The Hindu Business Line : PSL: Buy

Investments with a long-term perspective can be considered in the stock of PSL, which is the country’s largest manufacturer of high grade helical pipes.

At the current market price of Rs 308, the stock trades at about nine times its estimated FY09 per share earnings, assuming full equity dilution. This leaves considerable headroom for further appreciation in the stock’s price given PSL’s expanding order book, capacity additions and promising demand prospects.

Better realisations and margins from recently bagged orders and the likely contribution from its overseas units in the UAE and the US in the coming quarters also suggest strong earnings prospects.

PSL’s regional distribution presence and large installed capacity has helped it meet its customers’ need for compressed delivery schedules, giving it an edge over its competitors. Over the last three years, it has enjoyed sales and earnings growth of about 16 per cent and 37 per cent respectively, on a compounded annual basis.

The growth rates may improve further, considering the company’s current order book of Rs 6,000 crore (2.7 times its FY08 consolidated revenues). That a bulk of its current order book was bagged only recently amidst tough competition also points to PSL’s strong position in the market.

Another factor that highlights our optimism on the company’s business prospects is its raw material procurement policy. It covers its entire steel requirement within the shortest possible time after the receipt of any order, giving itself sufficient leeway to protect margins.

While operating margins had dipped by a percentage point to 9 per cent for the year ended March 2008, it is likely to improve in future as its US and UAE plants are slated to start production soon. The average realisation per tonne for pipes, which is currently around $100-200 per tonne net of steel price, may see improvement when these facilities begin contributing to the overall revenues. That both these ventures already have orders in hand also reduces any concerns regarding PSL’s ability to break into new markets.

The only flip side is PSL’s relatively high reliance on debt for working capital requirements for inventory maintenance and capacity expansion. While the costs may be easily absorbed with the current scenario of high demand and utilisation, the same could pose a threat to earnings if there were execution delays or orders, due to reduced capex spending by its user industries such as oil and gas.

Srividhya Sivakumar

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PSL diversifying into SEZ development
PSL lines up $60-m capex; raising Sharjah unit capacity
PSL net profit rises 36%

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