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I II
IV III
December 16, 2010
Industry : Metals Industry View :Overweight Sector Report
"Capacities In Place..... Implementation Is The Key"
Pipe Industry
Disclaimer:The information in this document has been printed on the basis of publicly available information, internal dataand other reliable sources believed to be true and is for general guidance only. While every effort is made toensure the accuracy and completeness of information contained, the company makes no guarantee and
assumes no liability for any errors or omissions of the information. No one can use the information as the basisfor any claim, demand or cause of action. LKP Securities Ltd., and affiliates, including the analyst who haveissued this report, may, on the date of this report, and from time to time, have long or short positions in, andbuy or sell the securities of the companies mentioned herein or engage in any other transaction involving suchsecurities and earn brokerage or compensation or act as advisor or have other potential conflict of interestwith respect to company/ies mentioned herein or inconsistent with any recommendation and related informa-tion and opinions. LKP Securities Ltd., and affiliates may seek to provide or have engaged in providingcorporate finance, investment banking or other advisory services in a merger or specific transaction to thecompanies referred to in this report, as on the date of this report or in the past.
LKPSince 1948
Ami Shah
ami@lkpsec.com
+91 22 6635 1247
Pipe Scoreboard
We have run a screener across various sectors wherein we derived that the pipe sector stands out to be one of the good bets.
We have considered companies with a market capitalization of more than *`200 cr. and evaluated them on the basis of
parameters like sales growth, operating and net profitability, etc. for the immediately preceding 20 quarters alongwith various
valuation ratios.
A growth score and a value score based on the above parameters are plotted in the scatter chart below:
* As on our cut-off date
Small Cap Mid Cap
Undervalued , High Growth Overvalued , High Growth
Undervalued , Low Growth Overvalued , Low Growth
Growth
Value
Prices as on of 14th December, 2010
Man Industries
Welspun Corp
Jindal Saw
Maharashtra
Seamless
Oil Country
TubularISMT
Ratnamani
Metals
PSL
Zenith Birla
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Introduction to Pipes A PrimerPipes find varied industrial applications in transportation of fluids such as oil, gas and
water. Pipes are made mainly from steel, concrete and plastic. Concrete pipes are used
more in irrigation systems, sanitary sewers and storm drains, while plastic pipes are
used in water mains, drainage, irrigation, fire sprinklers, etc. Steel pipes find use in long
distance high-pressure transportation of oil, gas and water.
Exploration &
Production
Transportation
HSAW
LSAW
ERW
Non-Oil
General Engg;
Auto & Boiler
Water & Sewage
Transport
Seamless
DI/CI
HSAW
ERW
Seamless
Pipes
Oil & Gas
Source: Company Reports
Pipes Classification
Pipes in the industry are classified according to the production process used for
manufacturing them. These production processes also determine the pressure handling
capability of pipes to a large extent.
Seamless PipesSeamless (SMLS) Steel Pipes are constructed from a solid round steel billet which is
heated and pushed or pulled over a form until the steel is moulded into a hollow tube.
Seamless pipes withstand pressure better than other types, and are often more easily
available than welded pipe. Seamless pipes are used both in oil & non-oil sectors like
Petroleum Exploration, General Engineering, Boilers and Automotives, etc. Major demand
for these pipes is from the oil & gas sector (E&P activities in particular) alone, while
some demand comes from shipbuilding, chemical, general engineering & automobileindustries.
SAW PipesSubmerged Arc Welding (SAW) is produced by the common arc welding process. Arc
welding is a form of welding that uses a welding power supply to create an electric arc
between an electrode and the base material to melt the metals at a welding point. There
are two types of SAW pipes; LSAW-Longitudinal SAW and HSAW - Helical SAW (a.k.a.
Spiral SAW).
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LSAW Pipes
LSAW pipes are pipes formed by bending rectangular steel plates, that are later
welded longitudinally (internally and externally) along the seam to form a pipe.
HSAW Pipes
HSAW pipes are pipes produced by conversion of Hot Rolled Coils, that are laterwelded internally and externally to form HSAW pipes. HSAW pipes have gained promi-
nence and have replaced LSAW applications in the majority of the cases. This is due
to inherent advantages of manufacturing HSAW pipes as compared to LSAW pipes,
both of which are used for high pressure oil & gas transportation
Welded (Electric Resistance Welded (ERW) and Electric Fusion Welded(EFW)) Pipes
ERW pipes are formed by rolling a plate and welding the seam. The weld flash can be
removed from the outside or inside surfaces using a scarfing blade. The weld zone can
also be heat treated to make the seam less visible. Welded pipe often has tighter
dimensional tolerances than seamless, and can be cheaper if manufactured in similar
batch quantities. Large-diameter pipe may be ERW, EFW or Submerged Arc Welded
(SAW) pipe.
Ductile Iron (DI) Pipes
Ductile iron, a type of cast iron, is much more flexible and elastic than other types of cast
iron, due to its nodular graphite inclusions. Ductile iron pipe, used for water and sewer
lines, is stronger and easier to tap, requires less support and provides greater flow area
compared to pipes made from other materials.
Availability of rawmaterials HR Coils v/splates
HSAW pipes are made from long rolled strips of steel known as HR
Coils, whereas LSAW pipes are made from large flat plates of steel,
known as plates. Procurement of HR Coils is comparatively easier
locally, compared to plates as supply of plates is limited, making them
more expensive than HR Coils.
Low capital costs LSAW pipe manufacturers require heavy equipment such as presses
which are built out of heavy steel components by specialized
manufacturers. HSAW pipe mills, on the other hand require lighter
equipment.
Suitable for largediameter pipelines
The HSAW technology provides for manufacture of large pipes using
HR Coils with diameter as large as 120 inches compared to about 56
inches using LSAW technology. For water projects, where large
diameter pipes are required, HSAW pipes are invariably used.
HSAW Technology takes over LSAW applications
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Classification of Pipelines
Volume / Pressure Matrix
Source: LKP Research
Volume
Pressure
High
Medium
Low
High Medium Low
ERW Seamless
HSAW & LSAW
Cast Iron &
Ductile Iron
Parameters Seamless Spiral/Helical Saw Longitudinal Electric Ductile Iron / Cast Iron
Pipes Pipes (HSAW) Saw Pipes (LSAW) Resistance Welded Pipes (DI / CI)
(ERW)
Raw Material Billets Hot Rolled Coils Steel Plates Hot Rolled Coils Iron Ore & Coking Coal
Size 0.5" to 14" 18"to 120" 16" to 56" 0.5" to 22" 3" to 39"
Application Wide Application in High Low Pressure High Pressure Application Low Pressure
Pressure Oil & Gas Application Cross Cross Country Application Cross Water Transport
Exploration & Drilling, Country Line Pipes for Line Pipes for Country Line Pipes for Sewage
Boiler, Automobiles, Oil & Gas and water Oil & Gas Oil & Gas and Water Disposal
Process, Pipelines, Transport and Transport Transport Sewage
Refineries Sewage Disposal Disposal
Key Indian Jindal Saw Jindal Saw Jindal Saw Jindal Pipes Jindal Saw
Players Maharashtra PSL Limited Welspun Corp. Maharashtra Electrosteel
Seamless Welspun Corp. Man Industries Seamless Castings
Indian Seamless Man Industries Welspun Corp. Electrotherm India
Metal Tubes (ISMT) Tata Metallics
Comparative of Different Categories of Pipes
Source: Company Reports
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Global Pipe IndustryThe increasing investments across the globe on pipeline projects are making capacity
additions to fill the demand supply gap. The region-wise global capacities for the
manufacture of SAW pipes are as follows:
Global Pipe Capacities
HSAW LSAW Total
North America 680,000 2,150,000 2,830,000
Western Europe 1,430,000 3,285,000 4,715,000
Eastern Europe 125,000 44,000 169,000
CIS 240,000 2,350,000 2,590,000
Asia 3,191,000 3,762,000 6,953,000
Middle East 845,000 980,000 1,825,000
South Africa 150,000 470,000 620,000
Africa 246,000 0 246,000
Other World 3,212,000 1,900,000 5,112,000
Total World 10,119,000 14,941,000 25,060,000
Source: Welspun Gujarat Annual Report 2008-09
The total capacity of LSAW (Longitudinal SAW) Pipes worldwide is approximately 15
million tons per annum (tpa). Asia, Europe & the Commonwealth of Independent States
(CIS) totally contribute nearly 63% of LSAW pipe capacities as shown below:
Currently, the demand for LSAW pipes has been affected because of cheaper HSAW
pipes which have similar applications as the former. However, for offshore applications,
only LSAW pipes are used. Middle East Region, where much E&P activities are taking
place, is witnessing an increase in demand for LSAW pipes. On the other hand, North
America, another major market for LSAW pipes, has seen a structural shift towards
HSAW pipes, resulting in lower demand for LSAW pipes.
North America,
14.4%
Western Europe,
22.0%
Eastern Europe,
0.3%
CIS, 15.7%
Asia, 25.2%
Middle East, 6.6%
South Africa, 3.2%
OtherWorld,
12.7%
Global LSAW Pipe Capacities
Source: Welspun, Annual Report 2008-09
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Global HSAW Pipe Capacities
Source: Welspun, Annual Report 2008-09
North America,
6.7%
Western Europe,
14.1%
CIS, 2.4%
Eastern Europe,
1.2%
Asia, 31.5%
South Africa, 1.5%
Middle East, 8.4%
Africa, 2.4%
OtherWorld,
31.7%
Source: LKP Research
Increasing reliance on
imported gas
GAS the future fuelRising E&P activities
boost pipe demand
Gas transportation is
becoming i ncreasingly
important as key producing
and potential consuming
areas are separate
Gas finds in Middle East,
Alaska, Russia and KG
basin provides ample
opportunity for p ipe
manufacturers
Deep offshore activities in
counties such as USA,
Middle East, Europe and
Africa, where huge oil &
gas has been discovered
The total worldwide capacity of HSAW (Helical / Spiral SAW) pipes is around 10 million
tonnes per annum (tpa). Asia, Europe & the Middle East totally contribute nearly 55% of
HSAW pipe capacities.
Demand Scenario in the Energy SegmentPipes find extensive usage in the energy segment, especially in transportation of fluids
such as oil and gas. With the global economy in the revival mode following the financial
crisis, E&P activities in the oil and gas space are expected to garner speed in the
coming years.
Create Long-term Sustainable Demand for Pipelines
Factors Driving the Growth in the Energy End-User Segment
General Factors Driving Growth Globally
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Energy Demand to Grow at a CAGR of 1.4%
The fastest growth in energy demand over 2007 to 2035 is expected to occur in non-
OECD nations. Strong long-term growth in GDP in the emerging economies of non-
OECD countries is expected to boost energy demand in these countries. In all non-
OECD regions combined, GDP is expected to rise by ~ 4.3% p.a. on an average v/s
~1.9% p.a. for OECD countries.
With the rise in world GDP, the energy demand is likely to grow at a CAGR of 1.4%, led by
growth in non-OECD countries at 2.2%, while demand for energy for the OECD countries
is likely to grow at a CAGR of 0.5% till 2035.
World Total Energy Consumption by Fuel, 2005-2035
Source: US Energy Information Administration, International Outlook 2010, July 2010
0
100
200300
400
500
600
700
800
2005 2006 2007 2015 2020 2025 2030 2035
Liquids Natural Gas Coal Nuclear Other
CAGR 1.4%
While the global demand for oil (liquid) would grow at a CAGR of 0.9% from 2007 to
2035, the demand for natural gas is expected to edge-up at a higher CAGR of 1.3%. The
demand for natural gas from the developing economies is expected to grow at 1.9%, as
compared to 0.7% growth in the developed economies.
(Qua
dri
llion
Btu)
World Total Energy Consumption by Region, 2005-2035
Source: US Energy Information Administration, International Outlook 2010, July 2010
(Quadri
llion
Btu)
0
190
380
570
760
2005 2006 2007 2015 2020 2025 2030 2035
OECD North America OECD Europe
OECD Asia Non-OECD Europe & Eurasia
Non-OECD Asia MENA
Central & South America
0.0%
0.8%
1.6%
2.4%
3.2%
China. Brazil India Middle
East
Africa Canada Russia United
States
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The demand for oil is likely to be driven by Asia, where demand is expected to grow at a
CAGR of 2.8% till 2035, led by China & India, where oil consumption is likely to grow at
a CAGR of 3.1% & 2.2%, respectively. Additionally, in Brazil the oil demand is likely to
grow at a CAGR of 2.5%.
With Crude Oil Prices Stabilizing, Exploration and Production (E&P)
Activity is Picking Up
Competitive Offshore Rig Utilization by Region
Source: Rigzone
The E&P segment is one of the most capital intensive industries, and investments in the
sector are an indication of how much investments would ultimately happen downstream.
Rig utilization rate is one of the factors in assessing the quantum of E&P activities. Rig
utilization rates have increased by around 1.6% from 76.9% to 78.5%.
Brent Crude Oil Price
Source: Bloomberg
40
60
80
100
120
140
160
Jan-05 Nov-05 Sep-06 Jul-07 May-08 Mar-09 Jan-10
USDPer
barre
l
0% 25% 50% 75% 100%
Africa - West
Asia - Far East
Asia - South
Asia - SouthEast
Europe - North Sea
Mediterranean
MidEast - Persian Gulf
MidEast - Red Sea
N. America - Mexico
N. America - US GOM
S. America - Brazil
Current % Utilization 1 Year Ago % Utilization
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Drilling activity is picking up with increase in activities in South America, especially in
Brazil, Mexico and Asia. Development of Brazils huge offshore pre-salt discoveries are
expected to keep activity high in the near future, with an expected 1,155 wells drilled.
Production from these fields is expected to make Brazil one of the worlds largest oil
producers. Massive stimulus spending has helped China to continue with its drilling
activities. China National Petroleum Corp. (CNPC) accounts for about 80% of Chinas
drilling activities, followed by Sinopec at about 19%. Most of the countries in the Middle
East region are expected to see moderate increase in drilling activity.
Overall Oil & Gas Capex Expected to Increase in 2010 Driven by NOCs
Investments
The capital expenditure of oil and gas companies, witnessed a significant decrease in
2009, after the surge in 200708. However, in 2010 capex activity is expected to rise,
driven mainly by spending by large National Oil Companies (NOCs).
Oil & Gas Spending, By National Oil Companies, 200510
Source: Global Data
0
220
440
660
880
NOCs Integrated Independent
E&Ps
Independent
Midstream &
Dow nstream
Total Capex
With crude oil prices stabilizing in the range of $80 85 per barrel, the global E&P capexpicks up and would thus drive the order books of pipes companies to grow further.
According to industry analysis specialist, GlobalData, the oil and gas sector capital
expenditure in 2010 is expected to grow 12% and the total capex of the leading listed oil
and gas companies to exceed $798 billion, driven mainly by the investments by NOCs.
The total capital expenditure by the listed NOCs is expected to register a 16% growth to
around $375 billion in 2010.
Robust Outlook for Global Demand for Pipelines
According to the global research agency Simdex, 831 pipeline projects of 340,144 km
are to be implemented till 2015.
USDbn
Region Projects % Total Length % Quantity Business Potential
(kms) (MMT) (US$ Bn)
North America 221 26.59% 70,908 20.85% 14 17
Latin America 50 6.02% 32,223 9.47% 6 8
Europe 136 16.37% 49,538 14.56% 10 12
Africa 65 7.82% 27,029 7.95% 5 6
Middle East 140 16.85% 47,751 14.04% 10 11
Asia 172 20.70% 96,083 28.25% 19 23
Australasia 47 5.66% 16,612 4.88% 3 4
Total 831 340,144 67 81
International Demand Outlook till 2015
Source: Welspun Corporate Presentation, August 2010 and Simdex, US, July 2010 Update
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Geographical Share of Expected Pipe Demand Until 2015
Source: Welspun Corporate Presentation, August 2010 and Simdex, US, July 2010 Update
North America, 21%
Latin America, 10%
Europe, 15%
Africa, 7%
Middle East, 14%
Asia, 28%
Australasia, 5%
Source: Company web-sites
Based on these projects mentioned above, the global pipeline requirement is expected
to be around 67 million tonnes with a total of 831 projects and an opportunity of more
than $81 billion across the globe over the next five years. The demand is estimated to
come largely from Asia, North America and the Gulf countries.
Supported by Well Planned Oil and Gas Pipeline projects
Investment plans of three of the largest pipelines companies in North America
TransCanada, El Paso and Kinder Morgan, suggests that pipeline requirement for oil
and gas transportation has huge potential. These companies are to invest more than
$50 billion in several projects over the next few years. In India, it is expected that GAIL
would be adding more than 7,000 km of pipelines over the next five years.
Pipeline Projects Planned Over the Next Few Years
Project Companies Length Investment Timeline Type
(km) Cost(USD mn)
Cushing Marketlink Project TransCanada NA 70 2013 Crude oil
Groundbirch Mainline TransCanada 77 200 2010 Natural Gas
Bakken Marketlink Project TransCanada NA ~140 to 400 2013 Crude oil
Mackenzie Valley Many 1220 7000 2014 Natural Gas
Alaska Pipeline TransCanada, ExxonMobil 2760 26000 2018 Natural Gas
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Key US Pipe Projects
Source: Welspun Annual Report, 2009-10
Replacement Demand from the US Also Remains Strong
Apart from the demand from new projects, there is another opportunity emerging in the
form of replacement demand for pipelines from the US. The average life of a pipe used
for transportation of oil and gas is approximately 25 to 30 years. More than one million
miles of gas pipelines out of the 1.5 million miles in the US were laid prior to 1975.
These pipelines, which have outlived their economic life, have a pressing need for
replacement to ensure smooth flow of operations. Demand from replacement markethas not yet started flowing in but when it does, it may provide an additional opportunity for
Indian SAW pipe manufacturers as the US companies alone will not be in a position to
satisfy this additional demand.
Demand Scenario in the Water SegmentThe largest use of water is currently in the agricultural sector. Though increasing
urbanization globally is expected to drive increasing use of water in domestic and the
manufacturing sectors, the agricultural segment is expected to maintain its dominant
end use of water.
Project Owner/ Type Length Commission Project size
Operator (km) date (US$ bn)
Bison TransCanada Gas 483 2010 1
Fayetteville Express Kinder Morgan Gas 299 2011 1.3
Horn River Mainline TransCanada Gas 72 2012 0.34Palomar Gas TransCanada Gas 347 2011 1.3
Rockies Express Kinder Morgan Gas 1,021 2012 6
Southern Lights Enbridge Gas 1,078 2010 2.2
Sunstone TransCanada Gas 936 2011 2.34
North Central Corridor TransCanada Gas 300 2010 0.92
Kestone Gulf Coast TransCanada Oil 3,168 2012 7
Keystone TransCanada Oil 3,437 2010 7
North Dakota Enbridge Oil 1,520 2010 0.15
Texas Access Enbridge Oil 1,229 2012 2.6
Gateway Pipeline Enbridge Oil Sands 1,150 2014 1.93
About 22% More Water May be Needed in 2030
Source: Water Investment Overview presentation by Venrock June 2010
-
1,100
2,200
3,300
4,400
5,500
2010 2015 2020 2025 2030
Manufacturing Agriculture Electricity Domestic
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Global Demand for Plastic Pipes to Rise
According to The Freedonia Group Inc., worldwide demand for plastic pipes is forecast
to increase 4.6% annually through 2012 to 8.2 billion meters, or 18.2 million metric
tonnes, based on sustained robust prospects in developing nations, particularly in
China. In fact, 30% of overall length demand gain for plastic pipes between 2007 and
2012 is expected to come from China.
Taking advantage of the economic expansion and ongoing infrastructure development,
developing countries of Eastern Europe, Asia (exclusive of Japan) and the MENA region
would generate demand for plastic pipe in networks for telecommunications and in
residential home building applications. Need to upgrade water treatment systems across
these regions will boost demand for plastic pipe used for potable water delivery and in
drainage and sewage applications.
Waste & Water Pipe Demand in USAccording to The Freedonia Group, US demand for plastic water and wastewater pipes
is likely to progress 7.0% annually to $8.5 billion in 2014. PVC pipe would remain
dominant and grow at an above average pace, while HDPE pipe are expected to grow at
a faster pace as a result of opportunities in sewer/drain and potable water pipe.
-
1,800
3,600
5,400
7,200
9,000
2002 2007 2012
Plastic Pipe Demand North America Western EuropeAsia/Pacif ic Other Regions
World Plastic Pipe Demand
Source: The Freedonia Group Inc.
Though moderate expansion is predicted for US concrete pipe and cast iron pipe demand
through 2014, promoted by sewer and drainage applications, further growth could
stagnate due to competition from lower cost plastic pipe. Steel pipe will remain a leading
player in storm sewer and culvert applications, competing with concrete and corrugated
HDPE pipe.
mn
Me
ters
Waste & Water Pipe Demand for the US
Source: The Freedonia Group Inc.
USDmn
-
6,000
12,000
18,000
24,000
2004 2009 2014
Water & Waste Water Pipe Demand Sewer & Drain
Potable Water Irrigation
Other Applications
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Indian Pipe IndustryThe Indian pipe industry is among the top three manufacturing hubs after Europe and
Japan. With their low cost quality products and various certifications, Indian companies
have improved their export sales over the last three to four years. Low penetration levels
in the oil and gas transportation and new discoveries represent the huge scope for
growth for the pipe industry. Additionally, India is one of the major exporting nations
including Indonesia, Malaysia and Thailand.
Indian Demand for Pipes Expected to be Strong
Locally, demand for pipes is expected to remain firm over the next few years. The demand
is expected to be led largely due to:
Lower penetration of pipeline in oil & gas transportation
High transportation cost via rail & road
New projects announced by oil & gas transmission companies
Low penetration of water distribution and sewage infrastructure
Energy SegmentCurrently, India has only 6,000-7,000 km of pipelines. The oil and gas pipeline
infrastructure is being accorded top priority by the nations planners. And with the oil and
gas industry been awarded infrastructure status recently, it is expected to result in
increased demand for oil and gas pipelines. The pipeline market itself is estimated to
be around`20,000 crore over a period of five-six years.
The National Gas Grid, being implemented by GAIL (India) Ltd is expected to use 3
million tonnes of LSAW pipes to lay a 17,000 km pipeline network. The proposed oil
pipeline network, on the other hand, is expected to use 0.6 million tonnes of LSAW pipes
for a network spanning over 5,000 km. Most of the major pipe manufacturers in India are
expected to triple the pipeline capacity in the next 5-6 years, undertaking massive
investment to the tune of about`50,000 crore.
Capacity Welspun Jindal Saw PSL Man Industries Ratnamani Maharashtra Seamless
LSAW 350,000 1,100,000 500,000 350,000
HSAW 900,000 550,000 1,900,000 500,000
ERW 200,000 200,000
Ductile Iron 300,000
Seamless / Welded tubes & pipes 220,000 21,900 350,000
Total Pipe Existing Capacity 2,950,000 2,170,000 1,900,000 1,000,000 371,900 550,000
Pipe Capacities as of FY 2009-10 ( in metric tonnes)
Source: Company Reports
Domestic Demand for Pipes
Company Total Length (kms) Quantity (KMT) Business Potential (US$ Bn)
GAIL 6,725 1,345 1.6
RGTIL 3,630 726 0.9
GSPL 2,711 542 0.7
Total 13,066 2,613 3.2
Note: (1) Conversion rate of 200 tonnes /km (2) Conversion rate of $1,200 / ton
Source: Welspun Corp.Ltd, Annual Report 2009-10
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Low Pipeline Penetration in India Provides Huge Potential
Indias current pipeline infrastructure is developing, with a total gas pipeline length of
less than 15,000 km, which is much less compared to 56,400 km in Pakistan and 1.83
million km in the USA. India has also one of the lowest pipelines spread per sq km of
land at 0.003 km/sq km, compared with 1.08 km/sq for UK and 0.19 km/sq for US. This
is mainly due to lower share of natural gas in the primary energy mix of the country.
Natural gas contributes only 9% to the primary energy basket of the country, compared
with 21% for the world and 24% for the OECD countries.
With large investments by both public & private players in India, the share of transportation
of oil & gas through pipeline is expected to increase in future. According to The Ministry
of Petroleum & Natural Gas (MOP&NG), penetration levels are expected to touch around
45% over the next 2-3 years.
Increasing Share of Natural Gas in Energy Demand
India is moving towards greater use of Natural Gas in transport, domestic and other
industries. The high cost liquid fuels are likely to be replaced by Natural Gas wherever
feasible to derive cost advantage, efficiency and environment protection. Natural Gaswould play a dominant role in total energy supplies during the next decade and beyond,
with its requirement increasing from 10% in 2001-02 to 20% in 2024-25.
Developments of Natural Gas Share in Total Energy Demand
Hydel, 2%Nuclear, 1%
Gas, 10%
Oil, 33% Coal, 54%
Hydel, 2%Nuclear, 1%
Gas, 12%
Oil, 32%Coal, 53%
Hydel, 2%Nuclear, 1%
Gas, 14%
Oil, 30%
Coal, 54%
2001-02 2006-07
2011-12 2024-25
Hydel, 2%Nuclear, 3%
Gas, 20%
Oil, 25%
Coal, 50%
Pipe Penetration Levels (Oil & Gas Sector)
32%
59%
79%
0%
20%
40%
60%
80%
India US Global
Source: Various News Articles
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Players like Petronet LNG Limited, Shell and others have created and are creating large
LNG terminals at various locations across the country (like Dahej, Hazira, Dabhol, Kochi,
Ennore) to handle imports of natural gas. This provides another opportunity for increased
pipe demand.
With Petroleum & Natural Gas Regulatory Board in action, trunk pipelines
to receive boostWith the setting up of the Petroleum & Natural Gas Regulatory Board (PNGRB) and new
gas finds on Indias eastern coast, heavy investment is being lined up for laying pipelines
across the country. As per plans, the length of trunk pipelines is set to triple to 33,000
kms in the next 4-5 years. The PNGRB is currently evaluating Expression of Interests
(EOI) from various companies for about 26% of proposed pipe length and has already
invited EOIs for around 2,500 km of the total capacity.
Robust Outlook As Witnessed in Capex Plans of Major Playersand Increasing Opportunity in City Gas Distribution (CGD)networks
Capex Plans of Major Players
India has relatively under-developed gas pipeline infrastructure which is rapidly edging
up with respect to the increasing demand & ramp up in supplies. Currently, the countrys
gas requirements are serviced primarily through GAILs pipeline network, supported by
some pipelines of other PSU-s such as ONGC, and some regional players such as
Gujarat State Petronet (GSPL).
With the addition of Reliance Industries, significant investments in pipelines are
expected.Major oil & gas pipeline players, GAIL, GSPL and RGTIL (Reliance Gas
Transportation Infrastructure Ltd.) plan to lay around 13,066 km of pipelines over the
next 3-4 years. GAIL currently has total gas pipeline length of more than 7,500 km across
India and by the end of 2013, plans to take it to more than 13,000 km with a total capital
expenditure of around US$ 2.7 billion. GSPL intends to expand its grid to 2,200 kms with
an outreach to all the 25 districts in the state of Gujarat. It also aims to explore anopportunity to extend and replicate the grid in the neighboring state of Rajasthan.
Capex Planned for Pipeline Projects
Source: Company Reports
17
140
170
320
0
50
100
150
200
250
300
350
Indian Oil GSPL Reliance Industries GAIL
`.
Billion
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Gail plans to spend over`320 billion in pipeline infrastructure over the next few years.
City Gas Distribution segment is poised for strong growth in
the near futureWith the notification of Section 16 of the PNGRB Act, which gives PNRGB authority to
issue licenses for City Gas Distribution (CGD), the board is expected to auction outlicenses for CGD networks. With this, CGD coverage is expected to increase to over 200
cities by 2025. Recent new discoveries, development of gas transmission infrastructure
and emphasis on use of less polluting fuels have fuelled development of CGD.
Additionally, various regulatory and policy initiatives taken by the Government have aided
growth of city gas distribution networks.
Though CGD is still in a nascent stage, development of CGD projects are expected to
get a push in cities which are in the vicinity of trunk pipelines. The Government plans to
connect all cities with populations of over 2.5 million by 2012, followed by cities with
populations between 1 million to 2.5 million. Currently, CGD accounts for about 5-6% of
the total gas consumption, at 5-6 mmscmd. In the next four years, consumption is
expected to grow to 20 mmscmd.
Water SegmentIn India, the water-piping sector mainly caters to the irrigation and drinking purposes, as
water requirement is the highest for these two sectors.
Urgent requirement for developing water infrastructure and heavy spending by GoI under
various schemes opens up a massive opportunity for the manufacturers HSAW & DI
pipes as these pipes are as these pipes find extensive use in India for water and
sewage pipeline systems, following the mounting demand & low penetration of water
distribution and sewage infrastructure in the country.
Source: GAIL, Investor Presentation, August 2010
Proposed Pipeline of GAIL
Pipeline Network Length (Kms) Capex (`Billion) Likely Complet ion
HVJ-DVPL/GREP Pipeline Projects
Dahej-Vijaipur, Phase II 610 52 2011
Vijaipur-Dadri 505 57 2011
Dadri-Bawana-Nangal 646 23 2011
Chainsa-Jhajjar-Hissar 349 13 2011
3 Mega Cross-country Pipelines
Jagdishpur- Haldia 2,050 76 2012-13
Dabhol-Bangalore 1,389 50 2012
Kochi-Koottanad-Bangalore-Mangalore 1,114 33 2012
Spur Lines
Karanpur- Moradabad-Kashipur-Rudrapur 185 3 2011
Focus Energy Consortium to RRUVNL 90 1 2011
Agra and Ferozabad Region 71 2 2011
Vijaypur Kota Upgradation/Spurliness 290 5 2011
Bawana Nangal (Uttaranchal & Punjab) 270 5 2011
7,569 320
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Plan-wise Allocation of Funds Towards Water Management
Source: Electrosteel Castings Limited Coporate Presentation, Nov 2009 and National Water Policy, PlanningCommission
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
1990-92 1992-97 1997-01 2001-07
`.
Millio
n
Existing Pipeline Infrastructure
The irrigation sector has witnessed planned development since the First Five Year Plan.
New projects were undertaken in the Second Five Year Plan, the Third Five Year Plan,
and the Annual Plans 196669. The Annual Plans 197880 and the Sixth Plan saw new
beginnings and then the emphasis was shifted towards completion of irrigation projects.
By the end of the Eighth Plan (199697), central assistance was provided under AIBP to
help the State Governments in early completion of the projects.
The share in total plan expenditure has reduced from 23% in the First Plan to 12.8% in
the Tenth Plan, despite a surge in plan expenditure on irrigation from`441.8 crore in the
First Plan to`111,503 crore (anticipated investment) in the Tenth Plan.
Increasing Demand Putting Strain on Existing Water Infrastructure
The triple whammy of healthy economic growth, increasing population and migration of
people into cities have resulted in an explosion of Indias water requirements, whileescalating pollution risks, prompting Asian Development Bank (ADB) to double its
investment on water from US$1.2 billion in 1999 to US$2 billion in 2010 in the South and
Southeast Asia region.
The Water Resources Group has predicted that demand will double by 2030, from 700
billion cubic metres to 1,498 billion cubic metres, with the largest deficits expected in the
most populous river basins Ganga, Krishna and Indus.
This demand is nearly double of Chinas projected 818 billion cubic meters demand.
Estimates by various sources indicate that agriculture would consume a staggering
80% of that water.
The Water Resources Group has arrived at the ballpark figure of US$6 billion (`27,900crore) which would be the cost to execute enough water conservation strategies to meet
the projected demand.
Per Capita Availability of Water in India on a Decline
Rising population in the country has resulted in an increase in demand for safe water.
This in turn has increased the demand for transporting good quality water from potential
sources to distant cities without contaminating it.
Currently, 17% of the global population does not have access to water supply. In India,
25% of rural population and 9% of urban population do not have access to water supply
i.e. over 200 million people still strive to get even drinking water.
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Per Capita Availability of Water in India Continues to Reduce
Source: Electrosteel Castings Limited Coporate Presentation, Nov 2009 and National Water Policy, Planning Commission
0
1,000
2,000
3,000
4,000
5,000
6,000
1951 1991 2001 2025E 2050E
CubicMeters
Total Requirement of Water in India to reach 1,180 billion cubic m. by 2050
It is expected that by 2050, total requirement of water in India would reach 1,180 billion
cubic meters, of which nearly 69% would be required for Irrigation facilities. Meanwhile,
requirement for drinking water and industrial purpose would increase to 111 billion
cubic meter and 81 billion cubic meters, respectively.
Water Requirement for Various Sectors in India by 2050 (in billion cubic meters)
Sector 2010 2025 2050
Irrigation 557 611 807
Drinking Water 43 62 111
Industry 37 67 81
Energy 19 33 70
Others 54 70 111
Total 710 843 1,180
Source: Electrosteel Castings Limited Coporate Presentation, Nov 2009 and National Water Policy, Planning Commission
Given the increasing demand & low penetration of water distribution and sewage
infrastructure in the country, the growth prospect for this segment is favorable. There
has historically been slow implementation of water supply projects in India due to
issues on funding of such projects. However, with financial institutions such as ADB and
World Bank recognizing the need for pipeline network transmission of water in recent
times, coupled with increasing focus of the Central Government, State Government &
local bodies, the path has been cleared for the development of the water infrastructure.
Ductile iron pipe, which is widely used to transport water, would be the direct beneficiary
of investments in water infrastructure.
Sanitation Levels in India Continue to be Inadequate
The acceleration of the economy in recent years has placed increasing stress on
infrastructure of irrigation and urban & rural water supply and sanitation, all of which
already suffer from a substantial deficit from the past in terms of capacities as well as
efficiencies in the delivery of critical infrastructure services.
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India has Dismal Sanitation Levels as Compared to Global Counterparts
Source: World Health Organization (WHO)
100% 99%91%
59% 55%
44%39%
33% 31%
0%
20%
40%
60%
80%
100%
120%
France Thailand Srilanka Pakistan Indonesia China Bangladesh India Angola
Government Initiative to Support Development of Water
Infrastructure
Bharat Nirman program
In 2005, the Government of India initiated the Bharat Nirman program, with a view to
erect rural infrastructure. Rural drinking water forms one of the six components of Bharat
Nirman. During the Bharat Nirman Phase I period, 55,067 un covered and about 3.31
lakh slipped back habitations were to be covered with provisions of drinking water
facilities and 2.17 lakh quality affected habitations were to be addressed for water
quality problem.
Jawaharlal Nehru National Urban Renewal Mission
Jawaharlal Nehru National Urban Renewal Mission (JNNURM), with an estimated
provision of`50,000 Cr for a period of 7 years, is a national level initiative which enables
both the State Governments and Urban Local Bodies (ULB) towards providing investmentsupport in the sectors of urban infrastructure as well as urban reforms. JNNURM, in the
first phase, planned to extend to 60 cities with population exceeding 1 million, state
capitals and 20 other cities of religious and tourist importance. Some of the major thrust
areas include water supply including setting up of desalination plants, sewerage and
sanitation, etc.
Water & Sanitation sector which includes water supply, sewerage, solid waste
management and storm water drainage accounts for approximately 73.4% of the total
number of projects sanctioned under JNNURM and 80.8% of the total cost of projects
sanctioned. In absolute terms, the number of such projects sanctioned is 340 out of a
total of 463 projects sanctioned under the scheme.
Accelerated Irrigation Benefits Programme
The Accelerated Irrigation Benefits Programme (AIBP) is designed to provide financial
assistance to the irrigation projects, as an incentive to the States for creating irrigation
infrastructure in the country. The AIBP now meets the demands of the Bharat Nirman
programme which lays major thrust on irrigation, as well as provides assistance to the
irrigation projects under the Prime Minister Package for agrarian distressed districts.
For the year 2009-10, the projected grant requirement of AIBP is around `12285 crore
for creation of an additional irrigation potential of 10.50 lakh ha. Budget allocation made
available for 2009-10 for AIBP is of`8000 crore. The allocation proposed for XI Plan for
AIBP is of`43710 crore.
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SWOT Indian Pipe Industry
Salient Features of the Indian Pipe Industry
Indian Manufacturers have a Cost Advantage
India has become a global pipe-manufacturing hub primarily due to lower cost, high
quality and geographical advantage. The domestic manufacturers have started making
inroads into international contracts, as Indian quality is getting widely accepted. Indian
manufacturers basically cater to the pipe requirements of the Middle East Countries.Companies such as Jindal Saw are most likely to benefit, as their current export orders
contributes to about 55% of their order book position, with major exports to the Middle
East countries and to South East Asia. Similarly, Welspun generates more than 75% of
its sales from overseas clients. Freight costs being the second most cost for pipe
manufacturers, Indian pipe companies would benefit due to their proximity to these up-
coming markets.
Pipes are the preferred mode of
transportation due to lower opera-
tional cost, safety and protectionagainst pilferage
Strong order book position of
manufacturers
Lower cost of production in India
as compared to other countries
Highly fragmented industry lead-
ing to tough competition amongst
players
Higher dependence on govern-
ment spending for pipeline infra-
structure in the country
Shrinking oil reserves coupled with
rising demand expected to fuel
huge investments in E&P activities
Low pipeline penetration in India
compared to developed countries
Rising usage of natural gas
across the country
Replacement of old pipelines in
the US
Planned large projects in various
parts of the world for the period
2011-2015
Robust plans from major players
like GAIL, GSPL and RGTIL (Reli-
ance Gas
Foreign pipe manufacturers set-
ting up local operations in India
Increased competition from
China
Raw materials prices and their
availability - Shortage or unex-
pected increase in the cost of
steel plates/coils
Crude oil prices
Global economic environment
Overcapacity resulting in pres-
sure on margins
Helpful Harmful
InternalOrigin
ExternalOrigin
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EBITDA Margins
Source: Company Filings
4%
8%
12%
16%
20%
24%
28%
FY2007 FY2008 FY2009 FY2010
Welspun Corp Ltd Jindal Saw Ltd*
Maharashtra Seamless Ltd PSL Ltd/India
Man Industries India Ltd
-5%
0%
5%
10%
15%
20%
25%
30%
CY2007 CY2008 CY2009 CY2010
Sumitomo Pipe & Tube Co Ltd Vallourec SA
TMK OAO Northw est Pipe Co
Order Book Position Looks Robust
Indian manufacturers have been able to build strong order books, primarily because of
resilience in exports and also because of dominant growth in the domestic market.
Capacity Utilization Ranges between 2560%
In a pipe mill, pipe production per hour increases gradually as production increases,
and it generally takes a couple of years for a pipe mill to achieve optimum levels of
production. Also, since a large portion of current capacities have been added in the past
23 years, Indian pipe manufacturers are slowly reaching their optimization levels.
Capacity Utilization (as on FY10)
Source: Company reports
57.5% 56.1%
48.7%
33.0%28.2%
17.0%
0%
10%
20%
30%
40%
50%
60%
Maha
rashtra
Sea
mless
W
elspun
Jind
alSaw
Ratnamani
Man
Industries
PSL
Order Book (`````billion)
Company Order Book Sales Order Book to Sales Ratio
Welspun Corp. 71 65.8 1.1
Jindal Saw 35.3 67.8 0.5
Man Industries 25 14.9 1.7
PSL Limited 15.4 25.9 0.6
Maharashtra Seamless 4.5 15.9 0.3
Source: Company Fillings
* For Jindal Saw, EBITDA margins for FY2007, FY2008, FY2009 have been taken as those of CY2006, CY2007 and CY2008, respectively
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Capacities Strategically Located Near Ports
Nearly all Indian pipe manufacturers have set up their manufacturing facilities in the
state of Gujarat (west coast of India) because of its proximity to the port.
Having locations near the port had lead to significant savings in freight costs, enabling
Indian manufacturers to compete in the export market. Indian manufacturers have the
closest proximity to the largest market for pipes (the Middle East), where it is estimated
the demand for the pipes to remain robust in the next five years, giving them a clear
advantage over global pipe manufacturers.
Higher Concentration of Manufacturing facilities in the West of India
Source: Company Reports, Company Websites
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Peer Comparables
Company Name Fiscal Year Revenues (USD Mn) 3 Yr CAGREBITDA (USD Mn) 3 Yr CAGREPS (USD) 3 Yr
End FY07 FY08 FY09 FY10 CAGR FY07 FY08 FY09 FY10 CAGR FY07 FY08 FY09 FY10 CAGR
Welspun Corp Mar-10 593.2 993.2 1257.2 1551.7 37.8% 72.6 163.6 130.7 288.1 58.3% 0.24 0.52 0.25 0.67 41.5%
Jindal Saw Mar-10 1445.2 1235.8 1202.3 -5.9% 205.7 120.8 178.1 -4.7% 0.70 0.29 0.40 -17.0%
Maharashtra Seamless Mar-10 308.8 359.5 430.2 336.3 2.9% 75.6 65.4 67.8 86.8 4.7% 0.85 0.69 0.80 0.85 0.1%
PSL Ltd/India Mar-10 353.7 559.0 779.7 832.0 33.0% 36.1 54.3 58.3 75.0 27.6% 0.45 0.52 0.49 0.49 2.8%
Man Industries India Mar-10 250.6 362.6 412.5 311.1 7.5% 18.6 29.2 32.4 25.6 11.2% 0.23 0.34 0.09 0.18 -8.2%
Sumitomo Pipe & Tube Co Mar-10 563.7 613.9 669.2 519.8 -2.7% 53.5 70.0 69.7 18.3 -30.1% 0.50 1.25 0.89 0.23 -22.9%
Vallourec SA Dec-09 8417.5 9468.2 6225.5 - -14.0% 2400.0 2491.5 1367.4 - -24.5% 12.95 13.46 6.55 6.55 -28.9%
TMK OAO Dec-09 4178.6 5690.0 3461.0 - -9.0% 900.2 996.0 321.2 - -40.3% 0.56 0.23 -0.36 -0.36 NM
Northwest Pipe Co Dec-09 382.8 451.4 278.7 - -14.7% 44.6 64.5 -1.4 - NM 2.32 3.43 -0.79 -0.79 NM
* FY 2007 and FY2010 figures are adjusted annualized figures of Jindal Saws 15 Month Results. Fiscal year end for FY 2007 and FY 2008 is December 2 year CAGRcomputed for companies with fiscal year end as December
Company Name Order Book Position** (USD Bn) P/E P/BV EV/Sales EV/EBITDA
Welspun Corp 1.6 8.6 1.9 1.0 5.5
Jindal Saw 0.8 10.5 1.6 1.4 9.8
Maharashtra Seamless 0.6 8.8 1.1 1.3 5.0
PSL Ltd/India 0.3 6.0 0.8 0.4 4.7
Man Industries India 0.1 9.2 1.0 0.4 4.9
Sumitomo Pipe & Tube Co - 26.4 0.5 0.4 10.7
Vallourec SA - 13.4 1.9 1.6 7.5
TMK OAO - NM 2.6 2.1 22.8
Northwest Pipe Co - NM 1.0 1.1 NM
** Order Book Position as on Q1 FY11; Exchange Rate (USD-INR) used for conversion: 45.2944
Note: Valuation ratios based on latest completed financial year
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LKPLKPLKPLKPLKP
Research Team
S. Ranganathan Head of Research Pharmaceuticals , Agriculture 6635 1270 s_ranganathan@lkpsec.com
Ashwin Patil Research Analyst Automobiles & Telecom 6635 1271 ashwin_patil@lkpsec.com
Chaitra Bhat Research Analyst Banking & Financial Services 6635 1211 chaitra_bhat@lkpsec.com
Ami Shah Research Analyst Cement & Sugar 6635 1247 ami@lkpsec.com
Deepak Darisi Research Analyst Energy 6635 1220 deepak_darisi@lkpsec.com
Institutional Equities
Pratik Doshi Director 98210 47676 - pratik_doshi@lkpsec.com
Hardik Mehta Sales 98190 66569 6635 1246 hardik_mehta@lkpsec.com
Varsha Jhaveri Sales 93241 47566 6635 1296 varsha_jhaveri@lkpsec.com
Hitesh Doshi Sales 93222 45130 6635 1281 hitesh_doshi72@lkpsec.com
Sunil Shah Sales 98211 50270 6635 1310 sunil_shah@lkpsec.com
Kalpesh Vakharia Dealing 98193 08082 6635 1267 kalpesh_vakharia@lkpsec.com
Gurdarshan Singh Dealing 93228 61461 6635 1246 gurdarshan_singh@lkpsec.com
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