Industry+ LKP

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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

[email protected]

+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



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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)


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%


Gas, 12%

Oil, 32%Coal, 53%


Gas, 14%

Oil, 30%

Coal, 54%

2001-02 2006-07

2011-12 2024-25


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


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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Research Team

S. Ranganathan Head of Research Pharmaceuticals , Agriculture 6635 1270 [email protected]

Ashwin Patil Research Analyst Automobiles & Telecom 6635 1271 [email protected]

Chaitra Bhat Research Analyst Banking & Financial Services 6635 1211 [email protected]

Ami Shah Research Analyst Cement & Sugar 6635 1247 [email protected]

Deepak Darisi Research Analyst Energy 6635 1220 [email protected]

Institutional Equities

Pratik Doshi Director 98210 47676 - [email protected]

Hardik Mehta Sales 98190 66569 6635 1246 [email protected]

Varsha Jhaveri Sales 93241 47566 6635 1296 [email protected]

Hitesh Doshi Sales 93222 45130 6635 1281 [email protected]

Sunil Shah Sales 98211 50270 6635 1310 [email protected]

Kalpesh Vakharia Dealing 98193 08082 6635 1267 [email protected]

Gurdarshan Singh Dealing 93228 61461 6635 1246 [email protected]

Industry+ LKP

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