The Hindu Business Line : Steel pipe makers to add capacity on rising demand

GROWING oil and gas demand across the world and the zeal with which oil companies are investing on adding pipeline infrastructure promise higher revenues for Indian steel pipes makers.

Saw Pipes Ltd, Man Industries (India) Ltd, PSL Holdings and Welspun Gujarat Stahl Rohren, leading steel pipes makers in India, plan to cumulatively invest close to Rs 400 crore on expanding production capacities this fiscal.

"A huge pent-up demand for pipes has cropped up over the last few months. For the refining industry, pipes are the most economical way to transport oil and gas," said Mr Alok Agarwal, Senior Analyst, Motilal Oswal Securities. Currently, only about one-third of India's petroleum products are moved through pipelines.

"Ever since crude prices have edged up, refining margins have improved considerably. This has prompted several international companies to make investments in infrastructure,'' Mr Agarwal said.

Recent gas finds and increased thrust on LNG imports have also resulted in growing demand for gas transportation. Over the next five years, domestic companies, including ONGC, Gail (India), Reliance, GSPL and even Unocal, which is endorsing the India-Bangladesh natural gas pipeline, are expected to invest in laying 21,090 km of pipe with an annual average addition of 4,218 km. Gail (India) has the biggest capex plan for setting up 7,900 km of new trunk lines over the next five years.

A recent research note circulated by investment bank CLSA predicts, gas supply in India will increase 2-3 times over the next five years, translating into increased investments in setting up pipelines.

"It is estimated that total demand from the oil and gas sector in India would be about 17,000 km of pipelines over the next 3-4 years. Even if 50 per cent of the projects fructify in the given timeframe, the domestic pipe companies will witness a quantum jump in business opportunity," said the report.

According to Man Industries, which reported a 213 per cent jump in its financial year 2004 profits at Rs 39.32 crore, revenues are expected to rise 10-15 per cent in the current fiscal, in spite of a fall in first quarter revenues.

The company plans to invest Rs 160 crore on doubling its 580-km capacity for longitudinally submerged arc welded (LSAW) pipes, 270-km HSAW pipes capacity and increasing coating systems from 36 lakh square metres to 56 lakh square metres, this year.

PSL Ltd, which saw 87 per cent higher profit and 127 per cent surge in revenues to Rs 890.66 crore in financial year 2003-04, is likely to continue its robust growth in revenues as it has been able to get more orders for the supply of API-grade pipes for gas transmission, oil supply and steel pipes for water. PSL plans to invest Rs 50 crore on increasing its 30,000-tonne capacity to one million tonne per annum, this year.

Welspun Gujarat, meanwhile, will be one of the highest spenders with its plans to invest Rs 200 crore in setting up a new manufacturing unit in Gujarat. The saw pipes manufacturer plans to add capacities of around 5,00,000 tonnes by the end of this calendar year.

A major portion of earnings for pipeline companies is expected from exports. While PSL claims its overseas earnings will contribute 50 per cent to its turnover two years from now, Welspun Gujarat Stahl Rohren Ltd has bagged a Rs 407-crore ($90m) order for supplying 3 LPE coated pipes in Libya.

Amidst all the positives favouring this industry, upturn in steel prices has been a negative factor. However, officials say the companies have been able to build in steel price hikes into the costs of the projects, to some extent.

"But we are affected by rising prices of imported steel and because we are unable to secure long-term contracts,'' said Mr Shashank Belkhede, Vice-President (Finance) & Company Secretary, Man Industries.

Saw Pipes Ltd, which reported a 44 per cent improvement in revenues for the nine months ending June 2004 at Rs 610.68 crore, however, did have an impact on lower profit at Rs 30.91 crore (Rs 38.16 crore) because of high raw material costs. According to Mr Agarwal, SAW Pipes has been able to employ its capacities fully on account of projects flow.