Profit margins of steel pipe manufacturers are likely to surge in the second half of the current financial year. This is because of a sharp decline in steel prices and a surge in orders, following the Centre's increased focus on infrastructure development for the transportation of water, oil, and gas.
Companies manufacturing steel, other pipes and allied products have reported steady improvement in their profit margins over the past four quarters, with about half a dozen leading producers posting 4.6 per cent cumulative profit margins in Q1FY20, from around 2 per cent in the same period last year. Analysts believe the improvement has continued in Q2 as well.
A report from Edelweiss Research suggests 20-25 per cent decline in the prices of hot rolled coil (HRC) and steel raw materials.
Since steel pipes manufacturers mostly sell their products on long-term contracts for delivery in 9-12 months, the price decline benefits them till the next contract is signed with consumer industries. “The future looks promising for the line pipe sector, on the back of increasing production in oil and gas to meet the growing consumer demand. The government’s renewed focus on the water sector gives additional opportunity for growth. With the required expertise and capabilities, we are fully poised to tap this opportunity,” said R C Mansukhani, chairman and managing director, Man Industries.
Companies like Man Industries, Jindal Saw, Surya Roshni and others have reported up to 30 per cent increase in orders in the past three months from their customers in the water, oil and gas sectors. The Rs 50,000 crore steel pipe industry contributes around 8 per cent to India’s overall steel production of 100 million tonnes.
A CRISIL report estimates 7-8 per cent growth in demand for steel pipes by 2024 because of a massive investment planned by the government in water supply, irrigation and sanitation projects, and increased usage of structural pipes for the same. People in the know said that the government plans to spend Rs 130,000 crore on the supply of water, irrigation, sanitation, oil and gas by 2024 under various schemes. With the government's focus on 'Nal se Jal' and river linking projects, huge potential is seen in the water sector in addition to oil and gas.
The total investment potential in water infra stands estimated at $270 billion over the next 15 years.
Rajeev Goyal, assistant vice president, Jindal Saw, believes that demand from the oil and gas sector is sufficient, with the next driver of growth expected from water supply and sanitation projects, as the government’s Jalshakti Mission is carried out across the country.
Goyal said that the ongoing robust demand has improved capacity utilisation of the sector over the past few months.
In the export segment, demand has surged from all major geographies like the MENA region (which includes 19 countries such as Iran, Iraq, Israel and several gulf nations) for oil and gas and refining, Asia Pacific for oil and gas and water, and North America for liquefied natural gas (LNG), oil and gas etc.
“Usually, steel pipe makers buy raw materials in advance. However, the incremental buying in the past three months would certainly benefit them in the second half because of a sharp decline in steel prices. With most stocks in this sector trading at a P/E multiple of 5-6x, we see a big opportunity for these stocks to perform better in the next few years,” said Bajrang Bafna, head of research, Sunidhi Securities.
The allied segment, including the welding industry, is also forecasted to grow in the wake of massive infrastructure spending by the government.