Opportunites in India's pipe industry

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The pipe sector went through a lean patch last year due to the global slowdown in oil exploration and production (E&P) activities. However, the recent flow should keep order books of companies in this sector robust and translate into higher revenues.

The domestic pie
India’s largest gas company, GAIL, which operates about 7,200 km of pipelines, recently announced plans to put up an additional 1,000 km by the end of this calendar year and a total of 5,000 km by 2013. The company has outlined investments of $6-7 billion (Rs 28,000-33,000 crore) in the next five years.

These investments are almost equal to the amount it had invested in the last 25 years. GAIL’s decision to expand its pipe network would help it meet the increasing demand for gas. While India has a supply deficit, the situation is expected to improve as a result of the new gas discoveries in the country by RIL, ONGC and others. Currently, the gas supply is about 135 mscmd; this should go up to 215-220 mscmd by 2014. This will require large investments in improving and expanding the network.

Water transport
Demand is also likely to come from the increasing expenditure on urban infrastructure and water transport projects. According to Crisil, over the next three-four years, Rs 2,65,000 crore will be invested on urban infrastructure, a three-fold increase compared to the Rs 85,300 crore invested in the past four years. The players who will benefit the most from these new investments are Jindal Saw and PSL.

Jindal Saw
In the water and sewage segment, ductile iron (DI) pipes are used, where Jindal Saw is the leader, with total capacity of 3,00,000 tonnes, which the company is increasing to 5,00,000 tonnes by June 2011. The company is also active in the export market, supplying pipes for gas pipelines.

PSL
PSL is another key player in the domestic market. The company makes HSAW pipes, used in the transportation of oil and gas, water and sewage. These pipes are cost-effective and help PSL price its products competitively.

International markets
The outlook for pipe companies in the international markets has also improved on the back of recovery in crude oil prices, leading to higher E&P expenditure. According to the global research agency Simdex, 714 pipeline projects of 3,24,301 km are to be implemented over the next five years. The demand is estimated to be coming largely from North America, Asia and the Gulf countries.

Analysts believe the sector is likely to witness a change in fortunes. Says Pritam Lala of Batliwala & Karani Securities, “A number of pipeline projects were stopped during the recession but are now being revived and new projects are also being announced or will be awarded in the near future.”

The revival in prices of crude oil is also helping to justify the costs of exploration. “E&P activities are viable only if the crude oil trades above $50-55. We have already seen recovery in crude oil prices and thus improvement in global E&P activities,” says a SBI Capital analyst who tracks the pipes sector. Besides the demand for the new pipelines, according to Macquarie Research, the replacement of old pipelines laid during the 1960s and 1970s would generate significant demand for SAW (submerged arc welded) pipes. The brokerage expects that 50,000 km of pipelines would need to be replaced in the next five years, which may in fact turn out to be conservative, as 1.8 million km out of a total 2.7 million km of pipelines in the US are over 30 years old and will need to be replaced.

High on exports
Some Indian companies have already bagged a couple of orders in the export market and the trend is likely to continue, believe analysts. Companies such as Maharashtra Seamless will be key beneficiaries; this company manufactures high-pressure seamless pipes, used in oil and gas exploration.

In the transport segment, Welspun Gujarat Stahl Rohren and Man Industries are key players in the international markets. Welspun Gujarat generates almost 80-85 per cent of its revenue from international markets. “International companies in the oil and gas sector were earlier not awarding new projects, simply because commodity prices were falling and nobody wanted to catch a falling knife. But, commodity prices have now stabilised and the companies have now committing investments as a result of which we are getting lot more enquires,” says Akhil Jindal, Director, Welspun Gujarat. The company has an order book of Rs 7,800 crore, which provides good revenue visibility.

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