Costs, competition to restrict profits for PSL

Adarsh Gopalakrishnan | Updated on June 15, 2011


Steel pipe producer PSL has bagged an order worth about Rs 750 crore from GAIL. The order, roughly about 35 per cent its outstanding order book of about Rs 2,200 crore as of March 2011, requires PSL to deliver large diameter welded pipes for gas transmission to the natural gas distribution and pipeline company.

No doubt, the order comes as a big relief and would add to the company's topline. However, margins on this order may only be modest.

Margin pressure

High input costs and competitive pressure would limit the scope for any significant margin expansion.

It will be interesting to note here that most pipe producers have operated on utilisation rates of 40-60 per cent over the last couple of years owing to low oil prices and lukewarm infrastructure spending.

While PSL had in the past been able to circumvent the effect of rising input costs by placing orders with multiple steel mills on order wins, it hasn't helped the company hedge against rising steel prices in recent times.

That it's had a hard time passing on the hikes fully to its clients is evident in its financial performance. Sales during FY11 were down by 21 per cent to Rs 3,100 crore, while net profits slipped by 55 per cent to Rs 55 crore. Net profit margins slipped from 3 per cent in FY10 to 2 per cent in FY11.

However, the increasingly shortening contracts and input cost pressure on steel producers have dealt a blow on all pipe producers alike, with peers such as Jindal SAW, Welspun Corp and Man Industries too forced to eat into their margins.

Growth triggers

While the challenging times may remain for pipe makers, owing to extra capacities, lower order accretion and input price inflation, the firm oil price scenario is a positive. That GAIL plans to spend over Rs 25,000 crore over the next two years to expand its distribution network too might help. The stock price on the BSE ended Tuesday up 2.7 per cent at Rs 75.

Published on June 15, 2011

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