The Hindu Business Line : Scoring on delivery

“The reason for PSL’s dominance in the domestic market is its high capacity of spiral pipes, which meets the customer’s need of a compressed delivery schedule”, says Mr Ashok Punj, Managing Director, PSL. The company, which contributes to both the onshore and offshore network of pipeline infrastructure within the country, has seen a significant ramp-up in its order book in the recent past.

In an interview with Business Line, Mr Punj shares his views on the growth potential and the challenges that lie ahead for PSL as well as the industry.

Excerpts from the interview:

How is PSL managing the current high input inflation scenario? Have you been able to pass on the steel price hike to your clients completely?

Since steel has been a volatile commodity for the last two years, PSL has formed a policy on steel procurement. On the receipt of an order, within the shortest possible time, PSL covers 100 per cent of its steel requirement and that includes placing the order and opening letters of credit in order to bind supply.

But even after that, there can be cost pressures. For example, in the case of the recent large order from GAIL, if we place order with one mill for 2,50,000 tonnes of steel, then the supply has to be over a long period of time since the amount required is large.

So even if we have covered the order with a letter of credit, after the initial two-month period, there will be pressure on the supplier to raise the price. So, as a matter of policy, we place orders with multiple supply sources. That way, for instance in the GAIL order, we have a minimum of five different mills on an average supplying about 50,000 tonnes — all of them firm orders, covered with letters of credit, wherein steel would be received within 60 days or so. So the risk of escalation in price over the execution period does not arise since we take delivery of the steel.

Now what it does to PSL is that we have an inventory carry cost. To that extent, PSL’s balance sheet carries a heavy interest cost. But then it is easier to calculate the interest cost and build it into your contract, than trying to anticipate the volatility or variation of steel prices.

There has been a significant ramp-up in PSL’s order book in recent times. How do you score over competitors?

If you look at the last two years, every single tendered onshore gas pipe or oil pipe orders of diameter 18 inches or more has been secured by PSL. May be one out of 10 such projects would have escaped PSL’s net. The reason for our dominance in the domestic market is our high capacity of spiral pipes, which meets our customer’s need of a compressed delivery schedule. Further, our regional distribution gives us a competitive price edge in tenders. In the gas segment, for example, if we look at the last five tenders that GAIL came up with, PSL has secured all five .

In terms of segmental break-up, how does the oil and gas pipes segment compare with that of water pipes for the last year?

The break-up in revenues varies from period to period. In the current year, for example, we expect the revenue break-up to be in the range of 80:20. That is, 80 per cent of the total revenues from the oil and gas segment and the remaining 20 per cent from the water segment. But in other years, for instance the year when we carried out a large water project in Chennai, it was almost reverse.

It was 70:30 in favour of water. While in the next few years, the oil and gas segment is likely to dominate, in a period of three-four years down the road, water may once again come to the forefront.

This is because there are many water pipeline projects that are being conceived currently; by the time they come for execution in two-three years time, there will a rush for water projects.

How will the realisation per tonne compare between the segments? What is your expectation on the contribution front from your overseas plants in Sharjah and the US?

In terms of payment, water has been as reliable as oil and gas. Net of steel price, average realisation of pipes would be around $100-200 per tonne, that is within Rs 4,000-Rs 7,000 per tonne. The final realisation, however, will depend on the end use and cost of converting steel into pipes. For example, the cost of converting steel in gas projects is higher as the consumables are higher and even the wastage percentage is high. So, in that sense, oil and gas pipes have higher realisation.

Our manufacturing units in Sharjah and the US have just started. But our planning, bidding and market survey tell us that the margins in these overseas ventures will be substantially higher because those markets are virgin markets and are being addressed by fewer competitors.

What are the demand drivers for helical pipes? How do you see that grow in the next couple of years?

Helical or spiral pipe, which is the only product that we make, is dominant in terms of tonnage of steel pipes not just domestically but also internationally. And as long as the end usage is for onshore oil and gas purposes, then no matter how high the pressure requirement is, the application is serviceable by spiral pipes. Driven by the high crude prices that will require a proper pipe network in place, the demand for pipes will remain high.

This is because in order for the product (oil or gas) to move from wherever it is found to its destination such as refinery, or to a port for exports or directly to the market, pipe networks are a must.

What would be the demand-supply scenario in the spiral pipes market, both in India and globally?

As far as the Indian market is concerned, we do not have a demand-supply gap as we have sufficient capacities for pipe manufacture. But what we have is a large regional disparity gap since much of the Indian pipe manufacturing capacity is focussed in Gujarat. So if a pipeline has to be laid in the Visakhapatnam or Kakinada region, then it becomes quite a freight-intensive proposition.

To that extent, PSL scores better since we have a multi-location production capacity. We have production plants in Chennai, Visakhapatnam, Jaipur and Ahmedabad. And all of these are servicing regional requirements for water and oil and gas pipeline. This makes us more competitive.

So while we service regional demand from local pipe mills most of our competitors have to transfer the finished pipeline to the end location.

PSL’s approach to global markets is also quite similar — we manufacture locally and service the markets locally. . And in US and West Asia, the demand-supply gap is quite large.

The US, for instance, imports over 2 million tonnes of steel pipes every year, suggestive of supply shortage.