PSL Ltd recomended in todays ...ET...Investor's Guide

Piping Hot

Rising demand, diversified manufacturing facilities and increased capacities provide higher upside potential for PSL

SANTAN U MI SH R A ET INTELLIGENCE GROU P


AS INDIA marches fast on the path of economic development, the demand for energy will increase rapidly. This has led to an increased exploration of oil and gas, raising demand for inputs such as pipes. Oil and gas companies such as Gas Authority of India (Gail) have been awarding bigger contracts to pipemakers in the last one year. A rebound in crude oil prices has also led to more exploration activity across the world, mainly in west Asia. PSL, with its diverse manufacturing facilities, will be one of the gainers of the increase in exploration. Anticipating more orders in the coming years, the company recently ramped up its capacity. An investor looking for reasonable returns with a 1-2-year horizon could consider adding PSL to her portfolio. BUSINESS: PSL is the largest helical submerged arc welding (HSAW) pipe-maker in the country and commands an over 50% share of the market with a capacity of about 1.5 million tonnes. The company also offers a range of coating services that are used to increase corrosion-resistance capacity of pipes. It has 13 pipe mills, a majority of which are spread strategically across eastern and western coasts. The well-distributed manufacturing facilities give it an edge over its competitors with lower freight cost and ability to service overseas markets. FINANCIALS: PSL’s net sales have more than doubled in the last two years. With an operating margin of 9-11%, the company has invested heavily in these two years. This has resulted in a sharp increase in its debt, with its debt-to-equity ratio at around 1.65. However, this is not a cause of concern as the company has consistent and high operating cash flows. It has given a return on capital employed (RoCE) of over 16% for the last five years, achieving a figure of 20% last year. PSL has the ability to set up its own manufacturing plants that saves it a lot of capital when building new plants. Also, the company uses hotrolled coil as raw material that is widely available in the country, helps it save on inventory maintenance cost. GROWTH DRIVER: PSL has an order book of about 1.3 times of its net sales in 2008-09, and most of these orders are from domestic clients. This provides a good visibility of its revenue flows for the next 12-15 months. The discovery of gas in the KG basin and a government proposal to set up a national gas grid provide ample growth opportunity for the company. PSL is probably the only firm that has a large number of manufacturing facilities in the east, helping it to tap a higher proportion of the pipe contracts from this region. VALUATION: The company’s decision to ramp up its capacity recently is timely considering the signs of recovery in the global economy. Also, its current capacity utilisation rate is 40-50% and this can be increased to 65-70%. The impact of all these factors would be visible in the coming years. The stock is currently trading at a trailing price-earning multiple of around 10.5. Historically, the stock has traded at a price-earnings multiple of more than 25 when Sensex was at around the 17,000 mark. PSL’s estimated earning per share (EPS) in 2009-10 is estimated at Rs 24, translating into a forward price-earning multiple of around 7. All these factors indicate that there is enough room for growth in the stock price. If an investor has a time horizon of 1-2 years, PSL is a good bet. santanu.mishra@timesgroup.com