................................................................................................................................................. 33

Companies

Welspun Gujarat Stahl Rohren ...................................................................................................................................................... 39

PSL ................................................................................................................................................................................................. 52

Jindal Saw ...................................................................................................................................................................................... 60

Man Industries ................................................................................................................................................................................ 71

Maharashtra Seamless ................................................................................................................................................................. 80

Ratnamani Metals & Tubes ........................................................................................................................................................... 89

ISMT ................................................................................................................................................................................................ 98



Executive summary

Our top picks in the pipe sector are Welspun Gujarat, Jindal Saw and PSl, which we rate

Strong Buys, followed by BUY rating on the entire sector including Man Ind, Mah. Seamless,

ISMT and Ratnamani Metals. Welspun is the largest steel pipe producer in India and one of

the largest in the world. The company has a unique product mix, catering to high-end oil and

gas sector. Welspun, Jindal and PSl put together account for more than 70% of the installed

capacity in India. The top three companies have significant exposure to the export market,

which we believe will grow at double digits over the next 5 years. We initiate coverage on the

sector with a Buy rating. Our DCF-based 18-month target price for almost all the companies

in the basket implies more than 70% upside, especially considering the potential of Indian

pipe players for growth and because the sector trades at low multiples, compared to its

international peers.

The Indian Pipe industry has seen solid growth, thanks to the expansion of the oil and gas

industry, and construction and infrastructure boom. Given the recent developments in the

local and global oil and gas markets and with oil prices hovering over $100/bbl, we expect

pipe makers to benefit from the strong demand and further improve their financials. Moreover,

with rising oil prices, countries have initiated state-sponsored infrastructure and construction

programs (to invest the windfall profits record oil prices have given them), which also have a

positive impact on the demand for pipe products. We forecast a pipe production CAGR of

22.6% in India over 2008F- 2012F and global demand CAGR of 9-10% during the same

period.

Prices for key pipe products have risen sharply. Prices for Oil Country Tubular Goods

(OCTG), line pipes and large-diameter (LD) pipes, which are currently enjoying the strongest

demand, have increased rapidly over the past few years. Most Indian pipe producers

concentrate mainly on LD pipes because they have a competitive edge over global players.

Pipe prices in the last one year have gone up by over of 25% and are currently at an all time

high. We believe that prices are sustainable at current levels given the tight demand scenario

globally.

High entry barriers to shield pipe makers from increasing competition. Setting up a new

plant is relatively difficult, given the substantial investment required and the long payback

period. Additionally, pipe suppliers’ main projects are usually of “national importance,” implying

increased responsibility, which is reflected in extra costs that only major players can afford.

Approval is another major hurdle which take anywhere between 8-12 months. However, the

superior clientele of Indian pipe players is skewed towards WGS, Jindal and PSL, giving

them an edge in bagging niche orders.

Other pipe producers in the sector appear undervalued, but scale and global presence

are required for a rigorous valuation. India’s other large pipe makers are still very small,

have no focus on becoming global leaders and do not perform well enough despite robust

demand in the sector. Several smaller pipe producers, including MSL and ISMT focus on

manufacturing seamless pipes, which face intense competition from Chinese players. There

are also concerns on sourcing of raw materials. We believe these companies too will start

giving good performance as they are augmenting capacities and plan to integrate backwards

in the years to come.

PSLCMP Rs. 372

Target Rs. 829

Recommendation BUY

Bloomberg Code PSLL IN

Market Cap (Rs .bn) 16.1

Jindal SawCMP Rs. 572

Target Rs. 1050

Recommendation BUY

Bloomberg Code SAW IN

Market Cap (Rs. bn) 35.1

Man IndustriesCMP Rs. 93

Target Rs. 192

Recommendation BUY

Bloomberg Code MAN IN


ISMTCMP Rs. 51

Target Rs. 140

Recommendation BUY

Bloomberg Code INSS IN


Maharashtra SeamlessCMP Rs. 307

Target Rs. 488

Recommendation BUY

Bloomberg Code MHS IN


Ratnamani Metals & TubesCMP Rs. 852

Target Rs. 1450

Recommendation BUY

Bloomberg Code RMT IN

Market Cap (Bn US$) 8.0

Welspun Gujarat Stahl RohrenCMP Rs. 363

Target Rs. 774

Recommendation BUY

Bloomberg Code WGS IN




In our view, the main risk for the Indian pipe industry is recent government intervention in

the form of export taxes and non-availability of raw materials locally. Raw materials

account for more than 65% of the cost for most pipe manufacturers with imports a major

source for LD pipes. With no major domestic capacity (except Welspun) coming up specifically

for API grade plates, companies will have to still depend on imports to fulfill their requirements.

In case of LD pipes most of the revenues are generated from exports (more than 75%),

where the government recently imposed 10% export tax which was later withdrawn. We

believe this duty has been rolled back forever, but the pressure on government to contain

inflation may lead to reimposition of the tax in the future, impacting the profitability of companies.

In case of such an unlikely action, we believe the players will be able to pass on at least 50%

of the duty to their clients for future orders.

We have done the sensitivity analysis only of LD players (excluding PSL) as most of their

revenues come from exports. For others, the export duty will have marginal impact on future

earnings as their export component is negligible.

Our analysis suggests the Indian pipe industry has substantial upside potential, with

investors tending to undervalue some of the producers. Though we do not expect major

producers’ share prices to double, but over the next 2-3 years these companies will not

disappoint investors. This is a conservative valuation: our forecast for selling prices is relatively

pessimistic and does not include the possibility of inherent upside of making better use of

their production capacity. We also believe that poor performance by some companies and

volatile raw material prices have contributed to skepticism among investors towards this

industry. But we think this will change.

We believe the top three players are likely to OUTPERFORM the basket, as they are the only

major pipe producers in the country to achieve global scales in capacity. By almost any

measure, LD pipes have better growth prospects, as the market for them is very large

compared to other grades of pipes. This has been seen in the performance of the companies

over last 2 years, but we believe that the future holds much better prospects than in the past.

Sensitivity Analysis

(Rs.Mn) FY09E FY10E FY09E FY10E FY09E FY10E

Export Sale Value 37,729 56,342 24,300 34,720 12,288 20,480

FOB Value 33,956 50,708 21,870 31,248 11,059 18,432

Export Duty 3,396 2,535 2,187 1,562 1,106 922

WGS Jindal Man

FY09E FY10E CY08E CY09E FY09E FY10E

Total Income 67,285 90,306 43,006 59,497 21,381 26,720

EBIDTA 10,110 16,392 4,593 7,972 1,590 2,472

% margin 15.0% 18.2% 10.7% 13.4% 7.4% 9.2%

Depreciation 1,485 1,650 749 892 242 294

Interest 2,273 2,434 1,129 1,211 390 415

PBT 6,352 12,308 2,715 5,869 959 1,763

PAT 4,129 8,000 1,955 4,226 633 1,164

Source : HDFC Sec. Research



EARNINGS WATCH - Pipes and Tubes

MIL WGSRL PSL JSL ISMT MSL Ratnamani

Share Price (Rs.) 92.7 362.7 371.9 571.9 50.9 306.8 851.8

Fully Diluted Equity (Rs.mn) 345.0 938.9 433.3 614.2 761.6 352.7 95.0

Face Value 5.0 5.0 10.0 10.0 5.0 5.0 10.0

No.of Shares (Mn.) 69.0 187.8 43.3 61.4 152.3 70.5 9.5

Mkt Cap. (Rs Bn.) 6.4 68.1 16.1 35.1 7.8 21.6 8.1

Mkt Cap. (US $ Mn.) 152.2 1,621.5 383.6 836.4 184.6 515.2 192.7

52 Week H/L (Rs.) 177/90 538/174 588/242 1225/516 140/47 675/259 1508/652

Outstanding Order Book (Rs.Bn) 14.0 47.0 62.0 44.0 3.0 5.0 5.3

SALES (Rs. Mn.)

FY07 11,331.0 26,834.0 15,998.5 64,756.9 11,971.4 13,947.3 5,712.5

FY08E 15,509.1 40,104.0 22,110.7 41,456.2 11,916.6 14,988.4 7,929.8

FY09E 20,881.3 66,935.0 36,845.7 57,947.2 16,677.8 20,428.9 12,499.4

FY10E 26,220.3 90,256.0 58,947.2 N.A 21,227.8 25,563.2 17,490.0

EBITDA (Rs. Mn.)

FY07 1,318.0 3,332.0 1,555.8 8,128.5 2,649.3 3,420.9 1,277.1

FY08E 1,887.9 6,529.0 2,172.0 6,779.8 2,069.8 3,090.4 1,768.0

FY09E 2,696.2 13,505.5 3,786.3 9,534.8 2,922.0 4,417.1 2,661.5

FY10E 3,393.2 18,927.4 6,301.5 N.A 3,820.7 5,553.0 3,557.5

NET PROFITS (Rs. Mn.)

FY07 553.0 1,426.0 652.4 2,822.7 1,301.3 2,353.0 641.8

FY08E 882.6 3,514.0 1,021.8 3,565.5 1,081.9 2,214.7 998.0

FY09E 1,362.7 6,368.6 1,839.0 5,386.9 1,458.3 3,092.1 1,498.8

FY10E 1,771.9 9,680.8 3,510.0 N.A 2,335.4 3,843.7 2,077.6

EPS (Rs.)

FY07 20.8 7.6 20.4 55.2 9.0 35.2 71.3

FY08E 16.6 18.7 23.0 63.7 7.4 31.4 110.9

FY09E 19.7 33.9 80.0 87.7 9.6 43.8 158.6

FY10E 25.7 51.6 90.9 N.A 15.3 54.5 219.8

EV/EBITDA (X)

FY07 5.5 18.7 12.0 4.8 5.7 5.7 7.4

FY08E 4.2 12.1 9.6 5.4 7.4 5.6 5.4

FY09E 3.1 5.9 5.7 4.2 5.0 3.8 3.4

FY10E 2.2 4.0 3.5 N.A 3.5 2.8 2.1

DPS (Rs.)

FY07 1.8 1.2 6.1 8.0 0.6 6.1 5.0

FY08E 2.0 1.5 7.0 7.2 - 5.5 6.0

FY09E 2.0 3.0 8.0 7.7 1.0 6.5 7.0

FY10E 2.0 4.0 9.0 N.A 2.0 7.0 8.0

DIVIDEND YIELD (%)

FY07 1.5 0.3 1.8 1.3 1.0 2.0 0.5

FY08E 1.7 0.4 1.9 1.2 0.0 1.8 0.5

FY09E 1.7 0.8 2.2 1.3 1.7 2.2 0.6

FY10E 1.7 1.0 2.4 N.A 3.3 2.3 0.7

P/E (X)

FY07 8.9 35.6 19.4 10.4 5.6 9.2 11.9

FY08E 5.6 20.7 15.8 9.0 9.1 9.6 7.7

FY09E 4.7 10.7 8.8 6.5 5.3 7.0 5.4

FY10E 3.6 7.0 4.6 N.A 3.3 5.6 3.9

*JSL DEC Year END (15 months for FY07)Source : HDFC Sec. Research



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Swot Analysis

S

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Weaknesses

• Tight demand-supply situation for raw materials of all pipes

• Working capital-intensive industry as projects are of long duration – Average execution

period is 9-12 months.

• Higher dependence on government spending and thrust on infrastructure

development

• The large number of unorganized players in certain types of pipes – ERW & Water

Pipes.

Strengths

• Cheapest mode of transport for liquids and gases – Rs.1.8/KM vs Rs.3.5/km by road

• Indian players globally cost competitive – cost of manufacturing 25% lower

• With proper installation, pipes have long useful lives

• Available in various types and sizes to meet specific end user needs

• Indian companies have won accreditations from major oil and gas companies

• Strong order book positive for pipe companies – Average order book is 1.2x FY08E

turnover.

Opportunities

• Low pipeline penetration in India compared to developed nations – less than 30%

compared to 60% in USA and 65% in France

• Government thrust on infrastructure development, irrigation & water supply

• Rising oil and gas exploration activities

• Oil and gas transport projects

• City gas pipe projects

• Low level of sanitation and drainage facilities

• Ageing pipelines need replacement – Expected replacement demand in excess of 1

mn kms.

• Higher exports due to the proximity to the Middle East which accounts for significant

oil and gas capex in thenext 3-5 years,

Threats

• Foreign exchange risks due to high imports and exports – Exports are more than 70%

for some players.

• Competition from China – restricted to seamless and ERW pipes.

• Slowdown in world economy will reduce demand for oil and gas

• Rising steel prices may impact margins



Industry Matrix

*Avg EDITDA/ton for the sector

Jindal Saw Man Industries PSL WGSRL Mah Seamless ISMT Total

Capacity (tonnes)

2007 1,250,000 600,000 1,100,000 930,000 550,000 158,000 4,588,000

2008E 1,400,000 1,000,000 1,175,000 1,000,000 550,000 158,000 5,283,000

2009E 2,000,000 1,000,000 1,475,000 1,300,000 600,000 475,000 6,850,000

2010E 2,000,000 1,000,000 1,475,000 1,750,000 700,000 475,000 7,400,000

CAGR (%) 18.4%

Production (tonnes)

2007 644,101 246,424 271,075 500,969 314,149 408,532 2,385,250

2008E 1,038,666 330,000 329,000 650,000 343,000 391,000 3,081,666

2009E 765,000 420,000 545,750 850,000 410,000 440,000 3,430,750

2010E 1,100,000 500,000 811,250 1,050,000 500,000 510,000 4,471,250

CAGR (%) 20.5%

EBITDA (Rs.Mn)

2007 4,099 1,318 1,514 3,285 3,421 2,649 16,286

2008E 8,128 1,888 2,172 6,529 3,090 2,101 23,909

2009E 6,780 2,696 3,786 13,506 4,417 2,922 34,107

2010E 9,535 3,393 6,302 18,927 5,553 3,821 47,531

CAGR (%) 41.0%

EBITDA/Tonne (Rs)

2007 6,364 5,348 5,584 6,557 10,889 6,485 6,871

2008E 7,826 5,721 6,602 10,045 9,010 5,373 7,429

2009E 8,863 6,420 6,938 15,889 10,773 6,641 9,254

2010E 8,668 6,786 7,768 18,026 11,106 7,492 9,974

CAGR (%) 15.9%



June 20, 2008 Page 10

Porter's Five Forces Model

Barriers To Entry

Low to Medium

Capital requirement low, however

High working capital intensive

industry.

Gaining accreditations and

stringent quality norms restrict-

new entrants.

Bargaining Power of Suppliers

Medium

Tight demand- supply situation

in steel, cement & PVC industry.

Hence pipe companies have little

say.

However, some pipe companies

are integrating backward to

secure RM supplies.

Inter-firm Rivalry

Medium

With higher demand, huge

opportunities exist for players.

A large number of unorganized

players cater to the domestic

market creating competition.

Bidding process for winning

contracts leads to competition

among players.

Bargaining Power of Buyers

Low

For use in critical applications of

oil and gas transport, E&P activity,

very few players exist. Also with

increasing economic activities,

their order book size is

increasing.

However, many players exist in

less critical applications of

domestic transport, where

competition is high.

Threats of Substitutes

Low

Traditional modes of

transport like rail and road

are costlier.


June 20, 2008 Page 11

Investment Case

Tight Demand-Supply position

Line Pipe

We are more bullish on the line pipe segment going forward compared to the seamless

variety, mainly on account of the tight demand-supply position in the segment and the lack of

Chinese competition.

In line pipes too ERW finds applications for less than 20” needs. But as per industry estimates

more than 90% of the projects planned are of larger diameter pipes(more than 20”) where

LSAW & HSAW pipes have an edge.

The total likely installed capacity in the line pipe (large diameter) segment would be around

25 mn tons annually, based on the corresponding tonnage capacity available. The average

utilization level is around 60% of this capacity implying a production of 15 mn tons per

annum, compared to an estimated demand of 16.6 mn tons p.a. There is likely to be a tight

demand supply scenario in the line pipe segment going forward, until new capacities are

added.

The expected replacement demand for line pipes is much larger than for new pipes (approx

6-7 times). We believe, even if the companies were to add capacities going forward, demand

supply scenario is likely to be tight as more and more projects are being planned globally.

The line pipe demand would be huge and the global capacity available will still not be

enough to cater to the sort of expansion being envisaged.

Global Demand-Supply Scenario

Annual Capacity (in tons) Line Pipe

LSAW 14,941,000

HSAW 10,119,000

Total Line Pipe Capacity 25,060,000

Utilisation Level (%) 60

Expected Annual Production 15,036,000

Total Global Demand Kms (3-4 Years) 232,000

Approx Conversion per Km 250

Expected Line Pipe Demand (3-4 Year) 58,000,000

Expected Annual Demand (3.5 Years) 16,571,429

Seamless

It is difficult to estimate the overall demand for seamless tubes mainly due to the wide variety

of user industries for the product. Seamless tubes, apart from OCTG, are also used in

project businesses, which account for more than 50% of overall seamless tube production.

We expect sustained demand for seamless tubes as various oil companies are into

exploratory drilling in areas totaling about 1 mn sq ft. In addition, development drilling is likely

in the blocks where oil and gas have been found.

In addition, huge investment is expected in power, automotive and engineering industries

where seamless tubes (for boilers) have major application. The growth in this sector is

expected to be around 20% per year for next 5 years.



June 20, 2008 Page 12

Product 2000 2001 2002 2003 2004 2005 2006 2007 CAGR (%)

OCTG

Seamless 4,567 5,278 4,511 4,943 6,183 7,026 6,920 7,790 7.9%

Welded 2,348 2,628 2,367 2,748 2,445 2,945 3,081 3,260 4.8%

Total 6,915 7,906 6,878 7,691 8,628 9,971 10,001 11,050 6.9%

LINEPIPE

Seamless 1,933 2,099 1,843 1,824 2,416 2,694 2,843 2,976 6.4%

ERW 4,125 4,449 4,298 4,410 4,945 5,103 5,368 5,563 4.4%

LSAW 5,122 6,201 6,281 6,443 8,073 8,209 8,857 9,410 9.1%

HSAW 2,019 2,155 2,077 2,262 2,781 2,762 3,024 3,166 6.6%

Total 13,199 14,904 14,499 14,939 18,215 18,768 20,092 21,115 6.9%

PLATE

Captive - - - - 2,990 3,016 2,732 2,796 -2.2%

Merchant - - - - 5,150 5,451 6,401 6,908 10.3%

Total 8,140 8,467 9,133 9,704 6.0%

COIL

Captive - - - - 1,952 1,998 2,429 2,569 9.6%

Merchant - - - - 7,888 8,626 9,267 9,646 6.9%

Total 9,840 10,624 11,696 12,215 7.5%

Global API Pipe and Feedstock Mix (000 tons)

Historically, line pipe and OCTG production have grown at similar rates (2000-07E) mainly

due to strong oil prices. However, we believe that in case of OCTG, the current global supply

is strong enough to address demand growth due to increasing oil prices, but in the case of

line pipes, significant capacity needs to be added to reach an over supply scenario. A close

look at capacity additions globally reveals that it is skewed towards line pipe capacity additions.

Natural gas: Increased share to augment line pipe growth

Natural gas has outpaced other forms of energy and has grown at a 10-year CAGR of 2.4%,

outgrowing the total energy demand of 2.1%. This has resulted in the proportion of natural

gas in the total energy consumption basket increasing from 17% in 1980 to 22.6% in 2030E.

This creates the need for larger gas infrastructure globally.

World Energy Share

Source : Industry, HDFC Sec. Research

Source : IEA

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Coal Oil Gas Nuclear Hydro Biomass& Waste

Others

1980 2004 2010 2015 2030


June 20, 2008 Page 13

Strong API Trade: Regional Imbalances

Severe imbalances in demand and supply still persist in the current market for API pipes.

These imbalances occur because regions with large oil reserves often have very little pipe

production capacity. Conversely, there are regions where pipe production capacity far exceeds

local requirements. As a result API pipe is traded heavily across the globe.

Global trade in API pipes and tubes has increased year-on-year for the last seven years, as

higher oil and gas prices have increased global demand. The largest growth has taken

place over the last three years, with global trade increasing by 64% since 2004, an annual

average growth rate of 18.2% for the period.

Both OCTG and line pipes have seen consistent growth in trade over the last three years,

with trade in OCTG increasing by 70% in the three years since 2004, and 60% for line pipes

in the same period. The fact that trade in API pipes and tubes has increased by double-digit

rates over the last three years was a direct consequence of oil price rise over the same

period. Indeed, oil prices reached over US$70/bbl in each of the last three years, taking

prices to their highest point since the oil crises of late 1970.

Global API Trade

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

E

'000

ton

nes

OCTG Line Pipe



June 20, 2008 Page 14

Industry Overview

The industry classified for pipes and tubes for our study includes

• Oil Country Tubular Goods (OCTG) Seamless & ERW.

• Line Pipes (LSAW/HSAW/ERW).

• Flat-rolled steel feedstock (Plate & Coil).

The basic distinction between OCTG and line pipe is one of end-use. OCTG consists of oil

and gas well tubing and casing, as well as drill pipe. Line pipe is fabricated into pipelines for

the transportation of oil, gas, and petroleum products. Together, these two families of products

are termed “API grade” pipes, because the American Petroleum Institute provides the

internationally accepted quality benchmark for such products and awards its certification to

most producers worldwide of these pipes.

Apart from API products, pipe mills globally may also produce a portion of their output as

pipes of different quality and for differing end-uses, from structural pipe to line pipe for the

transportation of water.

API Certifications

The primary certification obtained by most API product manufacturers across different products

includes.

• API 5CT for OCTG Tubing and Casing.

• API 5D for Drill Pipes.

• API 5L for Line Pipes.

Beyond the basic API 5CT, 5D or 5L standards, there are a variety of quality grades recognised

by the market, an increasing share of which have been developed by leading manufacturers

of API tubular products. The standard grade range for both OCTG and line pipes is based on

a number denoting the yield strength in thousands of pounds per square inch (ksi). Thus,

common OCTG grades range from H-40 to P-110, while line pipes range from X42 to X80,

apart from newer higher-strength grades such as X100 and X120.

OCTG

By application, OCTG subdivides into tubing, casing and drill pipes. Most mills manufacture

both tubing and casing.

Tubing is used to conduct the extracted oil and gas to the surface after drilling, while casing

provides an outside protection cover. Hence tubing has the smaller diameter. The common

steel industry definition is to classify as tubing OCTG up to 4.5", although some offshore oil

operators see the cut-off at 5".

Casing encompasses diameters above this, extending up to around 20" for the larger-

diameter OCTG. Drill Pipe is used to transmit rotary motion to the drill bit, and is the only type

of OCTG that is reusable. It is produced by a small number of mills and accounts for well

under 5% of overall OCTG output.

For casing and tubing, welded pipe competes with seamless, offering a generally lower cost

product, despite welded OCTG’s increased acceptance by the oil industry. Seamless products

still account for approximately two-thirds of the OCTG market. Unlike casing and tubing, drill

pipe is exclusively seamless because of the much greater strength required of this product.


June 20, 2008 Page 15

Line Pipe

Small Diameter

A very approximate distinction can be made between a “small-diameter” line pipe market,

up to around 20”, and the “large-diameter” market extending from 20” up to around 80”.

Broadly speaking, the two key types of pipes most suitable for the small-diameter segment

are seamless line pipes and electro-resistance welded (ERW) line pipes. It is worth noting

that ERW is also the manufacturing method used to make welded OCTG, and in a similar

way a seamless pipe mill is likely to be active both in OCTG and line pipe manufacture. The

presence of ERW and seamless pipes begin to decrease as the diameter rises above 20”

because of constraints inherent in the manufacturing method, and also because in the

welding of these pipes, coil width sets the limit on the diameter of the pipe. Until relatively

recently, 16” was the upper limit for ERW pipes, but the increasing availability of wide coils

has prompted an upgrade in ERW diameter capabilities.

Currently, many ERW pipe mills worldwide can produce to diameters of 20”; some mills’

range extend to 24” and in two cases– JFE in Japan and Hysco (formerly known as Hyundai

Pipe) in South Korea – pipes can be produced up to 26”. To further stress upon the absence

of clear boundaries, one of the key large diameter pipe technologies, LSAW, can be used to

make pipes as small as 16”. Indeed, within a crossover band of diameters around 20” all

seamless and welded pipe techniques can compete.

Large Diameter

Most of the large diameter market for over 20” falls under two different welded pipe-

manufacturing techniques. The first of these is longitudinal submerged-arc welded (LSAW)

pipe, which uses reversing mill plate as the feedstock. The alternative is Spiral Welding

(HSAW), which gets around the limitations of coil width by welding the coil helicoidally.

LSAW pipe consists in turn of three competing technologies. By far, the most widely used to

date is the “UOE” process, denoting three major steps in the pipe’s forming, namely the

bending of the plate into a U shape, then a roughly circular section, with welding prior to the

pipe’s final expansion. The UOE process is considered the most efficient operationally, but

has relatively high capital costs and thus requires a minimum operating scale of some

500,000 tpy.

UOE thus competes as a solution with the Three-Roll-Bending Process, which is a popular

choice in some Asian and Middle Eastern countries. Roll-bending’s lower fixed costs allow

economical operation at much lower volumes than for UOE. A third, and much less widely

used alternative is Press Bending, a powerful but low-throughput process whose niche is to

be found in the manufacture of technically difficult sections of pipe.

Spiral-welded’s competitive position relative to LSAW, is in some ways akin to welded OCTG’s

to seamless. Coil-based manufacture of spiral-welded pipe can enjoy a cost advantage over

LSAW, which requires discrete plates. But for high pressure (typically offshore) applications,

LSAW pipe is generally preferred on performance grounds, but even so there is a segment

of the market, particularly for onshore oil and gas pipelines, where the two types of pipes can

compete. Even in such applications, however, the perception of some project specifiers that

spiral-welded’s larger seam area represents an increased risk will tend to offset its cost

advantage. There is no universally accepted method for measuring this risk, and regional

and company preferences will heavily influence the choice of material that is eventually used.


June 20, 2008 Page 16

LSAW vs. HSAW

So what will it be? Longitudinal welded (LSAW) or spiral welded (HSAW)? According to most

product users, LSAW is still the king. It’s made from plate, it’s thicker, and therefore can

handle the higher pressures often needed for natural gas pipelines. And many believe that

there will be more demand for natural gas than oil in the long term, especially if oil stays at

$100 a barrel.

The problem, of course, is that LSAW is much more expensive than HSAW. Let’s say

commodity plate sells on an average for about $1,400 a ton. HSAW pipe is made from hot

rolled coil, which sells for roughly $1,100 a ton.

HSAW has much thinner walls than LSAW, which increases the risk of ruptures and other

problems. But to reduce costs, some are willing to take on those added risks. And there have

also been reports that safety waivers could be approved for some new pipeline projects. By

reducing pressure requirements, the waivers may in effect allow producers to use HSAW

instead of LSAW for some pipeline projects.

HSAW also has other advantages. It can be made with a larger outside diameter than LSAW,

which means it can push more product through. And it can be made in longer sections. With

lower costs and potentially relaxed regulations, HSAW appears to be gaining traction globally.


June 20, 2008 Page 17

Overview of Global Capacities

Pipes

Potential capacities for API pipe production in 2007 are given in the following table and in

mill-by-mill break-up at the end. The numbers refer to total installed capacities for the

production of pipes by a given manufacturing technique, for instance seamless. These

capacities may be used for the manufacture of API or non-API grade pipes, and this output

mix will vary depending on market conditions.

On an average, seamless and LSAW mills focus a greater share of their total output on API

applications, while ERW and spiral-welded mills, with some exceptions, are estimated to

produce more than half their output as non-API grades (e.g. pipe for water) even though they

hold the API monogram. The summarized capacities show that a relatively high concentration

of spiral-welded pipe capacity is in evidence in much of Asia with India’s share being 16%.

Conversely, spiral-welded capacity is relatively scarce, with LSAW and HSAW ratio being

60% and 40% respectively.

By Region

15%

5%

1%

4%

16%

2%

10%18%

29%

Total Africa Total South AmericaTotal Middle East Total CISTotal Eastern Europe Total East AsiaTotal Western Europe Total North AmericaTotal Other World

By Product

29%

39%

13%

19%

HSAW LSAW ERW Seamless

Global API Capacity



June 20, 2008 Page 18

Region Capacity by Process % of Global Capacity

(in tons) Seamless ERW L-SAW Spiral Total OCTG & ERW Line Pipe

USA 3,042,000 5,691,500 1,500,000 0 10,233,500 15.8% 6.0%Canada 250,000 1,150,000 200,000 600,000 2,200,000 2.5% 3.2%Mexico 780,000 495,000 450,000 80,000 1,805,000 2.3% 2.1%Total North America 4,072,000 7,336,500 2,150,000 680,000 14,238,500 20.6% 11.3% Germany 1,345,000 420,000 1,275,000 525,000 3,565,000 3.2% 7.2%France 855,000 180,000 480,000 100,000 1,615,000 1.9% 2.3%Italy 1,025,000 1,080,000 1,200,000 220,000 3,525,000 3.8% 5.7%UK 40,000 550,000 330,000 0 920,000 1.1% 1.3%Spain 420,000 0 0 85,000 505,000 0.8% 0.3%Austria 320,000 0 0 0 320,000 0.6% 0.0%Belgium & Luxembourg 0 0 0 100,000 100,000 0.0% 0.4%Finland 0 250,000 0 100,000 350,000 0.5% 0.4%Greece 0 570,000 0 300,000 870,000 1.0% 1.2%Total Western Europe 4,005,000 3,050,000 3,285,000 1,430,000 11,770,000 12.7% 18.8% Japan 2,371,000 4,059,000 1,787,000 751,000 8,968,000 11.6% 10.1%South Korea 0 2,641,000 175,000 175,000 2,991,000 4.8% 1.4%China 3,890,000 2,965,000 1,600,000 1,570,000 10,025,000 12.4% 12.6%Taiwan 0 412,000 0 60,000 472,000 0.7% 0.2%Indonesia 170,000 313,000 200,000 475,000 1,158,000 0.9% 2.7%Malaysia 0 0 0 160,000 160,000 0.0% 0.6%Total East Asia 6,431,000 10,390,000 3,762,000 3,191,000 23,774,000 30.4% 27.7% Croatia 200,000 0 0 0 200,000 0.4% 0.0%Czech Republic 510,000 0 0 45,000 555,000 0.9% 0.2%Slovakia 170,000 15,000 0 50,000 235,000 0.3% 0.2%Poland 100,000 15,000 0 30,000 145,000 0.2% 0.1%Romania 830,000 0 44,000 0 874,000 1.5% 0.2%Total Eastern Europe 1,810,000 30,000 44,000 125,000 2,009,000 3.3% 0.7% Russia 3,127,500 4,952,000 950,000 0 9,029,500 14.6% 3.8%Ukraine 700,000 900,000 1,400,000 240,000 3,240,000 2.9% 6.5%Azerbaijan 346,000 0 0 0 346,000 0.6% 0.0%Georgia 400,000 0 0 0 400,000 0.7% 0.0%Total CIS 4,573,500 5,852,000 2,350,000 240,000 13,015,500 18.8% 10.3% Iran 120,000 880,000 500,000 390,000 1,890,000 1.8% 3.6%Saudi Arabia 0 240,400 480,000 325,000 1,045,400 0.4% 3.2%Kuwait 0 0 0 130,000 130,000 0.0% 0.5%Total Middle East 120,000 1,120,400 980,000 845,000 3,065,400 2.2% 7.3% Brazil 540,000 450,000 300,000 140,000 1,430,000 1.8% 1.8%Argentina 850,000 534,000 70,000 10,000 1,464,000 2.5% 0.3%Venezuela 154,000 840,000 100,000 0 1,094,000 1.8% 0.4%Colombia 0 150,000 0 0 150,000 0.3% 0.0%Total South America 1,544,000 1,974,000 470,000 150,000 4,138,000 6.4% 2.5% Algeria 700 0 0 36,000 36,700 0.0% 0.1%South Africa 100,000 100,000 0 160,000 360,000 0.4% 0.6%Egypt 0 0 0 50,000 50,000 0.0% 0.2%Total Africa 100,700 100,000 0 246,000 446,700 0.4% 1.0% Turkey 0 1,200,000 0 910,000 2,110,000 2.2% 3.6%India 740,000 525,000 1,900,000 2,105,000 5,270,000 2.3% 16.0%Pakistan 0 16,000 0 182,000 198,000 0.0% 0.7%Bangladesh 0 30,000 0 0 30,000 0.1% 0.0%Australia 0 350,000 0 0 350,000 0.6% 0.0%New Zealand 0 0 0 15,000 15,000 0.0% 0.1%Total Other World 740,000 2,121,000 1,900,000 3,212,000 7,973,000 5.2% 20.4% Total World 23,396,200 31,973,900 14,941,000 10,119,000 80,430,100 100.0% 100.0%

Installed API Capacity



June 20, 2008 Page 19

Capacity Investments

With the exception of North America, API pipe capacity additions are more in LSAW pipes with

the product attracting the most investment. By region, the principal investments include:

North America - Expected capacity addition 1.7 mn tons

Berg Steel, part of the German Europipe, is to build a new large diameter spiral-weld

manufacturing unit in Mobile, Alabama. The new company, Berg Spiral Pipes, is due to be up

and running by mid 2008, at a cost of US$575m. The facility will have the capacity to produce

200,000tpy of 24 to 56 inch diameter pipes, with a maximum length of 80 feet.

IPSCO is set to expand its large diameter pipe mill at its Saskatchewan mill, Regina at a cost

of US$53m. Due on stream in mid 2008, capacity will be increased to 125,000tpy, and will

include a pipe forming mill and finishing equipment. At the same time, the company has also

announced its intention to increase its spiral weld capacity to 500,000tpy.

US Steel is set to form a spiral-weld producing joint venture in California. With annual

capacity expected at 300,000tpy, the new joint venture will be able to produce pipes of 24 to

64 inch diameter, with production expected to start in 2008.

It is expected that around 1 million tons of additional HSAW capacity will be added by Indian

manufactures Welspun, Man and PSL. These are all green field capacities and are expected

to start operations between mid Sept 08 and Sept 09.

Latin America - Expected capacity addition 0.7 mn tons

Tubos Soldados Atlantico (TSA), a joint venture led by Europipe, has began operating a

90,000tpy welded pipe mill in South Eastern Brazil. The joint venture between Europipe, V&M

do Brasil and Interoil is expected to increase the mill’s capacity to 180,000tpy, which will

include the production of SAW pipes.

French producer Vallourec, together with Sumitomo of Japan, is set to take part in a joint

venture in Brazil. Based in Minas Gerais state, the mill is expected to cost US$600m, and will

have the capacity to produce 600,000tpy.

Europe - Expected capacity addition 0.2 mn tons

A joint venture, Borusan Mannesmann, between Turkish company Borusan and Germany’s

Mannesmann Röhrenwerke, is installing a 50,000tpy spiral weld tube line in Albacete,

Spain. The equipment will come from a Europipe operation in Jouef, France, which was shut

down in March 2004. The mill will be transferred to Spain, where it will produce 100,000tpy, at

a cost of €15m.

In Italy, Arvedi Tubi Acciaio (ATA) plans to add 100,000tpy to its welded capacity at its Cremona

site. At a cost of €40m, the new capacity is due on line by mid 2008, and will produce 12 inch

diameter pipes.


June 20, 2008 Page 20

Asia - Expected capacity addition 0.7 mn tons

Chinese producer Shandong Lubao, a Baosteel subsidiary, is due to start building a

500,000tpy seamless pipe mill this year. The new mill, Shandong Lubao Steel Pipe, is

expected to produce OCTG and boiler pipes, among other commercial pipes, with diameter

range of 6 to 17 inches.

In Japan, Sumitomo Metal Industries (SMI) has announced plans to invest US$85m at its

Kashima works in order to prepare a system for the mass production of ultra high strength

steel pipes. Due to begin production in 2011, the company intends to supply pipes for an

increasing share of gas transportation projects.

Middle East - Expected capacity addition 1 mn tons

Jubail Energy Services Company of Saudi Arabia, is set to build the country’s first seamless

pipe plant in Al Jubail. With a planned capacity of 400,000tpy, the mill will be able to produce

pipes of 5 to 14 inch diameter. With production due to start in 2008, the plant will include a

heat treatment line, a finishing line and a coupling workshop.

Arcelor Mittal has signed a joint venture with the Bin Jarallah Group of companies in Saudi

Arabia for the construction of a seamless tube mill. With annual capacity of 500,000tpy, the

company will concentrate on OCTG products, and will have the capacity to produce 4 to 14

inch pipes. Due to start production in 2010, the project is an attempt by Arcelor Mittal to tap

into the Middle East market.

India - Expected capacity addition 1.7 mn tons

Indian Seamless Metal Tubes (ISMT) is planning a US$55m expansion project at its

Maharashtra facility. Set to increase capacity by 320,000tpy, the new capacity, expected to be

operational by the end of 2008, will make the company India’s largest producer.

Maharashtra Seamless is adding 400,000 tons of seamless capacity over the next 12-18

months. This includes the Romanian acquisition of 200,000 tons.

Jindal Saw, Welspun Gujarat, Man Inds each are adding capacity anywhere in the range of

300,000 – 400,000 tons of HSAW/LSAW, which are slated to commence operations by

H2CY08.


June 20, 2008 Page 21

Feedstock (Plate & Coil)

The American Petroleum Institute does not award a monogram to certify production of flat-

rolled feedstock (Plate & Coil) for API 5L or API 5CT pipes. The flat-rolled mills produce hot-

rolled strips or plates. A percentage of overall production will then be of API line pipe or OCTG

grade. Actual production depends on the production levels of welded pipes. As per industry

estimates, for an average configuration strip mill capable of API quality production, actual

output in these grades would typically not exceed 5% of the total gross HR coil output.

For plate mills, the assumed limits to API grade output will be the following:

• For mills known to be ideally equipped for line pipe grades (controlled rolling and

accelerated cooling), a maximum of 40% of total plate production will be the upper limit

for API grade output.

• For plate mills known to lack controlled rolling and accelerated cooling facilities, API

grade output has an upper limit of 10% of total production.

By some estimates, plate demand is expected to grow at about three percent a year. And

there aren’t many API/Heavy Plate grade plate producers globally. Driving that demand is not

only pipes and tubes but also other energy applications like drill rigs and windmills. Wind

mill towers, in particular, consume enormous amounts of plate and represent a strong

growth market.

Heavy equipment and transportation—such as railcars and barges—also account for a big

chunk of plate demand. Freight costs are spiraling in part because there does not seem to

be enough tankers out there. In South Korea, for example, most plates produced go into

shipbuilding and not into pipe markets.

And infrastructure demand in the developing world is booming. It is booming not only in

obvious places like India, China and Russia but also in Vietnam and formerly war-torn

countries such as Serbia and Croatia.

Infrastructure demand is also expected to pick up in the U.S., where the Minneapolis bridge

collapse will probably put more pressure on politicians to spend more and spend it faster.

And of course it’s not just the price of plate that is increasing. Upstream raw material costs

are also rising with global demand, especially demand from China. Iron ore prices are

expected to increase by as much as 20 percent to 30 percent over the next year. Coking coal,

scrap, alloy and electricity costs are also predicted to increase.

Mills may absorb smaller raw material increases of five percent or less. But most experts say

that if they get hit with increases of 30 percent or more, all bets are off. In fact, some argue that

the higher the cost increases, the more likely they are to be passed along to consumers.


June 20, 2008 Page 22

Global API Feedstock Capacity

Region API Capacities (TPA) % share

Plates Coils Plate Coil

USA 5,347,000 12,113,000 9.5% 8.4%

Canada 1,810,000 2,360,000 3.2% 1.6%

Mexico 503,000 1,290,000 ‘ 0.9%

Total North America 7,660,000 15,763,000 13.6% 10.9%

Germany 3,900,000 6,590,000 6.9% 4.6%

France 900,000 6,880,000 1.6% 4.8%

Italy 1,500,000 7,300,000 2.7% 5.1%

UK 1,050,000 3,820,000 1.9% 2.6%

Austria 470,000 1,840,000 0.8% 1.3%

Netherlands - 3,370,000 2.3%

Belgium - 1,500,000 1.0%

Finland - 2,300,000 1.6%

Total Western Europe 7,820,000 33,600,000 13.9% 23.2%

Japan 12,020,000 18,110,000 21.3% 12.5%

China 2,410,000 3,230,000 4.3% 2.2%

South Korea 5,638,000 10,460,000 10.0% 7.2%

Taiwan 1,330,000 9,750,000 2.4% 6.7%

Thailand 500,000 4,900,000 0.9% 3.4%

Indonesia - 1,700,000 1.2%

Total East Asia 21,898,000 48,150,000 38.9% 33.3%

Romania 2,300,000 2,100,000 4.1% 1.5%

Slovakia - 1,910,000 1.3%

Total Eastern Europe 2,300,000 4,010,000 4.1% 2.8%

Russia 3,370,000 13,560,000 6.0% 9.4%

Ukraine 6,320,000 - 11.2%

Kazakhstan - 2,400,000 1.7%

Total CIS 9,690,000 15,960,000 17.2% 11.0%

Iran 800,000 2,930,000 1.4% 2.0%

Arabia - 500,000 0.3%

Total Middle East 800,000 3,430,000 1.4% 2.4%

Brazil 2,104,000 4,150,000 3.7% 2.9%

Venezuela - 1,100,000 0.8%

Argentina - 1,950,000 1.3%

Total Latin America 2,104,000 7,200,000 3.7% 5.0%

Turkey 600,000 2,400,000 1.1% 1.7%

India 3,050,000 12,590,000 5.4% 8.7%

Australia 400,000 - 0.7%

Africa - 1,430,000 1.0%

Total Rest of world 4,050,000 16,420,000 7.2% 11.4%

Total World 56,322,000 144,533,000 100.0% 100.0%



June 20, 2008 Page 23

Plate and Coil capacity investments

Looking beyond 2007, a number of capacity developments are anticipated.

In Russia, Magnitogorsk Metallurgical Mill (MMK) is set to construct a thick plate mill. With

an intended capacity of 1.5m tpy, the company intends to target pipe producers for its thick

plate output, which is set to be operational by 2011.

Austrian steel producer Voestalpine Grobblech is to increase its clad plate capacity by a

third. The company is working with a number of pipe manufacturers, who expect rising

demand for clad plate in upcoming projects. The company’s capacity is set to increase to

30,000tpy, and is expected to be operational by 2009.

SMS Demag has won the tender to manufacture a plate mill for United Metallurgical Company,

based in Russia. The mill produces plates in sizes of 4.5 to 12.5 inches, up to X120 strength,

which will in turn be used to produce pipes of up to 56 inch diameter. The mill, which will have

a capacity of 1.2m tpy, will be operational by 2010, and will supply domestic pipe producers.

SMS Demag has also won a contract to construct a 2m tpy heavy plate mill for Chinese

producer, Minmetals Yingkou Medium Plate. The project will be based in Yinghou, Liaoning

Province and will have the capacity to produce heavy plate up to 17 inch thickness, with

production focusing on pipe grades as well as shipbuilding plate.

In the USA, Arcelor Mittal is to resume operations at its Gary plate mill. With the capacity to

produce plate up to 150 inches wide, the company announced intentions to resume

production on the back of strong demand for large diameter pipes, among other products.

South Korean steel producer Hyundai, has announced plans to produce a 8m tpy greenfield

project in Dangjin, South Korea. The first blast furnace is expected to be operational by 2010,

and with a 4m tpy capacity will supply the pipe market, among other domestic uses.

India: Jindal Steel & Power 1m ton capacity; 3.8 meters width; commercial production

began in August 2007. Essar Steel: 1.5m ton capacity; ~5 meters width; commercial production

likely to begin in 2008. Welspun Gujarat: 1.8m ton capacity; ~5 meters width; likely to go on

stream by April 2008.

Flat-rolled mills with ownership links to pipe mills

Plate Strip/Coil

Company Capacity (000 tpy) Company Capacity (000 tpy)

Jindal (USA) 910 CSI 1,630

Oregon Steel Mills 1,089 Lone Star (US Steel) 1,113

Dillinger Huttenw 1,800 Stelco 2,420

Salzgitter 1,200 Hylsamex 2,550

Liva 1,500 Salzgitter 2,960

Nippon Steel 4,600 Arcelor 31,800

JFE 5,600 Arvedi 800

Sumitomo Metal Industries 1,820 Liva 8,000

Rautaruukki 2,300

JFE 17,200

Nippon Steel 20,990

Sumitomo Metal Industries 5,000

Yieh Loong (CSC) 2,400

Krakatau Steel 2,900

USS Kosice (US Steel) 3,140



June 20, 2008 Page 24

Demand for API Pipe

OCTG

Forecasting demand for OCTG is aided by the fact that it is closely linked to oil and gas

extraction activity. The number of active oil and gas production installations, or “rigs”, both

offshore and onshore, is a good indicator of this activity. The “rig count” is published for most

regions and major countries, with the notable exception of the CIS. There is a strong correlation

between the reported rig count and estimated OCTG consumption. In turn, the rig count is

historically most closely correlated to the price of oil. Other things being equal, high-energy

prices will stimulate investment in new oil and gas field development, and low prices will

depress it. The relationship can break down at times of marked oil price volatility, as it

happened between 1999-2002, because the uncertainty caused by sharp oil price fluctuations

can deter investment even if average oil prices are high.

In the late 1990s, oil prices averaged below US$20/bbl, with an average Brent crude price of

US$16.50/bbl for the period 1997 to 1999. These low prices reflected significant available

production capacity of crude oil and, more significantly, the severe output indiscipline of

OPEC members. As a result, prices fell to as low as US$12/bbl in 1998. Since 2000, in

contrast, prices have been well above US$20/bbl throughout, with demand buoyed by a

mostly supportive global economy, with particularly strong consumption growth in China. At

the same time, potential supply has been held back by increased determination on the part

of key OPEC members to support prices, as well as declining spare capacity and political

instability from Venezuela to the Middle East.

However, since 2004 prices have rocketed, reaching well above US$60/bbl. While global

demand has remained relatively strong for the period 2004 to 2006, political instability has

also increased in oil-producing regions, culminating in the US led invasion of Iraq in 2004.

Initially intended to be a short, focussed operation, the war in Iraq is currently in its fourth year,

and has led to increased tension across the region as a whole, resulting in supply disruptions.

So far in 2008, oil prices have generally continued marching upwards, with prices in March

2008 above US$100/bbl.

Exploration vs Oil Price

0

500

1000

1500

2000

2500

3000

3500

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Wor

ld R

ig C

ount

0

10

20

30

40

50

60

70

80

Bre

nt C

rude

US

$/B

BL

Rigs Brent Crude (US$/bbl)



June 20, 2008 Page 25

OCTG Outlook

As a result of the recent boom in oil prices, OCTG consumption has consistently increased

year- on- year at the world level. The period since 2003 has seen annual average consumption

growth of 9.5%, with world consumption in 2007 at 11m tonnes, a record level. However,

given the close relationship between oil prices and OCTG consumption, the demand is likely

to be healthy going forward. Given the forecast for oil prices in excess of US$80, and therefore

the forecast of the rig count, we expect OCTG consumption to grow over next 3-4 years.

Over the forecast period, 2007 to 2011, we are expecting world OCTG demand to grow

moderately by around 2% between 2007-11E. Even though the growth rate is moderate,

world consumption of OCTG should remain at relatively high levels.

OCTG Consn vs Rig Count

0

500

1000

1500

2000

2500

3000

3500

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Rig

Cou

nt0

2000

4000

6000

8000

10000

12000

OC

TG

Con

sn (

'000

ton

nes)

Rig Count OCTG Consn

OCTG Consumption

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

E

2011

E

'000

ton

nes

Seamless Welded




June 20, 2008 Page 26

One of the competitive battlegrounds in the API pipe market is that between welded and

seamless OCTG, with the former’s advantage arising from lower average costs of

manufacturing, and the latter’s from a widespread perception that any weld in casing or

tubing (drill pipe is always seamless) would increase the risk of pipe failure. Seamless has

traditionally been the dominant product solution, but in the 1990s welded OCTG increased

its market share, owing in part to successful efforts to market the reliable performance of

welded pipe. Welded pipe’s share of the overall market for OCTG was around 30% in 2006,

having fallen from the record level of 38% seen in 1999. The share going forward most likely

will remain stable over the forecast period, with any cost advantages for welded pipe proving

insufficient to allow it to capture a substantially higher share of the market from seamless.

Regional product preferences remain entrenched, with the share of welded in the particularly

risk averse Middle East currently estimated to be only 16%, compared to almost 40% in

North America.

OCTG by Product Grade

There has undoubtedly been an underlying trend towards the customization of API pipe

qualities over the past several years, and pressure will continue for the development of

higher-performance products. Some higher-specification requirements, such as severe

pressure resistance, or low- temperature “arctic service” pipe, could however be reduced if

proportionately more exploration and production activity shifts to the (onshore) Middle East

region. However sour service pipe will be in high demand in the Middle East, owing to the

typical chemistry of crude oils in this region.

As per the recent long-term study by the International Energy Agency, an ever-increasing

share of oil production will come from the Middle East region, with its low oil development

costs and major reserves.

World Oil & Gas Production, 2010

Conventional57%

Acid Sour3%

Arctic6%

Heavy Oil7%

LNG10%

Tighy Gas3%

Deep Water14%

Source : IEA


June 20, 2008 Page 27

World Oil Supply (Million barrels per day)

2005 2010 2015 2030

North America 10 9 9 8

OECD Europe 5 4 3 2

OECD Australasia/pacific 1 1 1 0

Transition economies 11 14 15 16

China 4 4 4 3

Other Asia 3 4 3 3

Latin America 6 7 8 10

Africa 9 11 11 12

Middle East 33 36 41 55

Total 82 90 95 109

World Oil Supply (Regional share of world total)

2005 2010 2015 2030

North America 12% 11% 10% 7%

OECD Europe 6% 4% 3% 1%

OECD Australasia/pacific 1% 1% 1% 0%

Transition economies 14% 16% 15% 15%

China 4% 4% 4% 3%

Other Asia 4% 4% 4% 3%

Latin America 7% 8% 9% 9%

Africa 11% 12% 12% 11%

Middle East 41% 40% 44% 51%

Total 100% 100% 102% 100%

Line Pipe

Like the demand for OCTG, line pipe demand is also obviously correlated to oil and gas

market fundamentals, in this case to the construction of pipelines for the transportation of oil,

gas and refined products. However, the relationship is much more erratic than that between

energy prices and OCTG demand.

Since pipeline investments are major capital projects, it can take several years of negotiations

for a pipeline route to be agreed, and the deciding factors are often political, not economic.

Sustained high oil and gas prices will favour pipeline investments, but these cannot respond

to oil price fluctuations as readily as oil rig activity does. Nevertheless, in recent years, the

strong increase in energy prices has led to a sharp rise in line pipe consumption, as energy

companies have invested their profits in transportation infrastructure.

Line Pipe Vs Oil Price

0

5000

10000

15000

20000

25000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 20062007E

0

10

20

30

40

50

60

70

80

Line Pipe Cons Brent Crude

Source : IEA


(000

’ to

ns)


June 20, 2008 Page 28

Consumption of line pipe has been rising in recent years, with an increase in construction of

pipeline projects leading the way forward. The line pipe market did suffer from a drop in

consumption in 2000, due to a corresponding fall in pipeline construction projects in 2001.

However, since this decline, construction of pipelines has been increasing year-on-year in

line with increasing oil and gas prices.

Line Pipe: Best Yet to Come

Since 2003, the total line pipe market grew at annual average rate of 10.4%, compared to an

annual average rate of 2.4% for the period 1996 to 2003. However, the fact that growth has

been strong over the last few years is not surprising given the increases in the price of oil and

gas. Indeed, line pipe consumption has in fact grown rather conservatively compared to oil

prices, which have risen by an annual average rate of 31.4% for the three years since 2003,

dwarfing the growth seen in line pipe consumption. Looking ahead, we are expecting

consumption to increase further, given the number of planned and announced pipeline

construction projects and oil above US$ 100/bbl will stimulate newer projects.

A study by analysts Douglas-Westwood titled The World Onshore Pipelines Report 2008-

2012 forecasts that $180 billion will be spent on onshore pipeline projects worldwide

through 2012. The report estimates a 16% increase in the pipeline mileage installed from

2008-2012 compared to the historic five-year period 2003-2007. Nearly 75% of this

expenditure is expected to be spent in Asia, Eastern Europe, the FSU and North America.

Almost 70% is projected to be spent on gas pipelines. Asia stands out as the largest forecast

market — by length of pipeline construction — accounting for $42 billion of forecast capital

expenditure. The status of forecast pipeline projects shows a split between planning (47%),

under construction or ordered (40%) and approved (13%).

Much of this expected growth is based on modest increases in energy consumption. The

International Energy Outlook for 2007 suggests that world demand for primary energy will

increase by an average 2.3% per year for the period 2004 to 2010, before slowing to 1.8% per

year for the period 2010 to 2015.

The longer-term outlook: strongest for gas

Although decisions on individual pipeline projects are extremely unpredictable, the economic

fundamentals point to a sustained level of pipeline investment in the coming years because

of the forecast growth in inter-regional trade in hydrocarbons. In a continuation of recent

years’ trends, the strongest prospects are for larger-diameter natural gas pipelines. The

International Energy Agency forecasts a sharp increase in the requirement for imported

natural gas in major consuming regions such as North America, Europe and China. There

are relatively few physical connections between the major regional markets, but current and

planned pipeline projects are expected to rectify this situation.

Competition for the large-diameter market: LSAW vs HSAW

Although demand prospects are in principle supportive of large-diameter line pipe as a

whole, the degree to which the two key competing pipe solutions – LSAW and spiral-welded

– can capitalise on this may differ. This, in turn, has implications for the relative fortunes

respectively of RM plate and coil as the feedstocks for each of these two types of pipes.


June 20, 2008 Page 29

There is an ongoing debate in the industry about whether spiral-welded pipes, which enjoy

a production-cost advantage, has an unrecognised potential to compete for a wider range of

API pipeline projects. However strong evidences have not been found that suggests advances

in spiral-welding technology have fundamentally changed the competitive balance, which

largely rests on spiral-welded’s cost advantage versus its – real or perceived – lesser

reliability relative to LSAW. This standoff has capped spiral-welded’s market share to 25-

30% (15% overall line pipe) of the large diameter API line pipe over the past ten years, with

little sign of a durable breakthrough.

Just as in the seamless versus welded OCTG debate, there are entrenched regional

preferences, with US project specifiers traditionally distrustful of spiral-welded for energy

pipeline use, in contrast to the strong use of spiral-welded in the realisation of recent Turkish

and Chinese long-distance pipelines.

Leading North American plate, coil and pipe producer Ipsco has been making efforts to

promote the use within the USA of spiral-welded line pipe (which has always enjoyed a high

degree of market acceptance in Canada), also new capacities are added in HSAW. In North

America, forecasts of large-diameter line pipe consumption envisage an increase in spiral-

welded’s market share.

At a global level, however, forecasts see LSAW reasserting its dominance, with an increased

share of the large-diameter market by 2011. This view is partly informed by a belief that where

locally and economically available LSAW pipe becomes available, the average project specifier

will tend to opt for this type of pipe. This could have implications for markets like China, where

spiral-welded has traditionally had a strong position but recent LSAW pipe investments have

boosted the domestic supply base.

Line Pipe - Product wise

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007

LSAW HSAW ERW S/L



June 20, 2008 Page 30

Upcoming Pipeline Investment

Unprecedented demand for natural gas is helping fuel pipeline construction worldwide.

P&GJ’s (Pipeline & Gas Journal) latest worldwide survey figures that indicate 144,096 miles

of oil and gas pipelines are under construction and planned. Of these, North American

companies are planning, designing and building 46,072 miles of pipelines.

Algerian company, Sonatrach, and their Spanish counterparts, Spanish Gas Company

Natural, are constructing a pipeline to transport natural gas from Beni Saf, Algeria, to Almeria,

Spain at a cost of US$600m. The pipeline will be 466 miles, with a 24 inch diameter. The pipe

will have capacity to transport 1.5bcf/d of natural gas, and is due to be operational from 2009.

Australian company DBP is currently constructing a pipeline to link Carnarvon and Browse

Basins in Western Australia, to Perth. Due to be operational in 2008, the pipeline will supply

natural gas to residential, commercial and industrial customers. The pipeline is intended to

have a length of 354 miles, and will have a 24-inch diameter. The company is already

planning an expansion of the pipeline in 2010, which will add 87 miles of looping.

In Brazil, Transportadora Urucu-Manaus, a subsidiary of Petrobas, has ordered a new

pipeline to transport oil and gas between Urucuc and Manaus in Brazil. To be constructed by

Gasoduto Amazonia, a Skanska and Camargo Correa joint venture, the pipeline will be 166

miles in length, with a 20-inch diameter. Current expectations are that the project will be

operational in 2008.

The Canadian Gateway Project, currently being constructed by Enbridge Energy, will now

not be operational until 2012-2014. The company has announced that the project will be

delayed due to a slowdown in production allowing resources to be used elsewhere. Initially

due to be operationally in 2010, the pipeline will transport crude oil between Alberta and

British Columbia Canada.

Source : Pipe & Gas Journal


June 20, 2008 Page 31

Still in Canada, Kinder Morgan is planning to expand the Trans Mountain Pipeline. At a cost

of US$460m, the expansion, known as TMX-2, will consist of 308 miles of looping. The

expansion is split in two segments, the first from Edmonton to Edson, and the second from

Hargreaves to Darfield. The total expansion is set to consist of 308 miles, 157 miles at 36-

inch diameter for the first segment, and 151 miles in the second at 30/36-inch diameter. The

expansion will add 100,000b/d of capacity to the oil-transporting pipeline, and is expected to

be operational by 2009.

TransCanada is planning a further Canadian pipeline project intended to transport 435,000b/

d of crude oil. The Keystone Oil Pipeline, is expected to transport oil from Hardisty in Alberta,

Canada, to the US Midwest, Wood River and Patoka, Illinois. The pipeline, with a length of

1,845 miles and a with 30 inch diameter, is currently expected to be operational by mid 2010.

Pipelines for the transport of crude oil are not the only projects taking place in Canada. The

Pacific Trail Pipeline, a 50-50 joint venture between Galveston LNG and Pacific Northern

Gas Ltd., has been developed to transport natural gas from Kitimat, Canada, to Summit

Lake, also in Canada. At a cost of US$1.2bn, the project will be approximately 292 miles in

length, and have a diameter of 36 inches. The current expected date of completion for the

project is 2010, when it will have capacity to transport 1,000m cf/d.

Chinese company Sinopec, is planning a gas pipeline, which will carry gas from the East to

the West of the Pearl River Delta. Due to cost US$850m, the pipeline will have a length of 186

miles, with an operation date of 2010.

In Indonesia, the East Kalimantan to Central Java pipeline is being constructed. The pipeline,

with a length of 758 miles and a 42-inch diameter, will have the capacity to transport 1.1mm

cf/d of natural gas. The project is currently expected to be completed by 2010, and will run

from Kuala Badak, East Kalimantan, to Semarang, Central Java.

In Iran, the two main projects of note are the South Pars Gas Field Development Project, and

the South Pars to Gujarat pipeline. The South Pars Gas Field Development expansion

project is currently in the planning phase. It intends to take gas from the Parsian Gas Plant,

to South Pars. The project is currently intended to be 652 miles long, with a 56-inch diameter.

In Norway, Grasso AS is undertaking a pipeline connecting Karsto to Grenland. The pipeline

will transport gas, and will have a length of 287 miles, and a 24-inch diameter. The project is

expected to be operational by 2012, and will have the capacity to transport 7m bcu p/y of

natural gas, with the intention to supply gas to Scandinavian and Nordic countries.

In Russia, the Eastern Siberian Ocean Oil Pipeline will transport crude oil from Taishet, East

Siberia, to Nakhodka, Primorsky Krai, Russia. The pipeline will be 2,566 miles in length, with

a 48-inch diameter, at a cost of US$11bn. The pipeline will initially run to Taischet in 2008,

before being expanded to Nachoka on the Japan Sea. The object of the pipeline is to transport

oil from Russia to Asian and US markets.

Russia is also building a gas pipeline, connecting Russia to mainland Europe. The North

European Gas Pipeline (NEGP or Nord Stream) will extend 744 miles and have a 48-inch

diameter, running from Vyborg, Russia, to Greifswald, Northeast Germany, via the Baltic Sea.

Current predictions estimate capacity of 27.5bcm³ of natural gas, which will become

operational in 2010. The NEGP’s capacity is to reach 52bncm³ upon completion of a second

phase, due in 2013. The total cost of the project to Gazprom, the Russian gas company is

US$4.7bn.


June 20, 2008 Page 32

Key Future Projects

Company Name

USA

Kinder Morgan Energy Partners, Energy Transfer

Partners

Alyeska Pipeline Service Company

Kinder Morgan Energy Partners, Sempra Energy and

Conco Philips

Elpaso Natural Gas Company, Bear Energy

Spectra Energy

Canada

Trans Canada

Enbridge

Kinder Morgan Energy Partners

Galveston LNG, Pacific Northern Gas Ltd.

Asia Pacific

Reliance Industries

China National Petroleum Corp (CNPC)

Gov. of Western Australia

Sinopec

Negara (PT PGN)

GAIL

Dampier Bunbury Pipeline Co

PetroChina Co. Ltd.

Carin india /Ongc /J P Kenny

ONGC/Samsung

Middle East

National Iranian Oil Co.

Gulf Governments

Western Europe & EU Countries

Gasunie

PGNIG/Eneriginet

Plinacro

Ambo LL

Government of Kazakhstan

Govt. of Croatia,Romania, Serbia,Slovenia & Italy

Roseneft

TNK/BP

Transneft

Gazprom

NordStream AG

Calik Holding/ENI

Project Name/Location

Midcontinent Express Pipeline Project

Alaska Pipeline Project

Rockies Express Pipeline

Ruby Pipeline Project

Spectra Energy Pipeline Project

Key Stone Pipeline

Gateway Project

Trans Mountain Pipeline

Pacific Trail Pipeline

Pipeline Grid & Others

Second East-West Pipeline, Xinjiang Province to

Guangzhou, Myanmar - China Gas Pipeline

TransContinental Gas Pipeline

Puguang Gas Pipeline

Various Projects in Indonesia

Kakinada - Haldia, Haldia - Jagdishpur

Dampier Bunbury Pipeline

Nanning, China Lanzhou to human province china

Rajasthan, India

Kalmantan to Central Java

Iran-Pakistan-India Gas Pipeline

Trans-gulf Strategic pipeline persian gulf to oman

Gas Network

Baltic Gas Connector poland to scandanivia

Croatia to EU Member States

Burgas-Vlore pipeline bulgaria-macedonia-Albania

Kazaakhstan-china pipeline Atasu,kazakhstan to

xinjiang,china

Pan-european Crude pipeline

Krasnoyarsk, Siberia

East Siberia

E. Siberia-Pacific ocean oil pipeline Siberia to Asia Pacific

region

Nord Stream Pipeline Phase 2 Russia to germany

Tap Project

Length (Miles) Cost (US$ Bn.)

500 1.27

4,800 24

1,678 4.4

680 2

650 2.7

2,148 6

1,430 4

308 460 mn

292 1.2

6,200 N.A

5,479 10

1,827 3.2

1,055 1.23

1,638 2.58

1,140 N.A

725 1.5

N/A 1.5

212 800 mn

702 1.26

1,289 7

1,500 N/A

295 N/A

745 N/A

580 450

575 1.3

598 N/A

1555 3.9

435 N/A

54 N/A

1512 11.5

1071

560 6.5

748 12.6

340 1.5



June 20, 2008 Page 33

API Mill Capacity 2007

(In tons) Capacity by Process

Company Location S/L ERW L-SAW Spiral Total

USA:

American Steel Pipe Birmingham 500,000 500,000

Berg Steel (Europipe) Panama City, FL 400,000 400,000

California Steel Industries Fontana, CA 131,500 131,500

Camp-Hill Corp McKeesport, PA 240,000 240,000

Dura-Bond Industries Inc Steelton, PA 200,000 200,000

Grant Prideco Navasota 160,000 160,000

IPSCO (incl.Koppel Steel) Blytheville/Camanche 200,000 550,000 750,000

LTV Copperweld Youngstown, OH 462,000 462,000

Maverick Tube (Tenaris) Chesterfield, MS 1,650,000 1,650,000

Oregon Steel Napa, CA 160,000 400,000 560,000

Newport Steel Wilder, KY 570,000 570,000

North Star (V&M) Yougstown, OH 500,000 500,000

Northwest Pipe Portland, OR 70,000 70,000

Paragon Industries Sapulpa 120,000 120,000

Prudential Steel (Tenaris) Longview, WA 100,000 100,000

SAW Pipes USA Inc Baytown, TX 500,000 500,000

Stupp Corp. Baton Rouge, LA 250,000 250,000

Tex-Tube Dallas, TX 110,000 110,000

US Steel (Incl.Lone Star) 1,560,000 1,400,000 2,960,000

Total USA 3,042,000 5,691,500 1,500,000 0 10,233,500

Canada:

Camrose Pipe (Oregon Steel) Camrose 140,000 200,000 340,000

Ipsco 360,000 300,000 660,000

Prudential Steel (Tenaris) Calgary 450,000 450,000

Stelco (US Steel) Welland 200,000 300,000 500,000

Algoma (Essar Global) Sault Ste Marie 250,000 250,000

Total Canada 250,000 1,150,000 200,000 600,000 2,200,000

Mexico:

Hylsa San Nicolas 150,000 150,000

Procarsa Monterrey 120,000 120,000

Tuberia Cardenas 300,000 300,000

Tallleres Acero Rey Monterrey 50,000 50,000

Tenaris (Tamsa) Veracruz 780,000 780,000

Tubacero Monterrey 100,000 100,000 200,000

Tuberia Laguna Gomez Palacio 125,000 125,000

Tubesa San Luis Potosi 80,000 80,000

Total Mexico 780,000 495,000 450,000 80,000 1,805,000

Total North America 4,072,000 7,336,500 2,150,000 680,000 14,238,500



June 20, 2008 Page 34

Capacity by Process


Germany:

Europipe Mulheim 1,230,000 1,230,000

Mannesmann LP (1) Hamm 240,000 240,000

Salzgitter Salzgitter 200,000 200,000

Benteler Paderborn 260,000 260,000

Bergrohr Siegen 130,000 130,000

E.u-M. Ferndorf Kreutztal 45,000 45,000

Eisenbau Kramer Recklinghausen 75,000 75,000

Erndtebrucker Eisen. Erndtebruck 70,000 70,000

Fuchs Rohr Siegen 180,000 180,000

V&M Mulheim 1,085,000 1,085,000

Westfalenwerke Grebe Littfeld 50,000 50,000

Total Germany 1,345,000 420,000 1,275,000 525,000 3,565,000

France:

Europipe Dunkerque 480,000 100,000 580,000

Arcelor Tubes Lexy 180,000 180,000

V&M St. saluve 855,000 855,000

Total France 855,000 180,000 480,000 100,000 1,615,000

Italy:

Ilva Taranto 180,000 1,200,000 220,000 1,600,000

Alessio Tubi/Condessa Group La Loggia 450,000 450,000

Tenaris Dalmine 950,000 950,000

Tubimar Ancona 100,000 100,000

Arvedi Cremona 350,000 350,000

Pietra Orzinuovi 75,000 75,000

Total Italy 1,025,000 1,080,000 1,200,000 220,000 3,525,000

UK:

Corus Hartlepool 550,000 330,000 880,000

V&M Airdrie 40,000 40,000

Total UK 40,000 550,000 330,000 0 920,000

Spain:

Tubos Reunidos Vizcaya 420,000 420,000

STS Alegria 85,000 85,000

Total Spain 420,000 0 0 85,000 505,000

Austria:

Voestalpine Kindberg 320,000 320,000

Total Austria 320,000 0 0 0 320,000

Belgium & Luxembourg:

Umran Pipes Flemalle 100,000 100,000

Total Belgium & Luxembourg 0 0 0 100,000 100,000

Finland:

Rautaruukki Oulainen 250,000 100,000 350,000

Total Finland 0 250,000 0 100,000 350,000



June 20, 2008 Page 35

Capacity by Process


Greece:

Corinth Pipeworks Thisvi 570,000 300,000 870,000

Total Greece 0 570,000 0 300,000 870,000

Total Western Europe 4,005,000 3,050,000 3,285,000 1,430,000 11,770,000

Japan:

JFE Chiba 912,000 1,410,000 1,120,000 200,000 3,642,000

NKK Tubes Keihin 250,000 250,000

Maruichi Sakai 852,000 852,000

Nippon Steel Hikari 1,003,000 372,000 436,000 1,811,000

Nishimura Koki Amagasaki 36,000 36,000

Osaka Tokusha Tokushima 115,000 115,000

SMI Wakayama 1,209,000 794,000 259,000 2,262,000

Total Japan 2,371,000 4,059,000 1,787,000 751,000 8,968,000

South Korea:

Dong Yang Steel Pipe Inchon 60,000 60,000

Dongbu Steel Inchon 121,000 121,000

Husteel Dangjin 800,000 800,000

Hyundai Pipe Ulsan 720,000 65,000 80,000 865,000

SeAH Steel Pohang 1,000,000 50,000 95,000 1,145,000

Total South Korea 0 2,641,000 175,000 175,000 2,991,000

China:

Baoji Petroleum Steel Pipe Boji, Shaanxi 620,000 130,000 750,000

Baoshan Shanghai 540,000 300,000 840,000

Baotou Baotou 850,000 850,000

Beihai Steel Pipe Beihai 150,000 150,000

Chengdu Seamless Chengdu 450,000 450,000

Fanyu Zhujang Steel Pipe Fanyu 120,000 120,000

Hebei Litonglian Seamless Pipe Hebei 250,000 300,000 550,000

Hunan Hengyang Steel Tube Group Hunan 1,000,000 1,000,000

Jangsu Chengde Steel Tube Jangsu 80,000 80,000

Jilin City Jilin 125,000 125,000

Jingsi Steel Pipe Co. Jingsi 500,000 500,000

Julong Steel Pipe Bohai Bay 300,000 300,000

Liaoyang Steel Pipe Co. Liaoyang 500,000 500,000 1,000,000

Northern Steel Pipe Co. Haicheng 300,000 300,000

Panyo Chu Kong Steel Pipe Panyu 750,000 600,000 1,350,000

Shanghai Alison Steel Pipe Co. Jing Shangwei 300,000 300,000

Shashi Steel Pipe Works Shashi 200,000 150,000 350,000

Sino-American pacific Pipe Co. Pudong 50,000 50,000

Steel Tube Factory of China 3rd Met. Anshan 60,000 60,000

Constr. Corp.

Tianjin Pipe Corp Tianjin 500,000 500,000

Wuxi Seamless Oil Pipe Co. Ltd. Wuxi 220,000 220,000

Ziyang Steel Pipe Plant Ziyang 180,000 180,000

Total China 3,890,000 2,965,000 1,600,000 1,570,000 10,025,000



June 20, 2008 Page 36

Capacity by Process


Taiwan:

Femco Chiayi 149,000 60,000 209,000

Kao Hsing Chang Kaohsiung 100,000 100,000

Yieh Loong Kaohsiung 163,000 163,000

Total Taiwan 0 412,000 0 60,000 472,000

Indonesia:

Bakrie Jakarta 313,000 313,000

Bumi Kaya Pulogadung 70,000 70,000

DWI Sumber Arca Wajia Kabil-Batam Island 50,000 50,000

Indal Steel Pipe Manyar 200,000 200,000

KHI Pipe Industries (Krakatau) Jakarta 155,000 155,000

Seamless Pipe Indonesia Java Cilegon 170,000 170,000

Southwest Asia Pipe Industries Lampung 200,000 200,000

Total Indonesia 170,000 313,000 200,000 475,000 1,158,000

Malaysia:

Hicom Petro-Pipes Kedah 100,000 100,000

Petro-Pipe Industries Penang 60,000 60,000

Total Malaysia 0 0 0 160,000 160,000

Total East Asia 6,431,000 10,390,000 3,762,000 3,191,000 23,774,000

Total Eastern Europe 1,810,000 30,000 44,000 125,000 2,009,000

Russia:

Almetyevsk Pipe Plant Almetyevsk 350,000 350,000

CHTPZ Group Chelyabinsk 1,400,000 2,600,000 500,000 4,500,000

TMK Polevskoy 1,727,500 1,420,000 3,147,500

Izhorsky Pipe Mill Kolpino 200,000 200,000

Vyksa Steel Works Vyksa 382,000 450,000 832,000

Total Russia 3,127,500 4,952,000 950,000 0 9,029,500

Ukraine:

Nizhnedneprovsky 500,000 500,000

Nikopol Dnipropetrovsk 200,000 200,000

Khartsyzsk Tube Works Khartsyzsk 1,400,000 1,400,000

Nizhnedneprovsky Dniepropetrovsk 550,000 550,000

Novomoskovsk Novomoskovsk 350,000 240,000 590,000

Total Ukraine 700,000 900,000 1,400,000 240,000 3,240,000

Azerbaijan:

Azerboru Sumgait 346,000 346,000

Total Azerbaijan 346,000 0 0 0 346,000

Georgia:

Georgian Steel 400,000 400,000

Total Georgia 400,000 0 0 0 400,000

Total CIS 4,573,500 5,852,000 2,350,000 240,000 13,015,500



June 20, 2008 Page 37

Capacity by Process


Iran:

Ahwaz Pipe Mills Ahwaz 200,000 500,000 700,000

Iran Spiral Corp Isfahan 120,000 120,000

Kalup Corp Saveh 40,000 20,000 60,000

NISCO/Khuzestan Steel Co. Tehran 120,000 70,000 190,000

Sadid Pipe & Profile Co Tehran 120,000 250,000 370,000

Saveh Rolling & Profile Mills Co. Tehran 250,000 250,000

Sepahan Industrial Group Co. Isfahan 200,000 200,000

Total Iran 120,000 880,000 500,000 390,000 1,890,000

Saudi Arabia:

Arabian Pipes Co. Riyadh 160,400 300,000 460,400

Group Five Pipes Saudi Dammmam 75,000 75,000

National Pipe Co. Al-Khobar 180,000 250,000 430,000

Saudi Steel Pipe Co. Dammam 80,000 80,000

Total Saudi Arabia 0 240,400 480,000 325,000 1,045,400

Kuwait:

Kuwait Pipe Industries & Oil Services Zerifin 130,000 130,000

Total Kuwait 0 0 0 130,000 130,000

Total Middle East 120,000 1,120,400 980,000 845,000 3,065,400

Total South America 1,544,000 1,974,000 470,000 150,000 4,138,000

Total Africa 100,700 100,000 0 246,000 446,700

Turkey:

Borusan Boru Gemlik 350,000 350,000

Mannesmann Boru Izmit 200,000 200,000

Cayirova Boru Gebze-Osmangazi 300,000 300,000

EMC & Tembour Bour Kocaeli 100,000 100,000

Emek Boru 160,000 160,000

Noksel Celik Boru Hendek 200,000 200,000 400,000

Umran Steel Pipe Istanbul 350,000 250,000 600,000

Total Turkey 0 1,200,000 0 910,000 2,110,000

India:

Bharat Heavy Electricals Trichirappalli 160,000 160,000

Indian Seamless Metal Tubes Maharastra 155,000 155,000

Maharashtra Seamless Maharastra 325,000 200,000 525,000

MAN Industries Pithampur 600,000 200,000 800,000

PSL Holdings Chennai, Kandla, Daman 1,100,000 1,100,000

SAIL Rourkela 75,000 55,000 130,000

Jindal SAW Ltd Kalan 100,000 800,000 150,000 1,050,000

Surindra Engineering Bombay 200,000 200,000

Welspun Gujarat Stahl Rohren Gujarat 250,000 400,000 400,000 1,050,000

West Coast SAW Pipes Nasik 100,000 100,000

Total India 740,000 525,000 1,900,000 2,105,000 5,270,000



June 20, 2008 Page 38

Capacity by Process


Pakistan:

Crescent Steel Karachi 90,000 90,000

Data Steel Sadiqabad 80,000 80,000

Indus Steel Pipes Kotri 12,000 12,000

Karachi Pipe Mills Karachi 16,000 16,000

Total Pakistan 0 16,000 0 182,000 198,000

Bangladesh:

National Tubes Ghazipur 30,000 30,000

Total Bangladesh 0 30,000 0 0 30,000

Australia:

Onesteel Kembla Range 350,000 350,000

Total Australia 0 350,000 0 0 350,000

New Zealand:

SteelPipe New Zealand Auckland 15,000 15,000

Total New Zealand 0 0 0 15,000 15,000

Total Other World 740,000 2,121,000 1,900,000 3,212,000 7,973,000

Total World 23,396,200 31,973,900 14,941,000 10,119,000 80,430,100



June 20, 2008 Page 39

BUY

Key Stock Data

Sector Pipes & Tubes

Reuters Code WGSR.BO

BLOOMBERG Code WGS IN

No. of Shares (mn) 177.75

Market Cap (Rs bn) 68.1

Market Cap ($ Mn) 1,622

Avg. 6m Vol. 496,887

Stock Performance (%)

52 - Week high / low Rs.538/174

3M 6M 12M

Absolute (%) -8 -19 94

Relative (%) -2 5 87

Shareholding Pattern (%)

Promoters 41.9

FIs & Local MFs 20.2

FIIs 16.8

Public & Others 21.1

Sensex and Stock Movement

Nifty 4504

Sensex 15088

Source : Company

CMP Rs. 363

Target Rs. 774Stock Return 130.3%

Capital Appreciation 130%

Dividend Yield 0.3%

Welspun Gujarat Stahl Rohren (WGSRL)

Fully integrated pipe manufacturer

The company’s 1.5 mn tons plate cum coil mill became operational in March 08, which is

likely to boost its margins by more than 400 bps in FY10E. Currently, the raw material/sales

is around 75.5% (FY07), which is likely to come down to 67% by FY09E post expansion. This

backward integration is expected to save US$ 200/tonne on raw material costs. Currently, the

company sources HR plates from Europe as high grade and larger size plates are not

available in India. EBITDA margins in FY09E are likely to improve by more than 380 bps to

20.1% from 16.3% in FY08, as the benefits of this backward integration will come during that

period.

Enhanced capacity to tap growing demand

The company is setting up a new facility in US of 0.3 mn tons to be closer to one of the biggest

markets for pipes as US accounts for 35% of global demand along with expansions in India.

This will enhance its capacity to 1.75 mn tons by FY10E from 1 mn tons in FY08.

Swelling order book position

WGSRL has an outstanding order book position of Rs. 47 bn (executable by March 09) and

is likely to garner significant orders going forward. This order book is 1.2x its FY08 turnover

giving clear visibility of its long-term growth. Oil and Gas constitute more than 99% of the

unexecuted order book and the rest is in the water segment. WGSRL has the capacity to

receive orders worth US$ 7 bn over next 5 years.

Outlook and Valuation

The revenues and profits of WGSRL are expected to grow at a CAGR of 50% and 66%

between FY08-10E. The stock currently trades at a huge discount to its fair value as per our

DCF basis. On the basis of relative valuation also the stock is trading at 10.7x its FY09E and

7x its FY10E earnings. We therefore maintain our Strong BUY recommendation on the stock

with a target price of Rs. 774 (upside of 130%).

Year to March FY06 FY07 FY08E FY09E FY10E

Revenue (Rs mn) 17,738 25,523 40,104 66,935 90,256

Total Expenses (Rs mn) 16,642 23,453 33,575 53,729 71,329

EBITDA (Rs mn) 1,655 3,332 6,529 13,506 18,927

PBT (Rs mn) 904 2,191 5,342 9,798 14,894

Net Income (Rs mn) 614 1,426 3,514 6,369 9,681

EPS (Rs) 4.8 10.2 18.7 33.9 51.6

% Chg YoY - 114.1 71.8 93.6 52.0

P/E (x) 76.1 35.6 20.7 10.7 7.0

CEPS (Rs) 7.5 13.6 21.8 41.8 60.3

EV/E (x) 31.4 18.7 12.1 5.9 4.0

Dividend Yield (%) 0.2 0.3 0.4 0.8 1.1

RoCE (%) 8.5 10.4 14.1 22.8 25.6

RoE (%) 16.4 25.2 31.5 38.0 38.0


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June 20, 2008 Page 40

Background

Welspun Gujarat Stahl Rohren (WGSRL) is engaged in the manufacture of Submerged Arc

Welded Pipes (SAW). It is a part of the USD 1.5 bn Welspun group, which is engaged in terry

towels, home textiles and saw pipes. WGSRL is a one stop solutions company for all pipe

related requirements, as it provides an exhaustive size and product range incorporating

global best technologies (from M/s. Mannesmann Demag of Germany). It is therefore no

surprise that Welspun is the undisputed choice of companies worldwide. WGSRL supplies

pipes ranging from as small as ½ inch to as large as 100 inches of higher grades (up to X

100).

Its list of clients reads like a veritable who’s who of the global oil and gas majors. The latest

additions to the list of client accreditations are from Exxon Mobile in FY07, which makes

WGSRL the only Asian Company (except Japan) to obtain orders from the World’s largest

company. With the burgeoning client list, Welspun is well placed to participate in almost all

major oil and gas biddings across the globe.

Business Overview

WGSRL manufactures high grade line pipes-Submerged Arc Welded (both spiral and

longitudinal), branch pipes (Electric Resistant Welded Pipes-ERW) and also does coating.

The variety of products caters to diverse applications of resource transportation and

distribution. Global demand for LSAW is predominant over other types of pipes in critical

applications (particularly deep off-shore and sour gas applications) due to its safety and

quality features required in the oil &gas industry. The company is able to capitalize on the

demand across many conditions and applications with its varied product mix. The company

also caters to the water segment by supplying HSAW pipes for water transportation.

Capacity details

Its manufacturing facilities are located in Gujarat in western India, in proximity to the National

Highway and Sea ports. It has a technology tie-up with Capello Tubi Italy and SMS Meer

Germany (Mannesmann Demag) and EUPEC, Germany. The Company is approved by more

than 40 Oil & Gas giants across the globe.

Sectoral Presence

Oil40%

Gas45%

Water15%

Source : Company, HDFC Sec Research


June 20, 2008 Page 41

Product profile

(in tons) FY08E FY09E FY10E Outer Dia Thickness Length

LSAW 350,000 350,000 650,000 16"-60" 6mm to 40mm upto 12.2m

HSAW 400,000 700,000 850,000 18"-100" upto 25mm upto 18m

ERW 250,000 250,000 250,000 1.5"-16" upto 14mm upto 18m

Total 1,000,000 1,300,000 1,750,000

Of this almost all the facilities are fully operational. With the enhanced product profile, the

company will be able to receive and execute orders for low-pressure applications and increase

its market share in water and other infrastructure projects also.

The company derives it revenues predominantly from exports, which formed more than 78%

of its revenues in FY08. This scenario is likely to continue in future because of technical

approvals for WGSRL’s products and increase in pipe laying activities by oil and gas

companies in North America and Middle East countries along with cost advantage enjoyed

by Indian pipe manufacturers due to low freight cost.

Geographical Presence

USA52%

Latin America11%

India22%

Canada2%

Middle East13%



June 20, 2008 Page 42

Investment Arguments

Strong global demand

From third world countries to the most developed economies today nations have a growing

need for energy including oil and gas and need to import it. This has to be transported

offering an upward push to the demand for Oil & Gas transportation.

Global demand for pipes is predicted to be worth U.S. $ 68 bn over the next 3 to 5 years but

this figure could go up if various growth drivers for pipes internationally are considered.

Having secured the required accreditations, the Indian pipe manufacturers are positioned to

tap at least 21% of the U.S.$69bn global demand (excluding India). In India too, with the

demand-supply situation tilting in favour of suppliers and well-timed capacity expansions,

Indian pipe manufacturers are ready to move into a significantly higher growth orbit.

Expected Global Demand Over Next Five Years

Geographical Zone Length (kms) Required Qty Total Value Addressable market for Estimated Market

(Mn.tons) (US$. Bn) Indian Players (%) Oppurtunity (US$. Bn)

Middle East and Asia 79,074 24 25 40 11.0

North America 65,988 20 21 8 2.0

Europe 31,654 9 9 2 0.2

Latin America 22,565 7 7 2 0.1

Australia 13,673 4 4 5 0.2

Africa 12,036 4 3 15 0.6

224,990 68 69 21 14

Robust Global CAPEX in Pipelines

North America

North America accounts for roughly 40% of the total pipeline CAPEX. Demand comes from

both replacement of old pipelines and from new pipelines for natural gas. Approximately

65% of North America’s existing pipelines are more than 30 years old and close to

replacement. Increased spending in North America is expected to come from the increasing

‘Rockies’ Natural Gas production, higher use of LNG, and the ‘Canadian oilsand’ projects.

Key Projects in North America

Projects Estimated Tonnes Pipelines Miles Tube Diameter

(inches)

Alaska Gas 1,900,000 1,800 48

Altex 570,000 2,000 30

Mackenzie Gas 418,000 760 30

TCPL - Keystone 400,000 1,200 30

Enbridge - Alberta Clipper 385,000 1,000 36

Enbridge - Gateway 360,000 721 36

Kinder Morgan - TMX 348,000 1,000 30-36

Enbridge - South Access Phase 2 136,000 321 36-42

Enbridge- Gulf Coast na 2,055 36

Texas Gas na 555 36-42

Centre Point na 730 30,36,42

Total 4,517,000 12,142


Source : Industry, HDFC Sec Research


June 20, 2008 Page 43

Other Markets

Saudi Aramco has lined up mega projects totaling U.S.$45bn to increase oil production,

build petrochemical complexes and new pipelines. Russia plans to build gas pipelines to

supply China with natural gas. Work is currently under way on a 2800km oil pipeline. China

Petroleum Pipeline Bureau has commented that China plans to build 25,000 km of Oil and

Gas pipelines by 2010.

Backward integration towards raw materials

The company is setting up a plate cum coil plant at Anjar with a capacity of 1.5 MTPA. We

expect the company to utilize 50% of its output for internal consumption between FY08-10E

and the rest will be sold to other domestic players (Man, PSL, Jindal etc). This backward

integration project will lead to margin expansion, as the company will save on the cost of

plates, which are being imported at higher cost and will insulate itself from raw material

volatility. The steel plate plant is operational and by April 08, the company had produced

15,000 tons of X65 API grade steel pipes. The company will save approximately $200/tonne

(raw material cost) on 35% and 50% of its output in FY09E and FY10E respectively.

Funding for the project

Instrument Amount (Rs.mn)

Equity Warrants (US$ 25mn) 1,126

FCCB (US$ 75mn, 0% convertible at Rs.162.6/share) 3,346

Loan (8.5% p.a) 12,900

Internal Accruals 738

Total 18,110

Strong growth in volumes

We expect WGSRL to post a significant jump in production volumes on the back of efficient

capacity utilisation levels between FY08-10E. In FY08, the company produced 0.67 mn tons

of steel pipes against its installed capacity if 1 mn tons, a capacity utilization of around 67%.

We expect pipe production to go up to 1 mn tons by FY10E on enhanced capacity of 1.75 mn

tons. In addition, we expect WGSRL to sell 0.3 mn and 0.5 mn tons of steel plates in FY09E

and FY10E to other pipe manufacturers. The compounded production CAGR of pipes is

likely to be 51% between FY08-10E along with significant contribution from plates.

Production Schedule

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

FY07 FY08E FY09E FY10E

Plates Pipes




June 20, 2008 Page 44

Expanding Operating Margins

We expect WGSRL to report significant jump in OPMs once the plate mill is fully operational

by FY09E. We expect average EBIDTA contribution of around US$200/ton in plates on a

production of 0.6 mn and 1 mn in FY09E and FY10E respectively. Globally, a standalone plate

manufacturer enjoys EBIDTA contribution of anywhere between USD$ 300-400/ton. As a

result of significant synergies coming in from the plate mill, the blended EBIDTA margins are

likely to go up by 470 bps to 21% by FY10E from 16.3% in FY08.

Operating Matrix

Product Turnover EBIDTA EBIDTA Margin

FY08E FY09E FY10E FY08E FY09E FY10E FY08E FY09E FY10E

Pipes 40104.0 51335.0 64256.0 6529.0 8500.0 10500.0 16.3% 16.6% 16.3%

Plates N.A 15900.0 26000.0 N.A 5005.5 8427.4 N.A 31.5% 32.4%

Total 40104.0 67235.0 90256.0 6529.0 13505.5 18927.4 16.3% 20.1% 21.0%

Diversified product profile to de risk business model

The company is also focused on supplying pipes for water projects (HSAW pipes) apart from

oil and gas sector. The demand for pipes in the water segment is huge as most of the water

deficient countries, like those in the Middle East (Oman, Qatar, Saudi Arabia) are creating

large water transportation infrastructure projects. Such projects require huge quantities of

pipes measuring millions of tonnes.

Infrastructure development, stricter water management regulations, and renewal of ancient

sewerage and drainage systems are all major demand drivers for the pipe category. The

other major demand drivers for HSAW pipes are highways and street construction and

development of municipal drinking water systems. The Indian Government is also giving

great importance to urban infrastructure development.

Huge order book position

WGSRL has an outstanding order book position of Rs. 46.7 bn for the pipe business and is

likely to start booking orders for the plates from Q1FY09E. Of this, exports form 90% (Rs. 42

n) of the order book; the company expects to win new orders in HSAW segment from the

export market and regular orders from the Middle East and North American countries.

Key Orders Received

Order From Order Size (Rs.Bn.)

Gulf South USA 5.4

Hunt Oil 3.9

Saudi Aramco 5.3

Enterprise USA 2.6

Exxon Mobile 3.6

Geographical Diversification to De-risk Business Model

WGSRL is setting up a new HSAW facility in US with a capacity of 0.3 mn tons. The overall

CAPEX for this particular venture will be around US$ 100 mn and it is likely to be operational

by Q2FY09. Towards this, the company has already acquired 700 acres of land at Little Rock

in the State of Arkansas. WGSRL will get local tax exemptions to the extent of 50% for 20 years

from this unit.




June 20, 2008 Page 45

Key Concerns

Steel Cost

Steel cost is the largest cost component and thus non-availability or variations in steel prices

may affect profitability. However, the company tries to soften this by pre-booking its steel

requirements to the maximum extent.

Foreign Exchange Volatility

The foreign exchange markets, including the Rupee, have become more volatile, impacting

profitability. The company mitigates this risk by conservatively buying forward cover for the

exchange to the extent of the difference between its import and export transactions.

Execution Delay

Any delay in ramp-up of its plate mill may impact growth visibility going forward. However, we

believe that the chances of such a delay are unlikely beyond H1FY09E. Therefore for our

estimates we have taken the benefits accruing post the commencement of the plate mill only

to the extent of 40% and 60% in FY09E and FY10E respectively.


June 20, 2008 Page 46

Financial Analysis

Quarterly Earnings

Year End March 31 (Rs.Mn) Q407 Q408 Y-o-Y FY07 FY08

Net Sales 7400 12275 65.9% 26834.0 40104.0

Total Income 7447 12383 66.3% 26955.0 40290.0

Total Expenditure 6509 10312 58.4% 23549.0 33575.0

Operating Profit 891.0 1963.0 120.3% 3285.0 6529.0

EBIDTA 938.0 2071.0 120.8% 3406.0 6715.0

Interest 178 346 94.4% 739.0 801.0

PBDT 760.0 1725.0 127.0% 2667.0 5914.0

Depreciation 122 180 47.5% 476.0 572.0

PBT 638.0 1545.0 142.2% 2191.0 5342.0

Tax 223 523 134.5% 765.0 1828.0

PAT 414.0 1022.0 146.9% 1426.0 3514.0

Equity (FV = 5) 939 939 938.9 938.9

Ratios

OPM 12.8% 16.0% 320.2 12.2% 16.3%

Tax / PBT 36.0% 33.9% -217.4 34.9% 34.2%

NPM (Before EOI) 5.5% 8.3% 272.7 5.3% 8.7%

Cash EPS 2.9 6.4 120.7% 10.1 21.8

EPS 2.2 5.4 145.5% 7.6 18.7

Financial Highlights

• For Q4 FY08, WGSRL has achieved a net turnover of Rs. 12.27 bn, a growth of 65.9% over Q4 FY07 and

during FY08 the turnover went up by 49.5% to Rs. 40 bn compared to Rs. 26.8 bn in 9MFY08.

• The operating profits during the quarter were up by 120.3% y-o-y at Rs. 1.96 bn and PAT showed an increase

of 146.3% to Rs. 102.2 mn. Operating profits showed a sharp growth on the back of significant improvement

in realizations by 24% to Rs. 63,136/ton from Rs. 51,014/ton in FY07.

• OPMs increased by 395 bps to 16% in Q4 FY08 from 12% in Q4 FY07 mainly due to order execution of higher

value added HSAW and LSAW pipes. As per the our discussion with the management, the majority (75%) of

the orders executed during the quarter and the existing orders in hand are of very high value segment, where

there is less competition from domestic the players.

• During the year, the company sold 635,203 tons compared to 526,017 tons in FY07, a volume growth of 21%

for FY08. EBIDTA per ton went up during FY08 by 65% to Rs. 10,280/ton compared to Rs. 6,245/ton in FY07.



June 20, 2008 Page 47

DCF Analysis

Rm 20% Expected Returns from Market

Rf 8.5% Risk Free Rate

B 1 Beta - Assumed Higher Beta for capturing volatility

Cost of debt (Pretax) 10% Average cost of debt

Tax rate 30%

Post tax cost of debt 7%

Cost of equity 20% Re = Rf + (Rm-Rf)*B

We 43% Weights assigned as per target D/E ratio by FY08E

Wd 57%

WACC 14.4%

NPV per share 774 Assuming Terminal Growth Rate of 3% beyond 2014

Assumptions

• For additional conservatism we have not assumed any benefits from the plate plant.

The plate margins could be as high as its pipe margins (15%) but we have assumed

incremental margin benefit of only 470 bps between FY07-10E, whereas the margin

expansion can even be 1500 bps during the same period.

• The NPV calculation is based on current prices of pipes and plates. For future orders

also, prices have been kept flat or reduced to the extent of benefit due to backward

integration.

• The above NPV calculation is based on its fully diluted equity in FY09E and does not

take into account any further dilution, which may happen during the same period.

WGSRL trades at 10.7x and 7x its expected fully diluted earnings of FY09E and FY10E

respectively. Historically, the stock has traded in the P/E band of less than 15x. However, it

has re-rated significantly over the last couple of quarters on the back of significant

improvements in margins and robust profits. We believe that it should ideally trade at 20x

FY09E and 15x FY10E, given the robust momentum in earnings expected during the same

period. The fair value as per our FY10E comes to around Rs. 774. Also, other key reasons on

why this stock should command such P/E multiple are as follows.

• Strong order backlog of almost 1x FY08 turnover, giving clear visibility of its long-term

growth.

• Only Indian manufacturer to get into backward integration to decrease the volatility in

raw material prices and capture the entire value chain.

• WGSRL does not face any competition from the domestic players for more than 75% of

its order book position.

Source : HDFC Sec Research


June 20, 2008 Page 48

Outlook

WGSRL’s business is set to grow at a robust pace over the next two to three years. The

company has planned a capex to be in step with the growing demand. Tighter focus on costs

and steady growth in volumes will be the focus of the company. WGSRL’s leadership position

in each of its businesses, combined with steady demand from derived industries augurs

well for its growth. The change in product mix is expected to drive sustained profitability that

will improve further in the future. The revenues and profits of WGSRL are expected to grow at

a CAGR of 50% and 66% between FY08-10E. The stock currently trades at a huge discount

to its fair value as per DCF basis. We expect it to re-rate positively and when coupled with the

underlying earnings growth, should deliver significant out performance to investors in the

long term. We therefore maintain our Strong BUY recommendation on the stock with a target

price of Rs. 774(upside of 130%).

WGSRL PER Chart

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June 20, 2008 Page 49

Balance Sheet

Year ending Mar (Rs. mn) FY06 FY07 FY08E FY09E FY10E

ASSETS

Current Assets, Loans & Advances

Cash & Bank balance 3,067 3,434 2,294 6,135 9,877

Inventory 5,429 5,135 7,024 12,030 16,221

Sundry Debtors 3,070 5,849 7,849 10,086 14,837

Loans and Advances 1,223 1,911 2,000 2,000 3,000

Total Current Assets 12,788 16,329 19,167 30,251 43,935

Current Liabilities & Provisions

Current Liabilities 9,031 10,090 12,545 13,841 18,635

Sundry Creditors 1,454 1,884 2,649 4,585 6,182

Other Current Liabilities 7,577 8,206 9,896 9,256 12,453

Provisions 125 469 1,886 2,732 4,042

Total Current Liabilities and Provisions 9,156 10,558 14,431 16,573 22,676

Net Current Assets 3,631 5,771 4,737 13,679 21,259

Total Investments 0 256 0 0 0

Fixed Assets

Gross Block 7,893 9,112 24,000 27,000 30,000

Less Accumulated Depreciation 1,402 1,877 2,583 4,068 5,718

Net Block 6,490 7,235 21,417 22,932 24,282

Add: Capital Work in Progress 3,623 9,214 3,000 3,000 3,000

Total Fixed Assets 10,113 16,448 24,417 25,932 27,282

Total Assets 13,744 22,475 29,154 39,611 48,541

LIABILITIES AND SHAREHOLDERS’ EQUITY

Total Borrowings 8,027 15,146 15,920 17,920 17,920

Deferred Tax Liability 701 794 700 700 700

Share Capital

Paid up Equity Share Capital 644 699 857 939 939

No. of Shares outstanding (mn) 129 140 171 188 188

Reserves & Surplus

Share Application Money 68 68 0 0 0

General & Other Reserve 4,083 5,768 11,677 20,052 28,982

Net Worth 5,016 6,535 12,534 20,991 29,921

Total Liabilities & Shareholders’ Equity 13,744 22,475 29,154 39,611 48,541

Financial Statements



June 20, 2008 Page 50

Income Statement


Gross Sales 18,558 27,261 41,730 71,588 96,530

Less: Excise Duty 820 1,738 1,626 4,653 6,274

Net Sales 17,738 25,523 40,104 66,935 90,256

of which Export Sales 10,573 12,829 53,548 72,205

of which Domestic Sales 7,165 12,694 13,387 18,051

Other Operating Income 560 1,262 - 300 -

Job Work Charges 142 28 - - -

Export and Excise benefits 418 1234 - 300 0

Total Operating Income 18,298 26,785 40,104 67,235 90,256

Less:

Raw Material Consumed 13,574 20,224 26,439 44,989 59,595

Total Manufacturing expenses 2661 2633 6393 7396 9928

Personnel Expenses 408 595 743 1345 1805

Total Operating Expenses 16,642 23,453 33,575 53,729 71,329

EBITDA 1,655 3,332 6,529 13,506 18,927

Depreciation & Amortisation 352 476 572 1,485 1,650

Other Income 19 43 186 50 50

EBIT 1,322 2,899 6,143 12,071 17,327

Less: Gross Interest 419 708 801 2,273 2,434

Recurring Pre-tax Income 904 2,191 5,342 9,798 14,894

Less: Taxation 290 765 1,828 3,429 5,213

Current Tax 127 672 0 1274 1936

Deferred Tax 162 93 0 2156 3277

Net Income (Reported) 614 1,426 3,514 6,369 9,681

Recurring Net Income 614 1,426 3,514 6,368.6 9,681

Cash Flow Statement


Cash Flow from Operating Activities

Reported Net Income 614 1426 3003 6369 9681

Add:

Depreciation & Amortisation 345 475 706 1485 1650

Provisions (11) 343 1417 846 1310

Deferred Taxes 162 93 0 2156 3277

Less:

Other Income 19 43 50 50 50

Operating Cash Flow before Working Capital chg 1090 2294 5076 10805 15867

Working Capital Inflow / (Outflow) (1105) (2115) (1523) (5947) (5148)

Net Cash flow from Operating Activities (15) 179 3553 4858 10719

Cash Inflow/(outflow) from capital commitments (5056) (7067) (8418) (3000) (3000)

Free Cash flow after capital commitments (5071) (6888) (4865) 1858 7719

Net Cash flow from Investing Activites (d) 22 43 50 50 50

Net Cash flow from Financing Activites (e) 5654 7212 3675 1933 (4028)

Total Increase / (Decrease) in Cash 605 368 (1140) 3841 3742

Opening Cash and Bank balance 2461 3067 3434 2294 6135

Closing Cash and Bank balance 3067 3434 2294 6135 9877

Increase/(Decrease) in Cash and Bank balance 606 367 (1140) 3841 3742



June 20, 2008 Page 51

Key Financial Ratios

Year ending Mar FY06 FY07 FY08E FY09E FY10E

Per Share Data (Rs)

Diluted Earnings per share 4.8 10.2 17.5 33.9 51.6

Recurring Cash Earnings per share (CEPS) 7.5 13.6 21.6 41.8 60.3

Reported Book Value (BV) 37.2 46.7 73.1 111.8 159.3

Dividend per share 0.8 1.2 1.5 3.0 4.0

Valuation Ratios (x)

Diluted Price Earning Ratio 76.1 35.6 20.7 10.7 7.0

Price to Recurring Cash Earnings per share 48.4 26.7 16.8 8.7 6.0

Price to Book Value 9.7 7.8 5.0 3.2 2.3

EV / EBITDA 31.4 18.7 12.1 5.9 4.0

Dividend Yield (%) 0.2 0.3 0.4 0.8 1.1

Growth Ratios (% YoY)

Diluted Recurring EPS Growth 114.1 71.8 93.6 52.0

Diluted Recurring CEPS Growth 81.5 59.1 93.3 44.3

Total Operating Income Growth 76.2 46.4 41.2 77.8 34.2

EBITDA Growth 142.1 101.3 87.4 116.3 40.1

Operating Ratios (%)

EBITDA Margins 9% 12% 17% 20% 21%

Recurring Net Income Margins 3% 5.3% 8% 9% 11%

Effective Tax Rate 32.1% 34.9% 35.0% 35.0% 35.0%

Return / Profitability Ratios (%)

Return on Capital Employed (RoCE)-Overall 8.5 10.4 14.1 22.8 25.6

Return on Net Worth (RoNW) 16.4 25.2 31.5 38.0 38.0

Dividend Payout Ratio 15.8 11.5 8.6 8.8 7.8

Solvency Ratios / Liquidity Ratios (%)

Debt Equity Ratio (D/E) 174% 244% 133% 89% 62%

Debt Servicing Capacity Ratio (DSCR) 1.10 2.53 3.19 3.47 4.73

Turnover Ratios

Assets Turover Ratio (x) 1.74 1.48 1.47 1.96 2.05

Average Collection Period (days) 55.99 59.71 65.34 45.72 47.12

Average Payment Period (days) 32.05 25.97 26.21 24.57 27.55



June 20, 2008 Page 52

BUY

Key Stock Data

Sector Pipes & Tube

Reuters Code PSLH.BO

BLOOMBERG Code PSLL IN



Market Cap ($ Mn) 384

Avg. 6m Vol. 22,848


52 - Week high / low Rs.588 / 242

3M 6M 12M

Absolute (%) 2 -31 38

Relative (%) 8 -6 31


Promoters 48.4


FIIs 17.4



Nifty 4504

Sensex 15088

Source : Company

CMP Rs. 372



Dividend Yield 1.6%

PSLInvestment Summary

Strategic locational advantage

To supply pipes, generally of large diameter to its consumers with lower cost of transportation,

the company has established 10 traditional pipe mills, each with an installed capacity of

75,000 MT, at different strategic locations in the country. These include plants at Gandhidham,

Nanichirai in Kutch, (Mahudi near Gandhidham in Gujarat) and Daman, all on the Western

Coast and Chennai and Visakhapatanam on the Eastern Coast.

Largest domestic HSAW capacity to drive growth

The company has increased its installed capacity to 1.475 mn tones (40% of HSAW capacity

in India). With huge export potential in the Middle East and South Asian markets along with an

increase in the number of projects in the oil and gas and water management sectors in

India, this additional capacity is needed.

Strategic advantage over LSAW pipes

PSL has proved that HSAW pipes can be used to transport both oil & gas and water and has

been accredited by leading players in the oil & gas sector. Moreover, the raw material for the

manufacture HSAW (HR coil) is at least 25% cheaper than HR plates used for LSAW pipes.

The diameter of LSAW pipes is also limited (30-35"inches) if they use Indian sourced raw

material (HR plates). For bigger diameter LSAW pipes, HR plates have to be imported at

higher cost. PSL has made pipes with a maximum diameter of 120" (inches) using HR coil.

Huge order book position

PSL has an outstanding order book position of over Rs. 62 bn and has executed orders

worth Rs. 15.6 bn during the first nine months of this fiscal. The unexecuted order book

position is around 2.8x its expected turnover in FY08E; these orders will be executed over the

next 12-18 months.

Stable operating Margins

We expect stable to marginal expansion in EBIDTA margins for PSL in FY09E and FY10E in

the 10. 5-11% region, with flat steel prices and realizations per ton of pipe remaining stable.

Year to March (Rs. mn) FY06 FY07 FY08E FY09E FY10E

Revenue 14,503 14,433 22,111 36,846 58,947

Total Expenses 13,157 12,920 19,939 33,059 52,646

EBITDA 1,345 1,514 2,172 3,786 6,302

PBT 708 908 1,419 2,627 5,015

Net Income 519 653 1,022 1,839 3,510

EPS (Rs) 16.2 19.2 23.6 42.4 81.0

% Chg YoY 41.8 18.0 23.0 80.0 90.9

P/E (x) 22.9 19.4 15.8 8.8 4.6

CEPS (Rs) 27.0 32.2 36.5 59.1 98.2

EV/E (x) 13.0 12.0 9.6 5.7 3.5

Dividend Yield (%) 1.6 1.6 1.9 2.2 2.4

RoCE (%) 9.7 9.7 13.4 18.1 24.1

RoE (%) 22.6 20.7 23.5 29.0 37.0


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June 20, 2008 Page 53

Background

PSL (PSL) is the largest manufacturer of high-grade large diameter Helical Submerged Arc

Welded (HSAW) pipes in India. The company manufactures and supplies pipes certified to

API (American Petroleum Institute) standards for Oil, Gas and Water transmission as well as

Structural and Piling Applications for both Onshore and Offshore sectors. PSL is one of the

largest pipe manufacturers in India with 11 pipe mills strategically located along the coasts

in Chennai, Kandla and Daman with an annual capacity of 1,175,000 MT. PSL produces

pipes from 16" to 120" diameter with wall thickness from 5 mm to 25 mm. Its other business

segments include pipes coating, induction pipe bending and sacrificial anode manufacturing.

Over the years, PSL has successfully demonstrated its ability to manage multiple

assignments well on time and of high quality for both national and international customers.

Business Overview

PSL manufactures and supplies SPIRAL WELD PIPES certified by API (American Petroleum

Institute) standards for oil, gas and water transmission as well as structural and piling

applications for both onshore and offshore sectors.

Exports formed 20% of its total revenues in FY08E against more than 60% for other players

on account of higher usage of HSAW pipes in the domestic market, compared to LSAW

pipes. Going forward, this share is likely to remain constant. Demand from domestic

hydrocarbon majors and the impetus on water projects in the domestic market will utilize its

capacities and increase the domestic share of revenues for PSL.

The share of oil and gas to water projects, which stood at 70:30 in FY07 came down to 60:40

in FY08E as demand from water projects grew faster than from oil and gas. The company’s

positioning in both the sectors mitigates its risk of exposure to any particular sector.

Technical Capabilities

PSL is equipped to provide the Best in Yard Coating for large onshore and offshore projects.

The Pipe Coating Yard today provides a wide range of coating services as per international

technical specifications by leading consultants.

PSL’s expertise in Induction Pipe Bending spans over 2 decades and meets diverse high

quality requirements in accordance with ASTM, API, DIN, BS, ANSI, ASME PFI and other

international technical specifications.

Fusion Bonded Epoxy is ideally suited for protective coating on the complex surface

configuration of a reinforcing steel bar. The coating can withstand any hazardous

environmental condition.

These services give value to the pipes and offer a one-stop solution to clients’ demand.


June 20, 2008 Page 54

Strategic advantage towards LSAW pipes

HSAW pipes have been found useful in transporting oil and gas compared to LSAW and

have been certified by oil and gas majors. HSAW is manufactured using HR coils whereas

LSAW is manufactured using steel plates (largely imports). The former is cheaper by 15-

20%. It is also cheaper in terms of capacity addition by 30-40%. Moreover, the diameter of

LSAW pipes is limited to a maximum of 50" as making higher diameter LSAW pipes is

difficult due to shortage of raw materials. HSAW pipes of more than 100" can be manufactured

at a much lower price. PSL has made pipes with a diameter of 120" using HR coils.

Expansion to drive growth

PSL expanded its installed capacity to 1.175 mn tons in 9MFY08 from 0.675 mn tons in 2004.

The company is poised to tap the increasing demand for HASW pipes in the oil and gas

sector using this capacity in both export and domestic markets. The company has around

56% of installed capacity of HSAW in India. We believe that going forward domestic onshore

contracts for pipes will be skewed towards HSAW pipes compared to LSAW pipes.

Details of capacity addition

Financial Year FY07 FY08E FY09E FY10E

Capacity (MT in mn) 1.1 1.175 1.475 1.475

Capex (Rs.mn) - 700 4000 200

Source: Company, HDFC Sec Research

In addition to this, the company has plans to invest about USD 100 mn (1:3 D/E) to set up a

0.3 mn tonne per annum plant in the USA (Mississippi). This is part of the company’s two-

phase plan to cater to the growing US market. It has also signed a land-lease pact with the

local government. Operations will be under a subsidiary where PSL will hold 78% and the

rest will be with a local JV partner (12%) and a financial investor (10%).

The fully diluted equity after all conversions will be Rs. 432 mn by FY08E. We have taken the

full effect of the above dilutions in FY09E for our estimates.

Order Book Position

PSL has an outstanding order book position of over USD 1.5 bn and has executed orders

worth Rs. 15.6 bn during the first nine months of this fiscal. The unexecuted order book

position is around 2.8x its expected turnover in FY08E; these orders will be executed in the

next 18 months.

Major Orders in Hand and Under Execution

Name of the client Name of the Project Value (Rs.bn)

L&T Barmer Pipeline 3.08

Mittal Pipelines Mundra- Bhatinda Crude oil line 9.17

USA Florida Gas Transmission Company Ltd 17.0

GAIL 19.8

Total 62.0

Source: Company


June 20, 2008 Page 55

Key Concerns

Increase in Regional capacity

Investments by Japanese and European players in Asian regions could hamper Indian pipe

players’ chances of exporting to the Middle East and South Asia.

Reduction in Import Duty

Any reduction in import duty (current rate 15%) will make imports competitive and reduce

protection. Despite this, Indian companies have an advantage due to lower conversion and

freight costs.

Volatility in HR prices

There has been huge volatility in HR coil prices in the past, which put pressure on PSL’s

margins. Time lag between project bids and actual ordering results in pipe companies

being exposed to raw material price fluctuations.

Busy Production Schedule

We believe that PSL can achieve a volume growth of around 57% between FY08E-10E. This

volume growth will have higher proportion of high margin orders from USA. We expect the

share of Foreign subsidiaries to go up to 30% in FY10 from zero/negligible in FY08E.

Country FY08E FY09E FY10E

India 329,000 515,750 571,250

UAE - 30,000 40,000

USA - - 200,000

Total 329,000 545,750 811,250

Source : Company, HDFC Sec. Research


June 20, 2008 Page 56


Quarterly Financials

Year End March 31 (Rs.Mn) Q308 Q307 Y-o-Y 9M08 9M07 Y-o-Y

Net Sales 6590.5 4988.4 32.1% 15656.3 11819.2 32.5%

Total Income 6779.1 5048.6 34.3% 15956.4 11967.2 33.3%

Total Expenditure 6071.6 4509.2 34.6% 14231.8 10628 33.9%

Operating Profit 518.9 479.2 8.3% 1424.5 1191.2 19.6%

EBIDTA 707.5 539.4 31.2% 1724.6 1339.2 28.8%

Interest 162.6 134.4 21.0% 418.4 328.7 27.3%

PBDT 544.9 405.0 34.5% 1306.2 1010.5 29.3%

Depreciation 130.2 116.5 11.8% 390.3 328.3 18.9%

PBT 414.7 288.5 43.7% 915.9 682.2 34.3%

PAT 301.9 208.0 45.1% 664.5 490.9 35.4%

Equity (FV = 10) 425.7 319.5 425.7 319.5

Ratios

OPM 7.9% 9.6% -173.3 9.1% 10.1% -98.0

Tax / PBT 27.2% 27.9% -70.3 27.4% 27.9% -44.7

NPM 4.5% 4.1% 33.3 4.2% 4.1% 5.4

Cash EPS 10.2 10.2 -0.1% 24.8 25.7 -3.5%

EPS 7.1 6.5 8.9% 15.6 15.4 1.4%

• The company’s U.S. subsidiary PSL-NA, has achieved financial closure for its 300,000 MTPA spiral pipe

facility in the state of Mississippi, USA. The company plans to invest US$ 103 million in this facility out of

which around US$ 70 million will be towards acquisition and construction of buildings and installing plant

& machinery.

• The aggregate value of bids outstanding stands at over Rs. 50 bn (exports more than 50%), which includes

some of the bids outstanding form big oil & gas majors like Petronas, Saudi Aramco etc.

• For Q3FY08 PSL has achieved a net turnover of Rs. 6.59 bn, a growth of 32.1% over Q3FY07.

• For 9MFY08, the net turnover was at Rs. 15.65 bn, a growth of 32.5% over 9M FY07.

• Operating profit margins declined by 170 bps during Q3 FY08 to 7.9% from 9.6% in Q3 FY07, due to an

increase in raw material costs as a percentage of sales.

• Operating profits during the quarter were up by 8.3% y-o-y at Rs. 518.9 mn and PAT showed an increase of

45.1% to Rs. 301.9 mn.

Sales and Production Schedule

9M08 9M07 % chg Q308 Q307 % chg

Production 278016 196500 41.5% 117484 82441 42.5%

Sales 255056 204108 25% 131768 76269 72.7%




June 20, 2008 Page 57

Recommendation

The performance of the company in Q3FY08 and in 9MFY08 was not robust compared to

other pipe manufactures, despite significant capacity additions. We believe that this was on

the back of less than expected orders from domestic oil & gas majors. However, given the

nature and quantum of investments in the production and refining of crude oil/natural gas in

the region, it has become imperative to create support infrastructure to enable efficient and

reliable supply of oil/gas products to key industrial and individual users.

We believe that the domestic orders will be floated in an aggressive manner in the coming

quarters along with ramping up of export orders. Another key market segment of the company

is pipes for water supply projects.

We expect PSL’s revenues to grow at a CAGR of 60.9% over FY07-10E and net profits at a

more robust CAGR of 75.5% over the same period. The stock currently trades at a P/E

multiple of 8.9x FY09E and 4.7x FY10E, which looks reasonable. We maintain our BUY rating

on the stock with a target price of Rs. 829 (upside of 120%).

DCF Analysis





Tax rate 35%




Wd 51%

WACC 13.1%



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Balance Sheet


ASSETS


Cash & Bank balance 1,199 1,263 1,566 1,516 2,019

Inventory 5,206 6,226 7,269 11,104 17,765

Sundry Debtors 4,229 2,157 3,635 6,057 9,690

Loans and Advances 1,218 1,213 1,213 1,213 1,213

Operational 1,218 1,213 1,213 1,213 1,213

Total Current Assets 11,853 10,859 13,683 19,890 30,687


Current Liabilities 5,534 5,172 5,543 10,246 16,392

Sundry Creditors 5,534 5,172 5,543 10,246 16,392

Provisions 364 620 1,646 1,651 896

Total Current Liabilities and Provisions 5,898 5,791 7,189 11,897 17,288

Net Current Assets 5,955 5,068 6,494 7,993 13,399


Net Fixed Assets 3,564 5,131 4,873 6,450 6,005

Total Assets 9,620 10,224 11,470 14,545 19,507


Borrowings

Short Term Debt 1,754 1,743 893 35 36

Long Term Debt 5,056 4,955 5,400 7,000 8,000

Total Borrowings 6,810 6,698 6,293 7,035 8,036


Share Capital



Reserves & Surplus

Reserves & Surplus 2,458 3,178 4,737 7,070 11,031

Net Worth 2,777 3,519 5,170 7,503 11,464

Total Liabilities & Shareholders’ Equity 9,620 10,224 11,470 14,545 19,507


Income Statement


Net Sales 14,503 14,433 22,111 36,846 58,947


Less:

Raw Material Consumed 10539 9827 15340 25395 40267

Manufacturing and Process Expenses 1576 1955.3 2985 4974 8076

Administrative and Other Exp 673 625 951 1584 2535


Bad Debts w/o 28 42 0 0 0


EBITDA 1,345 1,514 2,172 3,786 6,302

% margin 9.28% 10.49% 9.82% 10.28% 10.69%


Other Income 193 274 400 300 300

EBIT 1,193 1,343 2,014 3,363 5,856

Less: Gross Interest 485 435 595 736 841

Recurring Pre-tax Income 708.2 908.0 1,419 2,627 5,015Less: Taxation 189 255 397 788 1,504Net Income (Reported) 519 653 1,022 1,839 3,510Source : HDFC Sec. Research


June 20, 2008 Page 59

Cash Flow Statement



Working Capital Inflow / (Outflow) (1267) 695 (2150) (1554) (4148)

Net Cash flow from Operating Activities (438) 1749 56 713 (947)


Free Cash flow after capital commitments (1543) (186) (321) (1587) (1248)

Net Cash flow from Investing Activites 193 274 399 301 299

Net Cash flow from Financing Activites 753 (24) 225 1236 1451

Total Increase / (Decrease) in Cash (597) 64 303 (50) 503



Increase/(Decrease) in Cash and Bank balance (597) 64 303 (50) 503



Per Share Data (Rs)


Cash Earnings per share (Wgt.Avg) 27.0 32.2 36.5 59.1 98.2






EV / EBITDA 13.0 12.0 9.6 5.7 3.5

Dividend Yield (%) 1.6 1.6 1.9 2.2 2.4


Diluted Recurring EPS Growth 41.8 18.0 23.0 80.0 90.9

Diluted Recurring CEPS Growth 37.0 19.3 13.1 62.2 66.1

Total Operating Income Growth 2.9 (0.5) 53.2 66.6 60.0

EBITDA Growth 58.3 12.5 43.5 74.3 66.4

Recurring Net Income Growth 55.9 25.8 56.5 80.0 90.9


EBITDA Margins 9% 10% 10% 10% 11%

Recurring Net Income Margins 4% 4% 5% 5% 6%









Current Ratio 1.39 1.28 1.54 1.57 1.70

Turnover Ratios

Inventory Turnover Ratio (x) 2.68 2.25 2.94 3.56 3.58






June 20, 2008 Page 60

Jindal Saw (JSL)BUY

Key Stock Data

Sector Pipes & Tube

Reuters Code SAWP.BO

BLOOMBERG Code SAW IN




Avg. 6m Vol. 55,473


52 - Week high / low Rs.1225 / 516

3M 6M 12M

Absolute (%) -32 -44 -10

Relative (%) -26 -19 -17


Promoters 43.8


FIIs 17.1



Nifty 4504

Sensex 15088

Source : Company

CMP Rs. 572



Dividend Yield 1.4%

Investment Summary

Margins to remain stable

We expect substantial expansion in EBIDTA margins for JSL between CY07-09E to 16.04%

from 11.98% in CY07 with steel prices remaining flat and so too the realizations per tonne of

pipe. The margin expansion is primarily due to the dilution of the low margin US subsidiary,

which was sold in June 07.

Diversified business mix

JSL has a diversified business model and can cater to the orders for SAW pipes, DI/CI pipes

and seamless tubes. This mitigates its risk from concentration in one sector. The company

is also entering into the infrastructure business, which we believe will start contributing in

CY09E.

Strong order book position

The current order book of the company stands at Rs. 44 bn. We feel JSL will be able to

achieve its targeted growth with minimum spillover in CY08E. The order book is likely to see

additions in the next 2-3 years with increased investments in the oil and gas sectors.

Strong demand from user segments

As oil prices are at all time highs and this trend is expected to continue through 2008, the

demand is expected to be robust from non-OECD countries and the US where the market for

replacing old pipes with new is huge. India’s gas consumption is also expected to grow at an

annual rate of 5.1% between 2007 and 2025, to 2.6 trillion cubic feet in 2025, spurring further

demand.

Capacity expansion to drive growth

JSL will be incurring a capex of Rs. 8 bn between CY07-09E mainly towards enhancing the

capacity of LD and DI pipe segments and to streamline the seamless tube business. Of this,

around Rs. 4 bn will be invested in new businesses. We believe the capex is funded adequately

and expect JSL to maintain its return ratios after implementing its entire capex plan.

Year to Dec (Rs. mn) FY06 CY07(15m) CY08E CY09E

Revenue 36,673 67,878 41,456 57,947

Total Expenses 34,457 59,749 36,176 49,912

EBITDA 4,099 8,128 6,780 9,535

PBT 2,633 5,771 4,952 7,482

Net Income 1,762 8,764 3,565 5,387

EPS (Excl.EOI) 36.4 55.2 63.7 87.7

% Chg YoY 70.4 51.5 15.4 37.7

P/E (x) 15.7 10.4 9.0 6.5

CEPS (Rs) 47.2 69.3 77.0 102.2

EV/E (x) 9.4 4.8 5.4 4.2

Dividend Yield (%) 1.0 1.4 1.3 1.3

RoCE (%) 11.4 14.4 12.4 14.3

RoE (%) 21.0 20.0 16.2 18.0


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June 20, 2008 Page 61

Background

JSL was set up in 1984 for manufacturing and coating of Submerged Arc Welded pipes

(SAW Pipes). It is one of the country’s largest producers of SAW pipes, which is widely used

in the energy sector for the transportation of oil and gas. With integrated facilities at multiple

locations and an ever-expanding market , JSL has diversified from a single product company

to a multi-product one, mainly operating in four divisions.

• SAW pipes

• Seamless Tubes

• DI/CI pipes

• Ship Building/Waterways etc.

JSL has established itself as a market leader, and a global major in providing total pipe

solutions to the industry. In CY07 the company sold its US subsidiary to JSW steel and in the

process earned profits in excess of USD 200 mn. The company is now expanding its facilities

extensively in India and is also entering into new businesses to embark on a robust growth

phase over the next 2-3 years.

Capex for new businesses and expansions

JSL plans to spend around US$200 mn on its capex plan for the pipe business and around

USD 100 mn for its new businesses (contribution to subsidiary). This expansion is already

funded by:

• US$80 mn raised in FCCB issuance (25% converted; conversion price Rs675 and

convertible until June 2011) in April 2006.

• US$25 mn raised by issuing convertible warrants to promoter (all converted on 4

November 2007).

• Additional warrants issued in Q5CY07 worth USD 110 mn to be converted by September

2009 (5.33 mn shares at a price of Rs.819/share.

• Cash inflow from US divestiture (US$200 mn post tax).

The promoters’ holding in the firm post conversion of warrants will go up from the existing

40.7% to 45.8%. The dilution in equity post dilutions is as follows.

Expanding equity

Equity (Rs.Mn)

Current Equity 511

FCCB 49

Warrants 53

Fully Diluted Equity 613

Promoter Holding 45.80%



June 20, 2008 Page 62

Improving Operating Margins

JSL’s margins are likely to go up by 400 bps between CY07-09E on the back of improved

margins from the Indian pipe business and the commencement of the new seamless

facility, which yields higher margins. The company till now had EBIDTA margins of 12% on

the back of low margins from its US subsidiary, which yielded of 8-8.5%. We believe that after

the sale of its US plants, the company will witness a substantial jump in margins over the

next 2-3 years on the back of improvement in seamless and DI pipe volumes, and due to the

divestment of the lower margin US business in 2HCY07.

Capacity Ramp up

The company is scaling up its capacity by 43% between CY07-10E to tap the robust demand

in user industries. JSL caters to a wide diversified pipe product portfolio for oil and gas

transportation (LSAW and HSAW pipes), exploration activities (seamless pipes) and water

distribution (HSAW and DI pipes). The company is expanding capacity across its product

portfolio and post expansion will have the highest pipe capacity of 2 mmt among the Indian

pipe companies.

We believe that with this enhanced capacity the company will be able to absorb the loss in

volumes on account of US plant sell off by CY10E. This capacity enhancement is being done

in high margin products (DI/CI & seamless) as well, which will give the company better

profitability.

Expanding Margins

10.63%11.98%

15.78% 16.04%

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June 20, 2008 Page 63

Business diversification to de-risk growth

The company recently ventured into new businesses in the infrastructure space. While the

businesses are unrelated, we believe that given the group’s expertise in identifying growth

sectors and scaling them up, it is a strong positive. The new ventures do pose a risk to

investors in terms of the business structure (as the capex in these businesses are high), but

we believe that the creation of a subsidiary level entity will not dilute interest in the parent and

therefore remains a positive. The potential value creation can be equally high, as in our view

the segments identified by the company hold growth potential.

The company plans to invest round Rs18-20bn over the next 2-3 years. The D/E ratio is

expected to be 3:1. Towards this, the company is issuing warrants to the promoters and the

total cash infusion from this is expected to be Rs. 4.6bn, which would be part of the equity

investment in the new venture.

Company Name Objective Capex (USD.Mn) Current Status EBIDTA Margin (%)

Jindal Water Infrastructure Ltd. Undertaking Water pipeline 25 Bagged one order worth 15

projects USD 85 mn

Jindal Water Ways Ltd. Charter of small ships and 45 To charter 9-10 ships by Dec-08 25

barges of 8,000-12,000 DWT

Jindal Urban Infrastructure Ltd Power & Infrastructure projects 50 Bagged one Delhi Govt.Power 15

order worth USD 30 mn

Jindal Shipyard Ltd. Manufacturing small ships 200 Planning stage. Revenues from CY10E 15

of 10,000-15,000 DWT

Jindal Railways Ltd. Wagon Fabrication 25 Planning stage. Revenues from CY10E 10

New Business Initiatives

We believe that the potential revenues from these new businesses in CY08E could be in the

range of USD 100 mn, with margins better than its existing pipe business, but we are not

factoring in any upside in our numbers from the new initiatives as more clarity is awaited on

this.

The new business ventures named above would be run as separate companies. Jindal

SAW has created a 100% owned subsidiary named Jindal ITF, which will invest in these

companies. The initial capital commitment from JSL to this subsidiary will be around USD

100 mn.

While currently the above companies would be 100% owned by Jindal ITF, the group indicated

that if needed, there could be stake sales that is financial or strategic in nature. Currently,

most of its new ventures are at a very nascent stage and plans are still being finalized.



June 20, 2008 Page 64

Robust Volume Growth

We believe that JSL can achieve a volume growth of around 20% between 15MCY07-10E.

However, this volume growth will have higher proportion of high margin products like DI/CI &

seamless pipes. We expect this share to go up to 37% of total volumes by CY10E compared

to 28% in 15MCY07E. The margins in the DI/CI & Seamless pipes are around 18-20%

compared to 15% in large diameter pipes.

Production Scale

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FY06 CY07 (15M) CY08E CY09E



June 20, 2008 Page 65


Year End September 30 (Rs.Mn) Q1CY08 Q2FY07 Y-o-Y CY07

Net Sales 9521.4 12691.0 -25.0% 67877.5

Total Expenditure 8055.9 11231.0 -28.3% 59749.1

Operating Profit 1465.5 1460.0 0.4% 8128.5

EBIDTA 1494.7 1491.7 0.2% 8219.4

Interest 203.6 290.5 -29.9% 1726.6

PBDT 1291.1 1201.2 7.5% 6492.8

Depreciation 152.1 138.7 9.7% 721.7

PBT 1139.0 1062.5 7.2% 5771.0

PAT 854.0 702.5 21.6% 2822.7

Extra-ordinary Items 0.0 1.0 5941.1

PAT after EOI 854.0 702.5 21.6% 8763.8

Equity (FV = 10) 521.2 483.6 511.4

Ratios

OPM (excl.Other Income) 15.4% 11.5% 388.7 12.0%

Tax / PBT 25.0% 33.9% -886.0 25.2%

NPM (Before EOI) 8.9% 5.5% 342.0 4.2%

Cash EPS 19.3 17.4 11.0% 69.3

EPS (Before EOI) 16.4 14.5 12.8% 55.2

• We believe that the company has reported very good set of numbers despite dilution in business from its

US facility. The margins of 15% and above during the quarter has resulted in better than expected numbers.

We believe that the company is likely to maintain such robust margins going forward on the back of a healthy

order book position and commensurate back to back arrangement for its raw materials.

• However over the short term, we are worried about rising coal prices as it may impact DI/CI margins for one

quarter. On a long-term basis, we believe that the company will be in a position to pass on the incremental

costs to its end customers.

• JSL currently has a strong order book position of USD 1.1bn (Rs. 44 bn), which is around 1x its expected

CY08 turnover. Of this, SAW pipe (LSAW & HSAW) order book is worth USD 860 mn, followed by DI pipes of

USD 165 mn and seamless pipes of USD 65 mn.

• New business initiative by the company will start contributing to the revenues and profits from H2CY08. We

believe that during the current year, the company will be able to post revenues in the range of USD 80-100

mn from its new businesses. But we have not factored this in our numbers as further clarity on these new

projects is awaited.

• Q1CY08 net sales decreased by 25% to Rs. 9.5 bn compared to Rs 12.7 bn in the same quarter last year.

The results are not comparable for this quarter on account of diminution in business on account of the US

subsidiary.

• Operating profits during Q1CY08 remained flat at Rs. 1.46 bn, followed by an increase in PAT of 21.6% y-o-

y to Rs. 854 mn.

• Operating profit margins (OPMs) at 15.4% in the current quarter recorded 390 bps increase y-o-y due to

lower cost of overheads as a percentage to sales.

• The tax rate for the quarter was at 25% compared to the full tax rate during previous quarters mainly on

account of higher sale of pipes from its EOU plant in Mundra. We believe that for the full year, the tax rate will

be around 28%.



June 20, 2008 Page 66

DCF Analysis




Cost of debt (Pretax) 10.5% Average cost of debt

Tax rate 35%




Wd 29%

WACC 16.1%


Assumptions

• The above NPV calculation is based on its fully diluted equity in CY10E and does not


• We have not assumed any incremental turnover from new businesses as most of

them are at the planning/financial closure stage. We believe that there could be

significant upside from these businesses, but it is premature on our part to assume

any benefits from it.

• The company has been notified for allotment of an iron ore mine in Rajasthan. The

capex plans going forward can be significant. However, we have not factored any benefits/

costs on account of this until the mine is finally handed over to the company.



June 20, 2008 Page 67

Outlook

Historically the company has delivered better numbers than our expectations mainly on

account of strong volume growth and buoyant realizations. The company has embarked

upon an aggressive capex plan in the pipe space and also into new businesses. We believe

that the contribution from the new businesses could be significant going forward but it is too

premature to assume any numbers yet. The current thrust on E&P activities across

geographies has resulted in a surge in demand for SAW pipes for transportation to the end

user. The company caters to an exhaustive client base and their growing demands. The

company is geared up to take the benefit of the bullish trend in these sectors. We expect the

company to demonstrate better performance going forward.

The stock currently trades at a P/E multiple of 9x CY08E and 6.5x CY09E, with cash per share

of Rs. 150 in its books, which can be used for any aggressive capex in the future. We expect

the stock to re-rate positively once its expanded capacities come on stream and start

contributing to profits. Thus, with a target P/E of 10x on CY09E earnings, we maintain our

‘BUY’ recommendation and a price target of Rs. 1050 (an upside of 83%).

Jindal Saw PER Chart

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June 20, 2008 Page 68

Balance Sheet

Year ending Dec (Rs. mn) FY05 FY06 CY07(15m) CY08E CY09E

ASSETS


Cash & Bank balance 1509 3910 2695 6996 8446

Inventory 9262 13741 11656 14986 21114

Sundry Debtors 3335 7526 10937 5111 7144

Loans and Advances 1646 1828 2553 4500 8500

Operational 1646 1828 2553 4500 8500

Total Current Assets 15751 27005 27841 31593 45205


Current Liabilities 4576 11005 8590 8004 10601

Sundry Creditors 3843 9672 7080 6474 9049

Other Current Liabilities 733 1333 1510 1530 1552

Provisions 371 899 1390 700 774

Total Current Liabilities and Provisions 4948 11904 9980 8704 11375

Net Current Assets 10803 15102 17861 22888 33829


Net Fixed Assets 7285 8817 12250 12851 13160

Total Assets 19050 24884 32381 38009 49259


Borrowings

Short Term Debt 1716 3478 2910 3500 5000

Long-term Debt 4015 3719 2994 4360 4360

Unsecured Loans 4246 6603 5690 3056 3450

Total Borrowings 9977 13800 11594 10916 12810


Share Capital



7.85% Redeemable Preference share capital 1000 1000 1000 1000 1000

Reserves & Surplus

Reserves & Surplus 7004 8835 18339 24734 34035

Net Worth 8475 10318 19850 26294 35649

Total Liabilities & Shareholders’ Equity 19050 24884 32380.6 38010 49259




June 20, 2008 Page 69

Income Statement


Net Sales 22,188 36,673 64,757 41,456 57,947


Less:


Manufacturing Exp 2794 6990 10188 1997 2735

Employee Exp 409 816 1304 831 1129

Selling Expense 950 2280 3105 2087 2879

Admin & Other Exp 406 356 1070 430 594

Total Operating Expenses 20,465 34,457 59,749.1 36,176.4 49,912.4

EBITDA 2,672 4,099 8,128 6,780 9,535


Other Income 144 178 91 50 50

EBIT 2,462 3,758 7,498 6,081 8,693

Less: Gross Interest 947 1,125 1,727 1,129 1,211

Recurring Pre-tax Income 1,515 2,633 5,771 4,952 7,482

Add: Extraordinaries 0.0 0.0 5941.1 0.0 1.0

Less: Taxation 508 871 2,948 1,387 2,095

Net Income (Reported) 1,007 1,762 8,764 3,565 5,387

Recurring Net Income 1,007.3 1,762.0 2,822.7 3,565.5 5,386.9

Cash Flow Statement


Operating Cash Flow before Working Capital change 1582 2786 4140 3575 6303


Net Cash flow from Operating Activities (4438) 361 (326) 3538 (3262)


Free Cash flow after capital commitments (6929) (1550) (5975) 2188 (4463)


Net Cash flow from Financing Activites 7955 3773 (1271) 2064 5863

Net Extra-ordinary Income 0 0 5941 0 0

Total Increase / (Decrease) in Cash 1170.6 2401 (1215) 4302 1449



Increase/(Decrease) in Cash and Bank balance 1170.3 2401 (1215) 4301 1450



June 20, 2008 Page 70


Year ending Dec FY05 FY06 CY07(15m) CY08E CY09E

Per Share Data (Rs)

Diluted Recurring Earning per share (DEPS) 21.38 36.43 55.19 63.67 87.70








EV / EBITDA 13.6 9.4 4.8 5.4 4.2

Dividend Yield (%) 0.7 1.0 1.4 1.3 1.3




Total Operating Income Growth 113.8 66.7 76.0 (36.7) 38.4

EBITDA Growth 102.3 53.4 98.3 (16.6) 40.6



EBITDA Margins 12% 11% 12% 16% 16%

Recurring Net Income Margins 4% 4.5% 4.2% 8.3% 9.1%




Return on Invested Capital (RoIC) 19.6 21.3 32.1 22.3 26.5





Current Ratio 2.12 1.64 1.96 2.22 2.24

Turnover Ratios







June 20, 2008 Page 71

Man IndustriesBUY

Key Stock Data

Sector Pipes & Tube

Reuters Code MIND.BO

BLOOMBERG Code MAN IN




Avg. 6m Vol. 96,433


52 - Week high / low Rs.177 / 88

3M 6M 12M

Absolute (%) -13 -36 -15

Relative (%) -7 -12 -22


Promoters 40.6


FIIs 4.0



Nifty 4504

Sensex 15088

Source : Company

CMP Rs. 93



Dividend Yield 1.9%

Investment Summary

Expanded capacity to drive growth

To capitalise on the growing demand for gas pipeline infrastructure, the company is expanding

its capacity from 5,00,000 tpa to 8,00,000 tpa by FY10E, which will result in volume CAGR of

26.6% between FY07-10E. The capacity addition will be in India and the US.

Strong growth in demand

The total combined capacity of the three major pipe manufacturers, Welspun Gujarat, Saw

Pipes and Man Industries, is less than 12,000 kms per year, of which almost 60% is exported.

Hence, the total domestic capacity available is just 4,800 kms. This favourable demand-

supply mismatch will augur well for pipe manufacturers’ bottomline as more than 20,000

kms of oil and gas pipelines will be added in the next four years domestically and 2,00,000

kms globally. Hence, the average yearly global demand would be over 50,000 kms in 3-4

years.

Operating margins to improve

We expect steel prices to stabilize at current levels and EBITDA margins to improve to 12.7%

in FY10E from 11.6% in FY07. Since the escalation clauses in its contracts are negligible,

any further decline in steel prices can give a fillip to the operating margins as pipe prices

globally are very bouyant.


The current outstanding order book position of MIL stands at Rs.14 bn, which will be executed

in the next 15-16 months. This order book represents 1x its FY08E turnover. Out of this

unexecuted order book position, US constitutes 60%, domestic orders are 10-15%, while

Middle East holds the balance. There was no major order addition during Q4FY08, but the

company has bids outstanding for over US$ 1 bn and is likely to get some of them converted

into concrete orders in the next few quarters.


Revenue 7,994 10,596 15,509 20,881 26,220

Total Expenses 7,762 10,013 14,121 18,685 23,327

EBITDA 937 1,318 1,888 2,696 3,393

PBT 513 840 1,337 2,065 2,685

Net Income 350 553 883 1,363 1,772

EPS (Rs) 6.8 10.4 16.6 19.7 25.7

% Chg YoY (29.4) 52.4 59.6 19.2 30.0

P/E (x) 13.6 8.9 5.6 4.7 3.6

CEPS (Rs) 9.8 13.6 20.2 23.2 29.9

EV/E (x) 6.1 5.5 4.2 3.1 2.2

Dividend Yield (%) 1.1 1.9 2.2 2.2 2.2

RoCE (%) 12.9 13.2 14.9 17.0 18.8

RoE (%) 19.1 19.0 25.5 26.9 25.0


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June 20, 2008 Page 72

Background

Man Industries (India) Limited (MIIL), is a leading manufacturer of large diameter SAW Line

Pipes and coating systems for high pressure applications like transportation of oil, gas and

other petrochemical products. The company has its plant located at Pithampur, MP and at

Anjar in Kutch, Gujarat. The company has a collaboration agreement with Chr. Haeusler,

Switzerland for API-grade longitudinally welded SAW pipes. The SAW pipe division can

manufacture pipes of diameters between 18 inches and 100 inches and thickness between

6 mm and 25.4 mm and of lengths upto 12 mtr.

The clients of the company include some of the biggest names in the energy industry,

including some of the frontline Fortune 500 firms in India and abroad.

International Clients Clients in the Middle East Indian Clients

Shell, Netherlands Saudi Aramco, Saudi Arabia ONGC, GSPL

Engineering for the petroleum and Process Industry Qatar General Petroleum Corporation (QGPC), Qatar BPCL, Petronet MHB Ltd.

Saipem, Italy, Hunt Oil, Petronas Kuwait Oil Corporation, Kuwait Bechtel, India, CAIRN India

Bechtel, USA, Kinder Morgan, Center Point Kuwait National Petroleum Engineers India Ltd.

Hyundai Heavy Industries, Korea Iranian Offshore Oil Co (IOOC) Reliance Petroleum

Source: MIL

Expanded capacity to drive growth

To benefit from the growing investments in the oil and gas pipeline infrastructure, Man

Industries had embarked upon a capacity expansion drive in FY07. It has increased its

capacity by 2,00,000 tpa — from 6,00,000 tpa to 8,00,000 tpa – at its Anjar plant. The capacity

expansion at Anjar would provide strategic advantage to Man Industries, as the Anjar plant

enjoys sales tax exemption and excise duty refund. Also, since the plant is close to the port,

the company can save on freight cost on its exports. The company is likely to increase its

capacity to 1.3 mn tons by FY10E of which 0.3 mn tons will be in the USA.

(Mn Tons) LSAW HSAW Total in FY10E

Current Capacity 500,000 100,000 600,000

Addition in FY08E 200,000 800,000

Addition in FY09E 200,000 1,000,000

Addition in FY10E (USA) 300,000 1,300,000

The capex for most of these expansions have been funded including the US plant. The

company will be investing USD 100 mn for its US venture, which will be funded in the D/E

ratio of 1:3.

Significant growth in production levels

We expect MIL’s production to go up significantly between FY07-10E on the back of buoyant

demand outlook for pipeline infrastructure and increased capacity during the same period.

In FY07, the company produced 0.25 tons of steel pipes against its installed capacity if 0.6

mn tons implying a capacity utilization of just 42%. We expect this production to go up to 0.5

mn tons by FY10E on the back of new capacities being added between FY07-10E in India

and the US



June 20, 2008 Page 73

Huge demand from major markets

Exports formed more than 65% of MAN’s revenues in FY07 and most of these revenues

came from the Middle East and Asian sub continent. Going forward, the majority of the

demand for LSAW pipes is likely to be from these regions only, which can be seen from the

following scenario.

Global Gas Investment in Pipelines

Geographical Zone Total Length (in miles)

Far East 18,151

Europe 15,326

South Pacific 9,145

USA 8,553

Canada 6,027

Middle East 4,851

Africa 4,555

South America 3,436

Mexico 2,880

Total 72,924

Even if some of these projects get delayed or scarped, the company can benefit from the

huge domestic demand on the back of huge investments (US$ 30 bn) by oil and gas

conglomerates.

Company Length Project Details Cost (Rs. Bn) Completion

GAIL 5,195 Km Seven Pipeline Projects forming part of an integrated National 170 2007 to 2011

Gas Grid in the country

RIL 10,000 Km Kakinada to Bharuch 250 2011

Kakinada to Chennai -

Kakinada to Kolkata 300

ONGC N/A Uran-Trombay Gas Pipeline Project 2.5 Jun-08

GSPL 620 Km Covering Seven Districts of Gujarat Jun-09

RNRL 3,000 Km City Gas Distribution 20 2010

1,600 Km Kakinada, Andhra Pradesh to Dadri, U.P 140 2010

Pipe Production

246,424

330,000

420,000

500,000

0

100,000

200,000

300,000

400,000

500,000

600,000

FY2007 FY2008E FY2009E FY2010E





June 20, 2008 Page 74


The current outstanding order book position of MIL stands at Rs.16 bn, which will be executed

in the next 15-16 months. This order book represents 1x its FY08E turnover. Out of this

unexecuted order book position, the US constitutes 60% followed by 10-15% of domestic

orders. The balance is from the Middle East. There was no major order addition during

Q3FY08. But the company has bids outstanding for over US$ 1 bn and is likely to get some

of them converted into concrete orders in the next few quarters.

New businesses

The company is entering into the real estate space on the back of past history of the promoters

of executing projects in and around Mumbai. Towards this the company has set up a subsidiary

named Man infrastructure (MIL’s Stake 51%), which will undertake various real estate projects

in India. The proposed new businesses may execute projects worth Rs.20 bn over next 3-4

years. However, we have not built in numbers from its real estate business, as it is premature.

We believe this initiative by the company may affect the overall business mix of MIL as it will

face the risk of diverting from its core business.


June 20, 2008 Page 75

Financial Analysis


Year End March 31(Rs.Mn) Q308 Q307 y-o-y 9M08 9M07 y-o-y

Total Income 4137.2 3271.1 26.5% 10893.9 8280.4 31.6%

Total Expenditure 3654.8 2945.1 24.1% 9601.5 7386.3 30.0%

EBIDTA 482.4 326.0 48.0% 1292.4 894.1 44.5%

Interest 88.0 74.6 18.0% 243.0 235.6 3.1%

PBDT 394.4 251.4 56.9% 1049.4 658.5 59.4%

Depreciation 79.6 45.8 73.8% 183.9 126.9 44.9%

PBT 314.8 205.6 53.1% 865.5 531.6 62.8%

PAT 207.3 164.7 25.9% 570.1 417.2 36.6%

Equity (FV = 5) 266.4 266.4 266.4 266.4

Ratios

OPM 11.7% 10.0% 169.4 11.9% 10.8% 106.6

NPM 5.0% 5.0% -2.4 5.2% 5.0% 19.5

Cash EPS 5.4 4.0 36.3% 14.2 10.2 38.6%

EPS 3.9 3.1 25.9% 10.7 7.8 36.6%

• For 9MFY08 MIL has achieved a net turnover of Rs. 10.9 bn, a growth of 31.6% over 9MFY07. The growth in

turnover was mainly due to commensurate expansion in volumes in the first half.

• For Q3FY08, the net turnover was at Rs. 4.14 bn, a growth of 26.5% over Q3FY07.

• Operating profit margins expanded significantly during 9MFY08 to 11.9% from 10.8% in 9MFY07 on the back

of significant decline in raw material costs as a percentage to sales.

• The operating profit during 9MFY08 was up by 44.5% y-o-y at Rs. 1.29 bn and PAT showed an increase of

36.6% to Rs. 570.1 mn.

• The company’s performance in FY09E and FY10E is likely to be on the growth trajectory on the back of stable

margins and considerable increase in volumes due to capacity expansion and increase in utilisation levels.

• We expect revenues to grow at a CAGR of 29% over FY08E-10E. Net profit growth would show an even

stronger CAGR of 42% over the same period aided by marginal margin expansion and favorable steel price

scenario.



June 20, 2008 Page 76

DCF Analysis





Tax rate 30%




Wd 43%

WACC 15%

NPV per share 191.5 Assuming Terminal Growth Rate of 3% beyond 2014

• The NPV calculation is based on current prices of pipes and for future orders also,

prices have been kept flat taking into account already ruling high prices of pipes globally.

We believe that the current pipe prices may not come down significantly and are likely

to sustain in the near future



MIL trades at 4.7x and 3.6x its expected fully diluted earnings of FY09E and FY10E respectively.

Historically, the stock has traded in the P/E band of less than 8x, but has not got re-rated

significantly compared to its peer group companies. We believe that it should ideally trade at

10x FY09E and 8x FY10E, given the robust momentum in earnings expected during the

same period. The fair value as per FY10E comes to around Rs. 208. Also, other key reasons

on why this stock should command such P/E multiple are as follows.

• Strong order backlog of almost 1x FY08 turnover giving clear visibility of its long-term

growth.

• It will be one of the key beneficiaries in the US market, as the company will commence

production at its facility in the US in the next 12-15 months.



June 20, 2008 Page 77

Recommendation

The pipeline investment for natural gas transportation in India in the near future will be US$

4.6-5.7 bn. The additional gas recently found in KG basin on the Eastern Coast is expected

to be monetized by 2008-2011 and will provide opportunities for the pipe industry to grow

further in the domestic market. Natural gas related projects and additional gas availability

would result in the development of infrastructure facilities such as LNG terminals and laying

additional pipelines. We believe that MIL is committed to explore the available opportunities

to enhance its market share and shareholder value. We expect Man Industries’ revenues to

grow at a CAGR of 30% over FY08-10E and net profits to grow at a more robust CAGR of 42%

over the same period. The stock currently trades at a P/E multiple of 4.7x FY09E and 3.6x

FY09E, which looks reasonable. We maintain our BUY rating on the stock with a target of

Rs192 (upside of 106%).

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Balance Sheet


ASSETS



Inventory 1154 1797 2294 3089 3879

Sundry Debtors 1006 3326 3399 4577 5747


Operational 1230 1814 2000 2000 2000









Net Fixed Assets 2465 2887 3691 4550 4756

Total Assets 5524 5909.5 9095 9928 11812


Borrowings

Short Term Debt 1362 1495 3950 2200 2300

Long Term Debt 1148 977 1050 1200 1350



Share Capital



Reserves & Surplus


Net Worth 2752 3069 3845 6276 7910

Total Liabilities & Shareholders’ Equity 5524 5910 9095 9927 11812



Income Statement (Stand alone)


Net Sales 7,994 10,596 15,509 20,881 26,220


Less:




Administrative Exp 153 74 95 98 102

Selling and Distribution Expenses 515 631 862 1,147 1,425


EBITDA 937 1,318 1,888 2,696 3,393

% margin 10.8% 11.6% 11.79% 12.6% 12.7%


EBIT 782 1,149 1,692 2,455 3,100


Recurring Pre-tax Income 513 839.6 1,337 2,065 2,685

Less: Taxation 163 287 455 702 913

Recurring Net Income 350 553 883 1,363 1,772


June 20, 2008 Page 79


Year ending Mar FY06 FY07 FY08 FY09E FY10E

Per Share Data (Rs)








EV / EBITDA 6.1 5.5 4.2 3.1 2.2

Dividend Yield (%) 1.1 1.9 2.2 2.2 2.2


Diluted Recurring EPS Growth (29.4) 52.4 59.6 19.2 30.0

Diluted Recurring CEPS Growth (25.6) 37.9 49.3 14.9 28.7


EBITDA Growth 120.3 40.6 43.2 42.8 25.8



EBITDA Margins 11% 12% 12% 13% 13%

Recurring Net Income Margins 4.03% 4.88% 5.51% 6.37% 6.63%






Cash Flow Statement




Net Cash flow from Operating Activities (638) (666) 508 1027 1513

Cash Inflow/(outflow) from Investing Activities (429) (482) (1001) (1101) (501)

Cash Flow from Financing Activities

Issue of Share Capital during the year 67 9 0 79 0

Proceeds from fresh borrowings 881 (37.2) 2528 (1600) 250

Dividend paid including tax (55) (94) (107) (138) (138)

Net Extra-ordinary Income 0 0 0 0 0

Total Increase / (Decrease) in Cash 1277 (1422) 1810 (605) 1125



Increase/(Decrease) in Cash and Bank balance 1277 (1422) 1810 (604) 1124



June 20, 2008 Page 80

Maharashtra SeamlessBUY

Key Stock Data

Sector Pipes & Tube

Reuters Code MHSM.BO

BLOOMBERG Code MHS IN




Avg. 6m Vol. 76,640


52 - Week high / low Rs.675 / 259

3M 6M 12M

Absolute (%) 4 -47 -48

Relative (%) 10 -22 -55


Promoters 46.2


FIIs 10.1



Nifty 4504

Sensex 15088

Source : Company

CMP Rs. 307



Dividend Yield 2.0%

Investment Summary

Strong growth in demand

We expect a substantial increase in the use of seamless pipes in the long term due to the

increase in oil and gas exploration and production following the hike in crude oil prices. MSL,

the leader in the seamless segment, is poised to grow in the next few years due to its low

capital and operating costs.

Capacity expansion to drive growth

The company plans to increase capacity in the seamless segment to 7,00,000 tons from

3,50,000 tons presently, in 3-4 years. It intends to become one of the largest manufacturers

of seamless pipes in SE Asia in this period.

Strong growth in earnings

We expect MSL to report a CAGR of 31.7% in earnings between FY08E-10E, with earnings

per share improving further to Rs. 43.8 in FY09E and Rs. 54.5 in FY10E. At a P/E of 6.5x

FY09E and 5.2x FY10E, the stock looks attractive in the medium to long term.

Monopoly in 9" to 14" Segment

MSL has a monopoly in the 9 5/8 inch to 14-inch range, where the value addition is much

higher and the products are import substitutes. This results in much higher realisations and

margins for the company, both from the domestic and international markets. The entry of a

new competitor in the seamless segment is unlikely as the investment for a new 0.5 mn

tonne capacity plant is about Rs. 20 bn, which can act as an entry barrier.

Swelling Order Book Position

The company has a strong order book position of Rs. 5 bn, which it will execute in the next 3

months. More than 80% of the order book is for seamless pipes, which offer higher margins

than ERW pipes.


Revenue 9,548 13,615 14,897 20,429 25,563

Total Expenses 7,663 10,560 11,898 16,012 20,010

EBITDA 2,080 3,410 3,090 4,417 5,553

PBT 2,069 3,527 3,282 4,581 5,694

Net Income 1,391 2,339 2,215 3,092 3,844

EPS (Rs) 24.1 33.5 31.4 43.8 54.5

% Chg YoY 64.5 38.1 (4.8) 37.6 24.3

P/E (x) 12.7 9.2 9.6 7.0 5.6

CEPS (Rs) 26.7 35.8 33.9 46.7 57.7

EV/E (x) 9.3 5.7 5.6 3.8 2.8

Dividend Yield (%) 1.4 2.0 1.8 2.1 2.3

RoCE (%) 20.4 23.4 19.5 22.5 23.0

RoE (%) 38.4 35.0 22.1 24.9 24.9


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June 20, 2008 Page 81

Background

Maharashtra Seamless Ltd (MSL), is the flagship company of the D.P. Jindal Group. MSL is

one of India’s leading manufacturers of seamless and ERW pipes. Seamless pipes are

superior in terms of technology and value addition compared to any other type of pipe and

thus enjoy much higher margins. The company also has a power division producing 7 MW

using wind energy (Satara, Maharashtra). It commenced operations in 1992 by setting up a

line for seamless pipes with an initial capacity of 50,000 TPA at village Sukeli in Maharashtra.

The capacity of this plant was enhanced to 1,00,000 TPA in 2002 through de-bottlenecking.

MSL diversified into the production of ERW pipes in the year 2000. This plant was set up with

a capacity of 1,00,000 TPA at a cost of Rs. 250 mn. The power division of the company was

set up with two objectives of saving taxes and ensuring that a part of the company’s power

consumption was met by internal generation.

The break up of sales, which is identical in both segments, is as follows – Institutions &

Government (45%), Retail (30%) and Exports (25%). MSL’s clients include IOC, ONGC,

BPCL, GAIL, Oil India, BHEL, ABB etc.

Dominant Player in the Seamless Segment

MSL is the largest manufacturer of seamless steel pipes & tubes in India, with a production

capacity of over 2,25,000 MT per annum (71% of revenues in FY06). The plant is located in

Raigad, Maharashtra and is equipped with state-of-the-art machinery and has a technical

collaboration with Mannesmann of Germany. The company uses the world renowned CPE

technology and is capable of producing pipes ranging in size from 3/4" OD to 7" OD in Hot

Finished and from 2/5" OD to 4.33" OD in Cold Drawn / Cold Pilgered condition.

The wide product range covers sizes & specifications catering to diverse application areas

like the ol & gas sector, the hydrocarbon Industry, boilers & heat exchangers, automotive,

bearing and general engineering industries etc. The company has a dominant 40% market

share in the overall seamless pipes segment with the remainder accounted for by Indian

Seamless Metal Tubes (30%) and Imports/Others (30%).

Monopolistic situation in major segments

The company expanded its production facilities, using Plug Mill Technology supported by

world-class reelers, to manufacture for the first time in India, large size seamless pipes upto

14" diameter and wall thickness upto 40 mm (1 lac Tonnes) in 2005. MSL has a monopoly in

the 9 5/8 inch to 14-inch range, where the value addition is much higher and the products are

import substitutes. This results in much higher realisations and margins for the company

both in the domestic and international markets. The size of the seamless pipes segment is

Rs 25 bn currently with a capacity of 0.8 mn tones per annum. The opportunity globally (9 mn

mtn tons p.a) in this segment is immense with the US market alone having a demand of 4

lakh tonnes per month. The company exports 25% of its seamless capacity.

The entry of a new competitor in the seamless segment is unlikely as the investment needed

for a new 0.5 mn tonne capacity plant is Rs. 20 bn, which can act as an entry barrier. MSL’s

current capacity in seamless pipes is 3,50,000 tonnes and its ERW capacity is 2,00,000

tonnes.


June 20, 2008 Page 82

The company has plans to increase its seamless capacity to 7,00,000 tons (Incl.Romania

acquisition of 2,00,000 tons) from the present capacity of 3,50,000 tons over a period of 3-4

years. The company already has the mill facility to increase capacity. The capex for this

expansion will be around Rs. 3 bn, mainly for adding balancing equipment and relocating

the Romanian unit.

Low capital costs

The company has an extremely low capital base, which has resulted in high fixed asset

turnover ratios. The first seamless plant was a used one from the US (cost of Rs. 690 mn)

and the capacity was ramped up at minimal capital expenditure. The higher diameter

seamless plant, which started production in the second half of fiscal 2005, set up at a cost of

Rs. 1500 mn was a pre-owned plant; a new plant would have cost much more. The company

has also benefited in terms of low depreciation costs.

Comparison of MSL’s cost

Product Capacity Cost (Rs.Mn) Green field cost (Rs.Bn)

Seamless tubes upto 7" 1,25,000 700 6.8

Seamless tubes upto 14" 1,00,000 1,500 6.0

ERW tubes 2,00,000 250 2.0

Romanian Unit 2,00,000 3,000 8.0

Total 6,25,000 5,450 22.8

Source: Industry, HDFC Sec Research

Long-term debt free company – MSL is one of the very few companies in the steel industry,

which has no long-term debt resulting in much lower interest costs as compared to its

competitors.

Lower staff costs – At around 1.3% of Net Sales (9MFY07), the staff costs are the lowest

among companies in the domestic or international markets. This has been possible mainly

due to high productivity levels.

Captive power – The company made a strategic decision of investing in wind power generation

for captive consumption. The variable cost of power generation is low at Rs 0.55 per unit.

MSL meets 10% of its power requirements from captive sources, which results in an annual

savings of Rs. 40 mn on power costs.

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June 20, 2008 Page 83


The company has a strong order book position of Rs. 5 bn, which it will execute in the next 3

months. Of this order book, seamless pipes are worth Rs. 3.6 bn and the balance is for

ERW. In March 2008, the company hiked the price (gross) by Rs. 10,000 per ton in the

seamless segment and Rs. 5,000 per ton in the ERW segment. Raw material prices have

gone up by about Rs.5, 000 per ton.

Sales & Realisations

Q4FY08 Q4FY07 % Growth FY08 FY07 % Growth

Sales (MT)

Seamless 61,150 56,959 7.4% 238,000 231,600 2.76%

ERW 25,500 26,805 -4.6% 105,000 86,600 21.2%

Realisation (Rs/MT)

Seamless 50,951 48,864 4.3% 50,362 49,708 1.3%

ERW 36,606 37,457 -2.3% 37,086 37,995 -2.4%

Raw Material Cost (Rs/MT)

Seamless 26,087 23,058 13.1% 24,403 23,015 6.0%

ERW 29,649 26,488 11.9% 28,650 26,817 6.8%

CAPEX plan for backward integration

The company has now finally decided on its backward integration plan to manufacture billets

and will now implement it in the next 2-3 years. The overall capex for this expansion will be

about Rs. 15 bn to be financed through internal accruals and debt. The company has already

acquired land in three different locations (Maharashtra, and Chhatisgarh). The final location

will depend on sustainable supply of raw materials.

We believe that the margin expansion on the back of its potential captive raw material supply

could be significant but it will be too premature to take into account any such benefits. Hence,

we have not factored in any benefits until FY10E on account of its steel plant.



June 20, 2008 Page 84

Key Concerns

Increase in raw material prices

Steel prices have been very volatile in the past owing to demand-supply concerns; MSL’s

inability to pass on the increase in raw material prices to its customers may significantly

affect its margins. However, past orders have been executed with good margins and with the

recent passing on of increased steel prices, stable margins will ensue.

Delay in backward integration

The main suppliers of raw materials in the seamless segment (round steel billets) are JSPL

and Kalyani Steel and imports are from Ukraine. In comparison, the raw material in the ERW

segment (HR coils) is more easily available. The main suppliers for HR coils are SAIL,

Jindal Vijaynagar, Ispat and Essar. As the requirement of raw materials has gone up, the

company is planning to integrate backwards to reduce the pressure on margins. This will

help the company obtain the right quantity and quality of raw materials. Any further delay in

this backward integration plan will increase the raw material risk substantially.


June 20, 2008 Page 85

Financial Analysis


Year End March 31 Q408 Q407 Y-0-Y FY08 FY07 Y-0-Y

Net Sales 3843.1 3668.3 4.8% 14988.4 13947.3 7.5%

Total Income 3961.6 3777.2 4.9% 15389.7 14264.5 7.9%

Total Expenditure 3092.3 2930.4 5.5% 11898 10526.4 13.0%

(Inc)/Dec in stock -460.9 145.6 -416.6% -456.7 189.8 -340.6%

Raw Material Consumed 2912.6 2197.3 32.6% 9939.6 8191.2 21.3%

Employee Expenses 85.1 61.5 38.4% 227.3 165.1 37.7%

Other Expenses 555.5 526 5.6% 2187.8 1980.3 10.5%

Operating Profit 750.8 737.9 1.7% 3090.4 3420.9 -9.7%

EBIDTA 869.3 846.8 2.7% 3491.7 3738.1 -6.6%

Interest 13.1 6.7 95.5% 32.3 32.9 -1.8%

PBDT 856.2 840.1 1.9% 3459.4 3705.2 -6.6%

Depreciation 44.3 39.2 13.0% 177.1 171.2 3.4%

PBT 811.9 800.9 1.4% 3282.3 3534.0 -7.1%

Profit after Extra-ordinary items 540.5 530.7 1.8% 2214.7 2353.0 -5.9%

Equity (FV = 5) 352.7 349.7 352.7 349.7

Ratios

OPM 19.5% 20.1% -57.9 20.6% 24.5% -390.9

Tax / PBT 33.4% 33.7% -30.9 32.5% 33.4% -89.2

NPM 13.6% 14.1% -40.7 14.4% 16.5% -210.5

Cash EPS 8.3 8.1 1.7% 33.9 36.1 -6.1%

EPS 7.7 7.6 1.0% 31.4 33.6 -6.7%

• MSL reported a flattish performance in Q4FY08 and FY08 with net sales improving by 4.8% and 7.5% during

the period. Operating profit and PAT grew by 1.7% and 1.8% respectively in Q4FY08. However, in FY08

Operating profit and PAT de-grew by 9.7% and 5.9% respectively.

• The subdued performance in FY08 was mainly on account of increased competition from Chinese players

and as a result the company was unable to pass on the increase in raw material prices.

• The OPMs of the company in FY08 came down to 20.6% compared to 24.5% in FY07 on account of negligible

margins (5-6%) on ERW pipes and also due to rising billet prices, which bought down the overall seamless

margins from 27% to 24%.

• We believe the current margins of 20% is sustainable going forward, as the company has significantly

raised prices (20%) in March 08, the results of which will be seen in the ensuing quarters.

• In FY09E and FY10E, the company is likely to be on a growth trajectory due to sustainable margins and

considerable increase in volumes due to capacity expansion.

• For FY09E, we expect the company to report a revenue growth of 36% on a YoY basis to Rs. 20.4 bn. We

expect this growth on account of increasing contribution from the enhanced capacity in the seamless

segment, aided by buoyant demand from user segments.



June 20, 2008 Page 86

DCF AnalysisRm 20% Expected Returns from Market




Tax rate 35%




Wd 8%

WACC 18.9%


Assumptions

• We have not assumed any upside from backward integration by manufacturing billets

as concrete plans and implementation schedules are still awaited. The cash flows will

be significantly different once the project is implemented, as the margin expansion on

backward integration could be significant.

• The NPV calculation is based on current prices of pipes and for future orders also,

prices have been kept flat taking into account the recent price hike by the company.



Recommendation

MSL’s performance in FY08E was flat owing to capacity constraints, Chinese competition

and increasing raw material prices. However, the recent price hike by the company and

buoyancy in the oil & gas sector coupled with negligible Chinese imports, we believe will

ensure MSL’s performance going forward will be robust.

Moreover, MSL is one of the most efficient players in the industry with a consistent track

record of growth, profits, high return ratios and high fixed asset turnover ratios. The

management policy is also conservative with growth preferred through internal accruals

rather than through debt. We are also positive on the growing demand from the main user

segment (hydrocarbons). The stock is currently trading at 6.7x expected FY09E and 5.6x

FY10E earnings estimates. We recommend it as a ‘BUY’ with a target price of Rs. 488

(Upside of 58%).

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June 20, 2008 Page 87

Balance Sheet

Year ending Mar (Rs. mn) FY06 FY07 FY08 FY09E FY10E

ASSETS



Inventory 2755 2513 3061 4198 5603

Sundry Debtors 1400 1996 2245 3078 3922






Provisions 243 153 391 463 501




Goodwill

Net Fixed Assets 2807 2858 3432 3730 4006

Total Assets 9457 10734 12514 15146 18495


Borrowings

Short Term Debt 4549 983 900 900 900

Long Term Debt 381 99 100 100 100



Share Capital



Reserves & Surplus


Net Worth 4139 9241 11103 13735 17084



Income Statement


No. of months 12 12 12 12 12

Net Sales 9,548 13,615 14,988 20,429 25,563


Less:





EBITDA 2,080 3,410 3,090 4,417 5,553


Other Income 182 314 401 400 400

EBIT 2,117 3,562 3,315 4,615 5,728


Recurring Pre-tax Income 2,068.5 3,527 3,282 4,581 5,694

Less: Taxation 673 1,188 1,068 1,489 1,851

Recurring Net Income 1,396.0 2,339 2,215 3,092 3,844



June 20, 2008 Page 88

Cash Flow Statement


Operating Cash Flow before Working Capital change 708 935 1455 2119 2260

Working Capital Inflow / (Outflow) (440) (171) (1662) (763) 378

Net Cash flow from Operating Activities 267 764 (207) 1356 2638


Free Cash flow after capital commitments (513) 222 (473) 811 1802


Net Cash flow from Financing Activites 382 (349) 3466 (1085) (467)

Net Extra-ordinary Income 0 0 (5) 0 0

Total Increase / (Decrease) in Cash 7 (6.6) 3170 40 1734



Increase/(Decrease) in Cash and Bank balance 7 (6.6) 3170 40 1734


Year ending Mar FY06 FY07 FY08 FY09E FY10E

Per Share Data (Rs)








EV / EBITDA 9.3 5.7 5.6 3.8 2.8

Dividend Yield (%) 1.4 2.0 1.8 2.1 2.3


Diluted Recurring EPS Growth 64.5 38.1 (4.8) 37.6 24.3

Diluted Recurring CEPS Growth 61.6 33.8 (4.0) 36.0 23.5


EBITDA Growth 61.8 63.9 (8.0) 40.8 25.7

Recurring Net Income Growth 64.5 67.5 (3.9) 37.6 24.3


EBITDA Margins 21% 24% 21% 22% 22%









June 20, 2008 Page 89

Ratnamani Metals and TubesBUY

Key Stock Data

Sector Pipes & Tube

Reuters Code RMT.BO

BLOOMBERG Code RMT IN




Avg. 6m Vol. 3,571


52 - Week high / low Rs.1508 / 652

3M 6M 12M

Absolute (%) -17 -41 -19

Relative (%) -11 -17 -26


Promoters 58.8

FIs & Local MFs 4.3

FIIs 8.8



Nifty 4504

Sensex 15088

Source : Company

CMP Rs. 852

Target Rs. 1,450Stock Return 74.6%


Dividend Yield 0.6%

Investment Summary


The company currently has an unexecuted order book position of Rs. 5.32 bn, which it has

had since April 2008. Part of the orders will be executed over a period of three to four months

and this will convert into sales by Q3FY09.

Export demand to drive growth

The company is capitalizing on the export opportunities presented by various regions around

the world. The company has a cost advantage in the Middle East and South East Asian

regions due to lower transportation costs. We expect exports to constitute 20% of the total

turnover in FY09E.

Integrated seamless tube manufacturer

The company’s mother tube (raw material for seamless tubes) steel manufacturing plant

will become operational in FY08E with a capacity of 7000 TPA for captive consumption. This

will save about Rs. 100-150 mn p.a on raw material costs. Currently, the company sources

mother tubes from Korea, China, Japan and some domestic players (Sandvik) as high

grade tubes are not available domestically. EBITDA margins in FY09E are likely to remain

stable at around 20% despite incremental contribution from low margin carbon steel tubes,

as we estimate 90% of its raw material requirement will be met by captive production.

Healthy demand from user segments

RMTL is on the approved vendor list of all the hydrocarbon majors for supply of SSTP and

CSTP. It supplies these pipes and tubes for direct (Oil majors, water sewage boards) or

indirect (EPC contractors) usage for oil and gas, engineering and water related sectors. The

company will benefit from the proposed refineries being added both in the domestic and

international markets and also from the huge investments in the power and engineering

industry.

Year to March (Rs. mn) FY06 FY07E FY08E FY09E FY10E

Revenue 3,160 5,655 7,930 12,499 17,490

Total Expenses 2,558 4,435 6,272 9,948 14,042

EBITDA 633 1,277 1,768 2,661 3,558

PBT 471 1,007 1,512 2,271 3,148

Net Income 335 642 998 1,499 2,078

EPS (Rs) 37.3 71.3 110.9 158.6 219.8

% Chg YoY 153.1 91.3 55.5 43.0 38.6

P/E (x) 22.9 11.9 7.7 5.4 3.9

CEPS (Rs) 45.5 88.6 137.3 190.5 253.2

EV/E (x) 13.6 7.4 5.4 3.4 2.1

Dividend Yield (%) 0.3 0.6 0.7 0.8 0.9

RoCE (%) 24.7 26.4 27.0 29.0 29.3

RoE (%) 50.7 57.8 53.2 45.7 39.9


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June 20, 2008 Page 90

Background

Ratnamani Metals & Tubes (RMTL), was incorporated in Sep.’83 as a small-scale industrial

undertaking and was called Ratnamani Metals & Tubes Pvt Ltd. It became a deemed public

limited company in Jul.’89. Another small-scale unit, Ratnamani Tube Industries Pvt Ltd was

also set up by the same promoters in 1985, which too became a public limited company in

Jul.’90. Ratnamani Tube Industries was amalgamated with Ratnamani Metals & Tubes in

Apr.’91 to form RMTL.

RMTL manufactures stainless steel seamless and welded pipes and tubes for various

applications. In addition, it undertakes job-work for drawing of pipes.

Business Overview

RMTL mainly manufactures and sells

Stainless Steel Tubes and Pipes (SSTP) – 43% of revenues

• Seamless

• Welded

• Mother tubes (Hot Extruded Seamless tubes) – 57% of revenues

Carbon Steel Tubes and Pipes (CSTP)

• LSAW

• Circumferential LSAW – Larger Dia LSAW Pipes

• HSAW

• ERW

SSTPs are typically used in heat exchangers, boilers, condensers, and refrigeration etc. The

major user industry segments are petrochemicals, fertilizers, refineries, chemical plants,

power plants, food processing and pharmaceuticals among others. Stainless steel has

many superior metallurgical properties and is the preferred metal in all the critical applications

involving transportation of corrosive liquids.

On the other hand CSTPs are primarily used for continuous transportation of large quantities

of oil, natural gas and water over the long distances and are more economical than other

means of transport because of the one time costs involved in laying the network and minimum

cost of operations and maintenance. Apart from the above, CS pipes also find application in.

• On shore and off shore drilling platforms

• Casing, structural pipes etc

• As project piping in large petrochemical and refinery projects.


June 20, 2008 Page 91

Capacity Snapshot

(in tons) Chhatral Kutch Total Addition Total

Carbon Steel Pipes FY08E FY09E FY09E

LSAW 30,000 10,000 40,000 - 40,000

HSAW - 100,000 100,000 100,000 200,000

ERW - 100,000 100,000 - 100,000

Circ.LSAW 60,000 -

Total 90,000 210,000 240,000 100,000 340,000

Stainless Steel Tubes/Pipes

Seamless 2,700 1,800 4,500 - 4,500

Welded 3,600 9,000 12,600 3,000 15,600

Hot Extruded Seamless - 7,000 7,000 7,000

Total 6,300 17,800 24,100 3,000 27,100

Most of these capacities have come up at Kutch in FY07-08 and are fully operational now. In

addition to this, the company is also adding some capacity to its HSAW and seamless

(welded) unit at Kutch, which will be operational by October 2008. The mother tubes (Hot

extruded seamless) will be used partly (4000 tons) towards captive consumption and the

rest will be sold outside. Over the years, the expanded capacity has tripled in the case of

CSTP and doubled in the case of SSTP (ignoring captive consumption).

The Kutch unit has the following locational advantage.

• Proximity to Kandla, the second largest port, will reduce the delivery time

• Excise exemption for 5 years and sales tax benefits for 10 years.

The total capex for this expansion was Rs.1.8 bn, which was funded mainly by way of term

loans and internal accruals.

Product Application

Power22%

Infrastructure8%

Oil & Gas48%

Fertilizers & others22%




June 20, 2008 Page 92

In the domestic market, the company has a dominant position in the segments of its operations

and has the leadership status with all the major refinery and petrochemical companies.

Some of its major domestic clients include BHEL, L&T, RPL, IOC, HPCL, BPCL and GAIL etc.

The company will benefit from the proposed refineries being added both in the domestic and

international markets and also from the huge investments being incurred by power and

engineering industries.

Details of refineries being added

Company Addition (MMTPA)

IOC

Panipat 6

Paradeep 9

BPCL

Mumbai 5.1

Bina 6

HPCL

Vizag 1

Bhatinda 9

MRPL 12.4

RPL 32

Essar Oil 12

Source: Industry, HDFC Sec Estimates

USA

Toyota Tsusho Inc.

Silbo Induatries Inc.

Okaya & Co.

DOW Chemicals

Europe

Kube Stahl, Germany

TW Metals, UK

Amari Metals B.V, Netherlands

Asia

Korea Heat Exchanger, Korea

Toshiba Corporation, Japan

Petronas, Malaysia

Middle East

Belleli Saudi Heavy Inds, Saudi Arabia

Kuwait national Petroleum Co, Kuwait

Qatar Gas, Qatar

Delta Sugar Company, Egypt

Sugar and Integrated Inds Co, Egypt

Razi Petroleum, Iran

Saudi Aramco, Saudi Arabia

Equate Chemicals, Kuwait

Huge demand coming up from user segments

RMTL is on the approved vendor list of all hydrocarbon majors for supply of SSTPs and

CSTPs. It supplies these pipes and tubes for direct (Oil majors, water sewage boards) or

indirect (EPC contractors) usage for oil and gas, engineering and water related sectors.

Some of its major clients in the international markets include.



June 20, 2008 Page 93

Healthy order book position

The company currently has an outstanding order book position of Rs. 5.32 bn, which it has

had since Q3FY08. The orders will be executed over a period of three to four months and will

convert into sales by Q2FY09E. Moreover, the company has put in bids for orders of more

than Rs. 7 bn and is very optimistic in securing them.

Details of orders Amount (Rs.bn)

Stainless Steel Tubes and Pipes 3.77

Carbon Steel Tubes and Pipes 1.55

Total 5.32

Out of which

RPL (Treated as exports) 1.46

Direct Exports 1.32

Net Domestic 2.54

Total 5.320

Source: RMMTL

The company is expecting a huge contribution from the power sector going forward to its

overall order book position. We believe that going forward power will account for more than

20% to its overall product mix from marginal contribution now.

Significant operating leverage

We except RMTL to expand its capacity utilization level significantly in FY09E and FY10E. The

company that was constrained with low capacity in the past, has now added significant

capacity at the right time to capitalize on the increasing demand from user segments.

(in tons) FY07 FY08E FY09E FY10E

SSTP

Capacity 18,900 18,900 21,360 24,000

Sales 7,358 10,600 15,000 20,250

CSTP

Capacity 3,00,000 3,00,000 4,00,000 4,00,000

Sales 61,525 70,000 1,25,000 1,75,000

Source: HDFC Sec Estimates

Sustainable margins in the long run

The company has added capacity to manufacture mother tubes at its Kutch unit, which was

imported earlier from Korea, China, Japan etc. The capacity addition is of 7000 tons, out of

which around 4000 tons will be used towards in-house consumption and the balance will be

sold outside. The company will save on conversion margins due to this initiative (from billets

to mother tubes). This will add directly to its bottom line and save around Rs. 80-100 mn per

annum on raw material cost in FY09E. We expect that this savings in raw material costs will

compensate for the loss in margins on account of incremental contribution coming from low

margin carbon steel business.


June 20, 2008 Page 94

Financial Analysis


Year End March 31(Rs.Mn) Q308 Q307 Y-o-Y 9MFY08 9MFY07 Y-o-Y

Net Sales 2144.1 1875.2 14.3% 6135.5 4187.4 46.5%

Total Income 2177.4 1875.2 16.1% 6259.6 4197.7 49.1%

Total Expenditure 1662.7 1452.7 14.5% 4782.0 3257.0 46.8%

Operating Profit 481.4 422.5 13.9% 1353.5 930.3 45.5%

EBIDTA 514.7 422.5 21.8% 1477.6 940.7 57.1%

Interest 44.4 34.7 28.1% 150.1 115.8 29.6%

PBDT 470.3 387.8 21.3% 1327.5 824.9 60.9%

Depreciation 61.5 33.1 85.9% 174.1 93.6 86.1%

PBT 408.8 354.8 15.2% 1153.3 731.3 57.7%

PAT 272.6 216.7 25.8% 766.7 467.1 64.2%

Equity (FV = 10) 90 90 90 90

Ratios

OPM (excl.Other Income) 22.5% 22.5% -8.0 22.1% 22.2% -15.8

Tax / PBT 33.3% 38.9% -558.4 33.5% 36.1% -260.8

NPM 12.5% 11.6% 96.0 12.2% 11.1% 112.2

Cash EPS 37.1 27.8 33.7% 104.5 62.3 67.8%

EPS 30.3 24.1 25.8% 85.2 51.9 64.2%

• RMMTL reported a strong performance in Q3FY08 and 9MFY08 with net sales improving by 14.3% and

46.5% during the same period. Operating profits grew by 13.9% and 45.5% in Q3FY08 and 9MFY08 respectively

followed by growth in PAT by 25.8% and 64.2% during the same period. The strong growth in the above

financials was seen on the back of increase in sales volumes and stable operating margins.

• The company’s performance in FY09E and FY10E is likely to improve considerably on the back of ramp up in

utilization levels and fairly stable product mix towards SS tubes which has better margins.

• For FY07-10E, we expect the company to report a revenue CAGR of 45.5% on a YoY basis to Rs. 17.6 bn. We

expect this growth on account of increasing contribution from the new facility at Gandhidham, Kutch aided by

buoyant demand from the user segments

• The operating profit is expected to improve by 40.7% CAGR between FY07-10E to Rs. 3.5 bn. The net profit

is expected to be at Rs. 2.07 bn in FY10E– a CAGR of 47.9%.



June 20, 2008 Page 95

DCF Analysis



B 0.8 Higher Beta - Assumed for capturing volatility


Tax rate 30%




Wd 36%

WACC 12.4%


Recommendation

The company has a current order book position of around Rs. 5.32 bn ranging in all sizes of

SSTP and CSTP tubes from hydrocarbon majors. The market of SSTP and CSTP pipes is

growing continuously due to the upsurge in the crude oil & gas sector, power and food-

processing industry etc with new capacities being added in the user segments.

The company has also reported a sharp increase in realizations in the SSTP segment

during the quarter. We believe that RMTL’s earnings over the next 2-3 years would be entirely

volume driven and despite competitive pressures from customers, RMTL is all set to report

a significant jump in profits which the markets have not yet fully discounted in the present

share price. At the CMP of Rs. 852, the stock is currently trading at about 5.4x its FY09E

earnings and 3.9x expected FY10E earnings. We maintain our BUY rating on the stock with

a target price of Rs. 1,450 (upside potential of 74%).

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June 20, 2008 Page 96

Balance Sheet


ASSETS



Inventory 588 1649 1829 2883 4035

Sundry Debtors 347 608 869 1370 1917


Operational 90 198 250 250 250






Provisions 29 64 64 76 86



Net Fixed Assets 1608 2589 3550 3449 3334

Total Assets 2080 3569 4678 6538 8539


Borrowings

Short Term Debt 423 779 1070 1070 1070

Long Term Debt 637 1064 1009 1008 1007



Share Capital



Reserves & Surplus


Net Worth 817 1406 2350 4210 6212




Income Statement


Net Sales 3,160 5,655 7,930 12,499 17,490


Less:



Other Expenses 503 660 850 1305 1810


EBITDA 633 1,277 1,768 2,661 3,558

% margin 19.8% 22.4% 22.0% 21.1% 20.2%


Other Income 1 50 160 100 100

EBIT 560 1,171 1,690 2,460 3,342


Recurring Pre-tax Income 471 1,007 1,512 2,271 3,148

Less: Taxation 136 365 514 772 1,070

Net Income (Reported) 335 642 998 1,499 2,078

Recurring Net Income 335 642 998 1,499 2,078


June 20, 2008 Page 97

Cash Flow Statement




Net Cash flow from Operating Activities 101 374 959 731 1558

Cash Inflow/(outflow) from Investing activities (610) (1133) (1200) (200) (200)

Free Cash flow after capital commitments (509) (759) (241) 531 1358


Net Cash flow from Financing Activites 531 720 112 360 (77)

Total Increase / (Decrease) in Cash 22 12 31 992 1382



Increase/(Decrease) in Cash and Bank balance 22 12 31 992 1382

Ratio Analysis


Per Share Data (Rs)








EV / EBITDA 13.6 7.4 5.4 3.4 2.1

Dividend Yield (%) 0.3 0.6 0.7 0.8 0.9





EBITDA Growth 117.1 101.7 38.4 50.5 33.7



EBITDA Margins 20% 22% 22.0% 21.1% 20.2%









June 20, 2008 Page 98

BUY

Key Stock Data

Sector Pipes & Tube

Reuters Code ISEA.BO

BLOOMBERG Code INSS IN




Avg. 6m Vol. 126,753


52 - Week high / low Rs.140 / 44

3M 6M 12M

Absolute (%) -23 -56 -52

Relative (%) -18 -32 -59


Promoters 49.7


FIIs 7.8



Nifty 4504

Sensex 15088

Source : Company

CMP Rs. 51



Dividend Yield 1.1%

ISMT LtdInvestment Summary

Stable operating margins

ISMT’s focus is on increasing it share of value added products like bearing races and is

planning to tap new growth segments like power and construction to de risk its business

model. We expect ISMT’s EBIDTA margins to stabilize at around 18% in FY10E, following 470

bps decline in margins in FY08.

International business has been a high growth segment

The company’s exports in FY08 were worth Rs.2.6 bn, a growth of 22.1% over FY07. Currently,

about 40-45% of the exports go to the US and European regions each. Exports are expected

to record a CAGR of 31.7% over FY08-10E and will be the main driver of company’s growth in

the future.

Largest integrated seamless tube player

ISMT has become the largest integrated precision seamless tube player in the Asia Pacific

region after its merger with Indian Seamless Steels and Alloys (ISSAL). ISMT is already the

single largest supplier of bearing races and seamless tubes to all domestic bearing players

like SKF India, ABC, NRB, NHK, as well as auto OEMs like Tata Motors, Bajaj Auto and Ashok

Leyland. It is also an established vendor to ONGC for undersea seamless tubes, which is

used for exploration activities.

Overseas diversification to de-risk business

Offtake of tubes to Structo from ISMT is estimated to quadruple from current levels of 10,000+

MT, due to higher proportion of sourcing from ISMT as well as increased production at

Structo.

The company has an annual turnover of SEK 450 million (Rs 3 bn) and is an established

supplier to many multinationals particularly those in the construction and agricultural

equipment industry.


Revenue 10,671 11,971 11,917 16,678 21,228

Total Expenses 8,212 9,322 9,847 13,756 17,407

EBITDA 2,459 2,649 2,251 2,922 3,821

PBT 1,254 1,377 1,278 1,657 2,654

Net Income 1,150 1,301 1,082 1,458 2,335

EPS (Rs) 8.0 9.0 7.4 9.6 15.3

P/E (x) 6.4 5.6 9.1 5.3 3.3

CEPS (Rs) 11.5 13.2 11.2 13.9 19.8

EV/E (x) 6.3 5.7 7.4 5.0 3.5

RoCE (%) 18.0 16.7 10.9 - -

RoE (%) 34.3 31.2 16.0 22.2 27.0


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June 20, 2008 Page 99

Background

Indian Seamless Metal Tubes (ISMT) was promoted in 1977 by B.R.Taneja to produce

specialized seamless tubes in India. ISMT commenced production in 1980 with initial capacity

of 15,000 tons by installing and commissioning an Assel mill in technical collaboration with

Mannesman Demag Meer of Germany. Subsequently, in 1990 the production capacity was

raised to 50,000 metric tons per annum with the addition of the second Assel mill.

In 1995, ISMT promoted another company, Indian Seamless Steels and Alloys (ISSAL), to

produce alloy steel, the raw material used in the manufacture of seamless tubes, giving

ISMT better control over product quality as well as deliveries.

In April 2000, ISMT took over Kalyani Seamless Tubes (KSTL), the other major Indian

manufacturer of seamless tubes. The combined entity, emerged as not only the largest

producer of seamless tubes in India but also as one of the largest and most diversified

producers of specialized seamless tubes worldwide with - an installed capacity of 1,50,000,

metric tons of tubes per annum in the size range of 6 mm to 273 mm.

In 2005, Indian Seamless Metal Tubes Ltd and Indian Seamless Steels and Alloys were

merged and with this came into existence ISMT. Accordingly, five equity shares of ISSAL of Rs

5 each were offered in exchange for four equity shares of ISMTL having a face value of Rs 10

each. ISSAL is the main supplier of alloy steel to ISMT giving it the advantage of assured raw

material supplies throughout the year.

Business Overview

All tubes at ISMT are manufactured through the Assel Mill route. This process yields tubes of

very high dimensional accuracy and excellent concentricity, thus minimizing the requirements

of final machining. As a result, these tubes are ideal for applications such as the manufacture

of bearings, automobile parts, drill rods, hydraulic cylinders, gas cylinders, boilers, etc.

Manufacturing locations and customer profile

The company’s manufacturing units are located at three different locations in Maharashtra

the details of which are as follows.

Particulars Ahmednagar Baramati Jejuri

Background First Plant to be set up in 1980 Set up in 1996 by Kalyani, Set up in 1995

acquired by ISMT in 2000

Initial Capacity 15,000 tons N.A 1,45,000 tons

Current Capacity 65,000 tons 90,000 tons 2,50,000 tons

Product Manufactured Seamless Tubes Seamless Tubes Alloy and Bearing Steel

Size Range 6mm - 139mm 19mm - 272mm Billet sizes 32mm - 200mm

No.of equipments Two Assel Mill tube rolling Lines One piercing and one Assel mill 50 MT Electric Arc Furnace. Two

strand continuous caster and 14

stand rolling mill

User Segments High end automotive and bearing Wider range of products used in Ability to produce complex

tubes engineering, power and other metallurgies

sectors

Source: Company


June 20, 2008 Page 100

Apart from tubes, ISMT also manufactures a wide range of value added products for each of

these industries. These include items such as bearing rings, gear blanks, shifter sleeves,

cages for constant velocity joints, swaged & machined axle, threaded and coupled casings,

couplings and a host of similar products.

ISMT is single largest tier 1 supplier of bearing races and seamless tubes for the bearing

industry. Apart from this it also supplies to hydrocarbon majors, engineering and power

companies. Some of its clients include the following:

Domestic M&M, Bajaj Auto, Telco, Gabriel, Endurance, SKF, FAG, NRB, ONGC, L&T, etc

Exports

USA RBC, Reiners & Furst, American Axles, Igwara

Europe Structo, Formflo, Atlas Copco

Middle East Petroleum Pipes, Crispin

South East Asia Pipelink, Summo

Source: Company

Industry Mix

Power13%

Construction Equipment

16%Oil Exploration

17%

Bearing13%

Auto & General Engineeering

30%Others11%

Source : Company


June 20, 2008 Page 101

Investment Summary

Merger with ISSAL to bring economies of scale

We expect that going forward the merger with ISSAL will reduce operating and other fixed

costs of the two companies. This will happen on the back of centralization of functional areas

pertaining to sales, marketing and other administrative overheads. Moreover, the yields are

likely to further improve due to increased product value addition to the overall sales mix. This

will gather momentum in FY09E and FY10E as it will enjoy benefits of a well integrated

operation right from basic input (alloy steel) to seamless tubes and other value added

products.

Sustainable operating margins

ISMT is targeting operating margins of 20% and above once the capacities for both seamless

tubes and alloy steels stabilize. The market’s buoyancy is expected to continue within higher

end value added segments like auto components, power and bearings where the company

has greater degree of pricing power.

We expect ISMT’s current EBIDTA margins of 17% and above to sustain over a longer-term

period. Margins in FY08E declined by 476 bps mainly on account of the sharp surge in raw

material prices. However in recent times, the company has taken price hikes to mitigate its

effects and current margins are likely to sustain in the near future.

Debt reduction plan to drive financial leverage

ISMT has a debt of Rs. 5.5 bn as on FY08E, which has come down by around 1.7 bn from

FY07E. The company intends to optimize this debt towards its expansion plan and is investing

Rs 2.25 bn to increase both aloy steels and seamless tubes capacity. Hence we believe that

despite its CAPEX plan, ISMT will reduce debt by Rs 1 bn over the next 2 years to Rs. 4.5 bn

in FY10E, bringing down the leverage to 0.45x in FY09E from 1x in FY08E.

Expanded capacity to drives volumes

ISMT is in the final stages of implementing its ambitious expansion plan to increase its

seamless tubes capacity from 1.55 lac tpa to 4.75 lac tpa. The company is importing the new

plant from Mannesman Demag Meer of Germany and expects the expansion to be completed

by Q2FY09, after which the benefits of the increased expansion would start flowing in.

The company is adding the desired capacity to cater significantly to the power sector (largely

imports as of now). The market size of over 100,000 MT is expected to increase 3-4 times in

the next 4-5 years. It is also the second largest segment in seamless tube industry, which is

growing at the rate of 20% per year . There is also the potential of huge replacement demand.

Strong growth in user segments

We believe that ISMT has positioned itself in very high growth sectors like oil and gas

business, engineering, bearings, auto components etc making itself a specialty tube

manufacturer. Back to back integration of its facilities would optimize benefits of value addition,

which were earlier booked in different entities. In addition to this, the company is also targeting

new segments like airbags, stabilizer bars and torsion bars for expanding its business mix.


June 20, 2008 Page 102

International business has been a high growth segment

The exports in FY08 were to the tune of Rs.2.59 bn registering a growth of 22.1% over FY07.

About 40-45% each of the exports go to US and European regions . The company’s tubes are

supplied to Tier I vendors in the auto, general engineering, bearing and mining industries

who are authorized suppliers to some of the Fortune 1000 companies. The exports are

expected to record 17% CAGR over FY08-10E and will be among the main drivers of

company’s growth in the future.

Structo Acquisition to synergies in the long term

In June 07, ISMT concluded its first ever overseas acquisition of STRUCTO HYDRAULICS AB

a European company, which is the pioneer & leading manufacturer of precision seamless

tubes and components for hydraulic cylinders industry in Europe. Its plant capacity is of

40,000 TPA, located in Storfors, Sweden and is a supplier to leading Hydraulics Manufacturers

worldwide with names likes Caterpillar, Volvo & Leduc under its folio.

We believe that this acquisition brings ISMT a step closer to its strategic objective of becoming

the largest producer of Tubes & Tubular components for Hydraulic cylinders in Europe &

Asia. Offtake of tubes to Structo from ISMT is estimated to quadruple from current levels of

10,000+ MT, both due to higher proportion of sourcing from ISMT as well as increased

production at Structo.

Key Growth Segments

-10,000

10,000

30,000

50,000

70,000

90,000

110,000

130,000

Auto, Bearing &GE

OCTG ConstructionEquipment

Boiler

2007 2012



June 20, 2008 Page 103

Financial Analysis


Year End March 31 Q408 Q407 Y-O-Y (%) FY08 FY07 Y-O-Y (%)

Net Sales 2959.4 3474 -14.8% 11917 11971 -0.5%

Total Income 3108.5 3489.7 -10.9% 12098 12008 0.7%

Total Expenditure 2526.3 2660.1 -5.0% 9846.8 9322.2 5.6%

Operating Profit 433.1 813.9 -46.8% 2069.8 2649.2 -21.9%

Interest 123.3 183.6 -32.8% 420.9 711.3 -40.8%

PBDT 458.9 646.0 -29.0% 1830.0 1974.2 -7.3%

Depreciation 139.7 173.1 -19.3% 552 597.5 -7.6%

PBT 319.2 472.9 -32.5% 1278.0 1376.7 -7.2%

Profit after Extra-ordinary items 317.7 498.2 -36.2% 1081.9 1301.3 -16.9%

Equity (FV = 5) 732.5 721.9 732.5 721.9

Ratios

OPM 14.6% 23.4% -8.8% 17.4% 22.1% -4.8%

NPM 10.2% 14.3% -4.1% 8.9% 10.8% -1.9%

EPS 2.2 3.5 -37.2% 7.4 9.0 -18.1%

• The results in Q4FY08 and FY08 were bad on the back of constraints on capacity and also due to sharp surge

in raw material prices.

• However, the company is now adding capacities, which will start contributing to revenues from H2FY09E. We

believe that the growth in FY10E will be much higher owing to full contribution in that year.

• For FY08-10E, we expect the company to report revenue CAGR of 33.5% on a YoY basis to Rs. 21.3 bn. We

expect this growth on account of increasing demand from user segments thereby limiting its downside to our

estimates.

• The operating margins on account of increasing realizations and cost cutting initiatives are expected to

improve by 50 bps to 18% by FY10E. Thus the operating profit is expected to improve by 35.9% CAGR to Rs.

3.8 bn in FY10E. The net profit is expected to be at Rs. 2.3 bn – a CAGR of 46.9% between FY08-10E.



June 20, 2008 Page 104

Outlook

We believe that the company is well poised in terms of scale, customers within the bearing,

automotive and oil & gas segments, making it a niche specialty steel producer manufacturing

value added products and not merely a commodity player. The company’s focus on continuous

increase in quality and delivery, large range of product offering, and the wide geographical

spread not only insulates it against competitor aggression but also makes it possible to

improve its penetration on a sustained basis.

Further the expansion in capacities would result in improved economies of scale and bring

down the cost of production. The revenues and profits of ISMT are expected to grow at a

CAGR of 33.5% and 46.9% between FY08-10E. The stock currently trades at a P/E multiple

of 5.3x FY09E and 3.3 x FY10E. Based on its growth, the valuations look reasonable. We

expect it to re-rate positively and when coupled with the underlying earnings growth, should

deliver significant out performance to investors in the long term. We maintain our BUY rating

on the stock with a target price of Rs. 140 (upside of 174%).

DCF Analysis



B 1.3 Beta - Assumed Higher Beta for capturing volatility


Tax rate 35%




Wd 51%

WACC 14.9%


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M-0

6

M-0

6

J-06

S-0

6

N-0

6

J-07

M-0

7

M-0

7

J-07

S-0

7

N-0

7

J-08

M-0

8

M-0

8

3x

8x

12x

17x



June 20, 2008 Page 105

Balance Sheet

Year ending Mar (Rs. mn) FY06 FY07E FY08E FY09E FY10E

ASSETS



Inventory 1847 2233 2090 2879 3664

Sundry Debtors 2471 2868 2985 4112 5234


Operational 761 1064 750 850 950






Provisions 51 166 52 52 52



Total Fixed Assets 8229 8101 9546 9081 8605

Total Assets 11141 12436 13461 13597 14528


Borrowings

Short Term Debt 2511 3578 3560 2680 2680

Long Term Debt 5330 4760 5390 4290 3190


Deferred Tax Liability (916) (508) (1000) (1000) (1000)

Share Capital



Reserves & Surplus

General & Other Reserve 3100 3980 4789 6866 8896

Less: Misc. Exp. not written off 75 96 0 0 0

Net Worth 3747 4606 5511 7627 9658



Income Statement


Net Sales 10,671 11,971 11,917 16,678 21,228


Less:


Energy 1373 1651 2118 2738

Manufacturing 236 272 3408 334 425

Selling and Distribution 285 331 403 512

Employee Cost 515 625 716 1001 1274

Other Overheads 155 170 220 220


EBITDA 2,459 2,649 2,070 2,922 3,821


Other Income 182 36 181 50 50

EBIT 2,132 2,088 1,699 2,307 3,195


Recurring Pre-tax Income 1,254 1,377 1,278 1,657 2,654



June 20, 2008 Page 106

Cash Flow Statement



Working Capital Inflow / (Outflow) (1488) (1070) 602 (1168) (1186)

Net Cash flow from Operating Activities 40 795 1815 905 1775


Free Cash flow after capital commitments (161) 438 (185) 705 1575


Net Cash flow from Financing Activites (592) (7) 216 (1322) (12972)

Total Increase / (Decrease) in Cash (572) 467 68 (568) (11346)



Increase/(Decrease) in Cash and Bank balance (572) 467 68 (568) 221



Per Share Data (Rs)


Recurring Cash Earnings per share (CEPS) 11.5 13.2 9.4 13.9 19.8


Dividend per share - 0.6 - 1.0 2.0





EV / EBITDA 6.3 5.7 7.4 5.0 3.5

Dividend Yield (%) 0.0 1.1 0.0 2.0 3.9


Diluted Recurring EPS Growth 155.1 13.2 (37.8) 70.9 60.1

Diluted Recurring CEPS Growth 57.7 14.4 (28.2) 47.6 41.8


EBITDA Growth 67.8 7.7 (20.7) 39.1 30.8

Recurring Net Income Growth 249.7 13.2 (37.8) 80.3 60.1


EBITDA Margins 23% 22% 17% 18% 18%




Return on Capital Employed (RoCE)-Overall 18.0 16.7 10.9 - -


Dividend Payout Ratio - 6.5 - 10.4 13.0



Long Term Debt / Total Debt 60% 54% 55% 55% 45%

Current Ratio 0.93 0.95 0.94 1.16 1.33

Turnover Ratios


Assets Turover Ratio (x) 1.00 1.02 0.94 - -





June 20, 2008 Page 107

RATING SYSTEMBUY = Expected to outperform the BSE Sensex by 15% or more over a 12 months’ time frame.MO = Market Outperformer - Expected to outperform the BSE Sensex by 10% or more over a 12 months’ time frame.MP = Market Performer - Expected to be a neutral performer relative to the BSE Sensex over a 12 months’ time frame.MU = Market Underperformer - Expected to underperform the BSE Sensex by 10% or more over a 12 months’ time frame.SELL = Expected to underperform the BSE Sensex by 15% or more over a 12 months’ time frame

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