The Hindu Business Line : PSL: Buy

Investors can consider fresh exposure in small lots in PSL at its current price of about Rs 200.The stock is valued at about 10 times its likely FY-07 per share earnings. The stock's current valuation has not fully captured the potential upside associated with its large-size orders. A robust order book, buoyancy in the oil and gas sector and a healthy volume growth from recently added capacities are encouraging trends for PSL in the medium term. However, there are concerns relating to the low trading volumes in the stock. Business prospects are positive and hence an expansion in its multiple is expected over the near-to-medium term.

PSL is a key enabler for infrastructure and construction projects and is engaged in various types of pipe coating and pipe manufacturing. Its supplies are largely to companies in the oil and gas transportation sector.

Currently, PSL has an order book of around Rs 1,600 crore, which is more than its revenue for FY-06. These orders are likely to be completed in the next 9-12 months, thereby improving its earnings visibility.

Activity in oil and gas exploration is set to intensify over the next few years; this is evident from the huge investment plans by various companies in the domestic and global markets. This is likely to translate into more orders for PSL.

That its order profile too has improved is another encouraging sign. From merely executing orders in the oil and gas business, PSL is now diversifying into areas such as design, engineering, supply and installation in offshore pipe coating. This model is likely to improve its margins.

PSL has an impressive clientele, which includes ONGC, GAIL, HPCL and IOC. It recently bagged an order from Reliance Ports and Terminal worth Rs 95 crore for the supply of anti-corrosion pipes, and another order from L&T worth Rs 270 crore for supply of coated pipes for the Rajasthan water pipeline project. These contracts are likely to act as catalysts in attracting more orders from the private sector.

PSL has virtually doubled the capacity of its pipes division with the addition of three pipe mills the last quarter. The aggregate pipe-manufacturing capacity of PSL now stands at 11,00,000 tonnes per annum. This is likely to ensure healthy growth in volumes for the company over the next few years.

PSL's debt-equity ratio has improved from 3.8:1 last year to 2:1 now. This is still on the high side compared to the industry average of about 1.5:1. However, healthy cash flows from operations (in the region of Rs 100-150 crore) over the next few years are likely to be used to bring down its level of gearing.

Eyeing overseas markets

PSL is increasing focus in the overseas markets and has built a significant presence in West Asia and North-East African countries. It is in the process of implementing the high-pressure gas pipeline project in the UAE. The overseas operations, apart from de-risking its revenue-base, are also likely to result in widening its client base.

Lower-than-expected capacity utilisation and delays in project execution remain the principal risks to the recommendation.

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