Mid Cap Stock Idea - PSL

PSL Ltd. (PSL) is the largest manufacturer of high grade large diameter helical submerged arc welded (HSAW) pipes in India. The company manufactures and supplies pipes certified by American Petroleum Institute (API) standards, for oil, gas and water transmission, as well as structural and piling applications for both onshore and offshore sectors. With a manufacturing capacity of 1.42 mntpa, PSL is one of the leading pipe solution providers to the domestic market.

Well Planned location of mills: All the 12 integrated HSAW pipe and pipe coating mills are located near ports across India to facilitate reduction in the costs of imported HR coils as well as reduced local transportation costs.

Strong Order Book facilitated by strategizing resource deployment: Existing order book of approximately Rs 4000 crores out of which nearly 50% is export driven.  PSL is a very well established player catering to the demand for pipes arising from large corporates like GAIL, IOCL etc. It benefits from its multiple facilities to deploy resources and plan capex based on regional demand.

Best Equipped to tap domestic opportunity: With the largest HSAW capacity which is movable and multi-located, PSL is best suited to benefit from visible demand expansion of pipelines in India over the next 4-5 years (low pipe penetration, demand from water infrastructure and National Gas Grid).

In-house design and engineering facilities: It develops equipment for pipe manufacturing and pipe coating in-house which leads to lower capital costs than most of its peers which import large parts of their equipment.

NELP-VIII and GAIL-RIL pack seems to be beneficial: With the decision of the government to allot blocks under NELP-VIII and expectation that GAIL would bag exclusive market rights for distribution of natural gas generated by RIL from the D-6 basin, PSL can look forward to a healthy rise in order book and higher revenues in the near future.

Outlook & Valuation

The company has positioned itself as one of the leading HSAW pipe manufacturers with a locational advantage. Despite difficult business conditions, PSL is likely to post a CAGR of 6% in net sales between FY09-11. It is likely to post a CAGR of ~15% on both EBITDA and PAT in the same period.

At the current market price of Rs 150, the stock is trading at 5.4x and 5.2x of FY10E and FY11E earnings respectively. This looks very cheap against its normal trading range of 11x forward earnings over the last 5 years. We recommend buying the stock with target price of Rs 290. At this price the stock would trade at 10.0x FY11E earnings.