STEEL TUBES & PIPES SECTOR REPORT

OCTOBER 23, 2010 SPA SECURITIES LIMITED

Contents
EXECUTIVE SUMMARY STEEL TUBES & PIPES SECTOR WELSPUN CORP MAHARASHTRA SEAMLESS PSL MAN INDUSTRIES APL APOLLO TUBES LTD. RATNAMANI METALS & TUBES LTD. ZENITH BIRLA (INDIA) LTD. 01-02 03-08 09-13 15-19 21-24 25-28 29-34 35-39 41-44

Executive Summary
THE FINANCIAL ADVISORS

As we draw near to the close of the rst decade of twenty rst century a clear anomaly has emerged between the Indian steel sector and its downstream product industries. The evidence gets starker on comparing the performance of steel sector with that of the Indian steel pipes and tubes Industry. Indian steel industry, at the dusk of twentieth century was highly unorganized and heavily dependent on the domestic demand. The level of competition was limited to domestic players, however there were consistent initiatives required to ward off dumping of cheaper imports in few downstream products like ats and some categories of pipes.

The last decade of twentieth century witnessed an evolution for the Indian steel industry players, in wake of huge raw material reserves and infusion of funds for capacity creation and modernisation. As a result, mainstream steel producers and iron ore producers have successfully scaled their operations to global scale. Amidst the sustained growth of the steel industry, Indian steel pipe industry continued to grow at snails pace. However, a large growth potential was waiting to be unearthed and the thrust came in wake of two important events one, the great Indian Infrastructure initiative by the Government of India to support the GDP Growth roadmap; and second, the surge in the global oil prices to USD140 levels, resulting in increased demand from oil and gas exploration industry. The steel tubes and pipes industry witnessed robust demand from various domestic industries like real estate, construction, telecom, power, energy, entertainment zones, metros, airports and ports, etc. Key policy-led initiatives such as the urban infrastructure programme under Public Private Partnership also proved to be a shot in the arm. Oil and Natural Gas industry, however continues to offer larger opportunity for the industry. During the rst ve years (2000-05), the global spend on exploration & production of oil & gas to satiate the demand for energy consumption was USD100 bn. The global demand for energy is estimated to grow at a CAGR of 1.4% to reach 738.7qbtu (quadrillion british thermal units) by 2035. Due to limited reserves in crude (present production of 80mn barrels per day), demand switch to natural gas has risen to present levels of 3tcm (trillion cubic metres).

As more than 70% of oil & gas reserves are found in Middle East and Eurasia, transportation of gas to decit regions of Asia and Europe entails huge demand for steel pipes. China is expected to be the largest consumer of energy in the coming years with demand of 181qbtu, followed by U.S. (114.5qbtu) and India (37qbtu). In India till date 17,576km of pipeline was laid with an investment of more than Rs 300bn. However, things are no longer the same. Recently, in India, sizeable investments in oil & exploration in wake of awarding oil blocks in NELP VIII in eastern coast is expected to witness extensive roll out gas of distribution networks by steel pipe companies (LSAW and HSAW). The constitution of PGNRB, paving way for implementation of National Gas Grid will act as an additional booster to the industry. The next ve years more than 18,000km of pipeline are planned to be laid with investments of more than Rs 400bn. Perceiving the onward demand opportunity, Indian companies have aggressively built up capacities to match global economic size. Over the last ve years Welspun Corp has expanded from 730,000tpa to 1.6mtpa, Man Industries from 375,000tpa to 1.0mtpa, PSL from 1.02mtpa to 1.8mtpa, Maharashtra Seamless from 425,000tpa to 550,000tpa. In the next ve years 18,000km of pipeline is envisaged in the domestic market and 368,244km globally. Total investments in the sector are expected to be around USD97bn.

Ankit Shah

[email protected] Ph. No. +91-22-4289 5000 Ext. 631

SPA Securities Limited

THE FINANCIAL ADVISORS

For ERW steel pipe manufacturers, the opportunity in domestic market has recently opened up with thrust on urban infrastructure. New airports, metro lines, new age buses (used as frame for bus bodies), telecom towers and entertainment malls provide huge untapped potential to the ERW Pipe industry. The industry, sensing the opportunity, has responded in equal measures through capacity expansion and wider reach. Large producers like APL Apollo Tubes, Zenith Birla and Welspun Corp are in midst of expansion plans. APL Apollo has more than doubled steel tube capacity to 490,000tpa through Indias largest Greeneld facility of 200,000tpa in Hosur, Tamil Nadu. Recently company has acquired Murbad facility of Lloyds Metals with capacity of 90,000tpa. In next two

years, company is planning to enhance to 600,000tpa through browneld additions. Similalry, Zenith is expanding its ERW and HSAW capacity by 150,000tpa and 75,000tpa respectively. The domestic opportunity in the new applications is said to cross one million tones, equivalent to the existing demand. In the oil & gas sector, the demand for pipeline network is estimated to cross 15,000km by 2015.

Valuations
We have a positive outlook on steel tubes and pipes sector on back of investment plans in gas distribution, oil drilling and power projects. Our top picks in the sector are Welspun Corp, Man Industries and APL Apollo Tubes.
PAT EPS FY12E 8,099.6 3,723.9 1,691.7 1,053.6 988.8 1,011.6 788.7 FY10 FY11E FY12E 29.9 36.6 25.5 12.5 14.4 17.9 2.2 33.8 40.3 26.3 17.4 24.0 18.2 1.7 39.6 43.5 31.6 18.9 42.1 22.0 2.3 P/E FY10 FY11E FY12E 8.4 10.8 4.5 6.8 11.0 7.9 5.4 7.4 10.0 4.4 4.9 6.6 7.8 7.1 6.3 8.2 3.7 4.5 3.8 6.5 5.3 EV/EBIDTA FY10 FY11E FY12E 4.3 6.9 8.0 2.2 7.0 5.6 3.4 4.1 6.1 6.0 1.6 4.9 5.1 3.8 3.2 4.7 5.1 1.4 3.3 4.1 3.6

Revnues Company Welspun Corp Maharashtra Seamless PSL CMP Reco. 250.9 BUY 434.8 BUY 116.0 BUY BUY FY10 FY11E FY12E FY10 13,371.6 4,528.4 3,550.9 1,743.4 643.1 1,690.1 442.3

EBIDTA FY11E 14,305.9 5,018.8 4,310.4 2,179.4 1,053.6 1,697.6 596.4 FY12E 16,436.4 6,196.6 4,733.7 2,352.1 1,902.0 2,037.7 788.7 FY10

FY11E

76,287.7 92,806.1 105,962.1 16,912.2 20,347.1 39,410.5 44,410.7 15,054.3 18,278.1 6,659.5 11,028.8 8,847.9 10,792.9 5,039.3 5,884.9 24,530.0 47,440.5 20,460.1 19,617.2 12,582.5 7,754.9

6,104.2 6,906.2 2,846.1 3,070.8 1,226.6 1,406.3 670.9 293.1 814.3 442.3 968.0 523.9 836.3 596.4

Man Industries 85.6 APL Apollo Tubes Ratnamani Zenith Birla

157.9 BUY 142.3 BUY 12.0 HOLD

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

Steel Tubes & Pipes Sector

THE FINANCIAL ADVISORS

SECTOR COVERAGE

Structure of the Industry PIPE SECTOR

OIL & GAS

NON-OIL

E&P

TRANSPORT

Gen. Engg., Auto, Power Plants

Water & Sewage

Metros, Airports, Malls

Seamless

HSAW

LSAW

ERW

Seamless

DI/CI

HSAW

ERW

ERW

Product Summary
LSAW Size Key Raw Material Manufacturing Process 16" to 50" diameter Steel Plates Longitudunally submerged arc welding of steel plates High Pressure conditions Key Difference Demand is directly related to Oil & Gas Sector Oil & Gas Transportation Application Jindal Saw, Welspun Corp, Man Industries HSAW 18" to 120" diameter HR Coils Spirally Welding HR Coils ERW 0.5 to 22" diameter HR Coils Hot Rolled steel coils using electrical resistance welding process Limitations in size, thickness and grade Suitable for branch lines in oil & gas distribution Seamless 0.5 to 14" diameter Steel Billets Piercing ingots/ billets of steel at high temperatures High Pressure conditions Application in oil and non-oil related industries Petroleum , Exploration, General Engg., Boilers Jindal Saw, Maharashtra Seamless, Ratnamani

Low Pressure conditions Demand is directly related to Oil & Gas Sector, Water and Sanitation Sector Oil & Gas/Water Transportation PSL, Jindal Saw, Welspun Corp, Man Industries

Oil & Gas/Water Distribution, Metros, Airports, Malls Welspun Corp, Maharashtra Seamless, Apl Apollo, Zenith Birla

Key Players

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

THE FINANCIAL ADVISORS

International Demand Drivers

The growth constituents of global economy had a face change in last two decades. Asian economies excluding Japan started having a fair share. However, the scorching pace of China from late nineties has upped GDP growth rates. China with double digit GDP growth, it has become a net consumer of minerals and energy. To cope up with the demand for increasing energy sources, exploration & production activities are also growing at a robust pace. With crude prices presently hovering over USD80/barrel exploration activities have become feasible and huge investments are being made to search for new sources of fuel. As a corollary, the demand for pipelines is directly related to the investments in the oil & gas sector. Over the past 10 years, oil production and consumption have been increasing at a CAGR of 1.0% and 1.1% respectively. As of 2009, the global oil production stands close to 80mn barrels/day and consumption stands over 84mn barrels/day. Global Oil Production (000 BPD)
90,000 75,000 60,000 45,000 30,000 15,000 0

Increasing Share of Natural Gas

Over the last 10 years, gas production across the globe other than North America and Europe has been growing at a robust CAGR of over 5%. Gas production and consumption have been increasing at a CAGR of 2.5% and 2.4% respectively. As of 2009, the total gas production stands close to 3.0tcm (trillion cubic meters) and consumption stands over 2.9tcm. Global Gas Production (BCM)
3,500 3,000 2,500 2,000 1,500 1,000 500 0 1989 North America Middle East 1994 Africa 1999 S. & Cent. America 2004 Asia Pacific 2009

Europe & Eurasia

Global Gas Consumption (BCM)

3,500 3,000 2,500 2,000 1,500
1989 North America Middle East 1994 Africa 1999 S. & Cent. America 2004 2009 Europe & Eurasia Asia Pacific

1,000 500 0 1989 North America Middle East 1994 Africa 1999 2004 Asia Pacific 2009

Global Oil Consumption (000 BPD)

90,000 75,000 60,000 45,000 30,000 15,000 0

S. & Cent. America

Europe & Eurasia

Source: BP Statistical Review, 2010, SPA Research

1989 Middle East

1994 Africa

1999 S. & Cent. America

2004

2009 Europe & Eurasia

North America

Source: BP Statistical Review, 2010, SPA Research

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

THE FINANCIAL ADVISORS

With oil consumption outstripping oil production, the need for alternative sources of fuel is pressing. Natural Gas is the preferable option as it is cleaner and cheaper than oil. As of 2009, oil and gas reserves stand at 1.3tn barrels and 187.5tcm respectively. However, more than 70% of these reserves are found in Middle East and Eurasia making it imperative to transport the fuel to gas decit regions of Europe and Asia. SAW pipe companies stand to benet from the increasing need to transport oil & gas through cross country pipelines. Further, huge reserves of shale gas are found in the north eastern parts of U.S. The production of shale gas is expected to increase at a CAGR of 10% to reach 4.8tcf (trillion cubic feet) by 2020. As per International Energy Outlook (IEO), energy consumption is expected to grow at a CAGR of 1.4% to reach 738.7qbtu by 2035. The highest demand is expected to come from China (181.9qbtu) followed by USA (114.5qbtu) and then India (37.6qbtu). The increasing crude prices have led to increasing E&P activities across the globe. Rig counts are one of the best indicators to gauge the ongoing exploration & production activities. From 1,829 rig-counts in 2002, the exploration activity reached its peak in 2008 as rig count rose to all time high of 3,336 following a blow out in crude prices. Though economic slowdown in following year resulted in a slump in rig count of 2,304, post the nancial crisis, average numbers of rigs deployed have increased. The average number of rigs deployed till September 2010 is 2,911 registering a 28.1% rise as compared to the corresponding period in the previous year. Another positive for the exploration activities is the likely lifting of ban on deep sea drilling in U.S. following oil spill episode of BP. The renewal of exploration activities will augur well for the seamless pipe companies as they are used in upstream oil & gas activities. Worldwide demand for the pipe industry continues to be robust for the next 3-5 years as USD180bn will be spent on onshore pipeline projects through 2012, according to a DouglasWestwood report titled The World Onshore Pipelines Report 2008-2012. The report also estimates a 16% increase in the pipeline mileage installed from 2008-12 as compared to the ve year period of 2003-07. Nearly, three quarters of this expenditure is expected to come from Asia, FSU, Eastern Europe and North America. According to the latest update by Simdex, more than 350,000km of pipeline is expected over the next ve years, presenting opportunities of more than USD88bn.

Future Pipeline Projects - September 2010 Update

Total Length Region North America Latin America Europe Africa Middle East Asia Australasia Total No. of Projects 244 62 139 68 145 192 59 909 26.8% 6.8% 15.3% 7.5% 16.0% 21.1% 6.5% 100.0% (Km) 79,758 34,466 48,778 28,213 49,953 108,761 18,315 368,244 (%) 21.7% 9.4% 13.2% 7.7% 13.6% 29.5% 5.0% 100.0% Total Investments Mn T (USD Bn) 16.0 6.9 9.8 5.6 10.0 21.8 3.7 73.6 19.1 8.3 11.7 6.8 12.0 26.1 4.4 88.4

Source: Simdex Sep 10 Update, SPA Research; Conversion: 200 tonnes/km and USD1,200/tonne

North America and Asia to be the Volume Drivers

North America is one of the largest consumers of the Indian pipes. 244 projects involving 16.0mn tonnes of pipes expected to come up over the next ve years providing opportunities worth USD19.1bn. In USA more than 1.5mn km of pipes had been laid prior to 1975. These pipes have outlived their economic lives of 30 years and due to few accidents there has been a pressing need to replace these pipes. This provides with a business opportunity of more than USD500bn. The demand arising due to replacement of old pipes in USA is also expected to increase the opportunities for Indian players. While in Asia 192 projects are expected to come up involving 21.8mn tonnes of pipes over the next ve years, representing investments worth USD26.1bn. Investments worth USD12.0bn in the pipe industry are expected over the next ve years in the Middle East. Being in close proximity to the Middle East, Indian companies have competitive edge over Japan and Europe as they are able to save on freight costs. We believe that these huge investments in the Middle East and North America will benet SAW pipe players like Welspun Corp, Man Industries and PSL as exports form a huge part of their revenues. Further, Welspun Corp and PSL also have their manufacturing facilities in U.S. and Middle East.

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

THE FINANCIAL ADVISORS

Domestic Demand Drivers

The Indian Pipe Industry is among the top three manufacturing hubs after Japan and Europe. However, the penetration level of pipelines in oil & gas transportation is quite low at 32% in India as compared to 59% in USA and 79% globally. The low penetration of pipes in the domestic market provides a huge business opportunity. The Indian line pipe industry is around Rs 235bn. Pipelines are also the economical mode of transport as compared to roads and rail. The Indian government is encouraging the use of pipes as this will reduce the costs of transportation and assist the Oil Marketing Companies (OMCs) like HPCL, BPCL, IOC etc. to trim their under recoveries and the government will save in the form of lesser subsidy outgo. Cost of Transport (Rs Per Km)
Rs/Km 4

Capacity expansion by domestic players

The current pipeline network is quite narrow and is just above 17,500km indicating a low level of penetration.
Category Product Pipeline LPG Pipelines Crude Pipelines Total Source: MoPNG, SPA Research, Capacity mmpta Capacity 63.7 4.5 45.9 114.1 Length (Km) 9,893 2,124 5,559 17,576

Many domestic players such as GAIL, GSPL and RGTIL have planned a large number of pipeline networks to be commissioned over the next 4-5 years. The prospects of GAIL, Indias largest gas transmission and marketing company are better as the countrys energy consumption pattern is shifting towards Natural Gas.

GAIL Existing Network

3 3.02 2

Pipeline HVJ/DVPL Mumbai

2.20

Capacity 57 24 12 49 142

Length (Km) 4,233 125 793 2,069 7,220

DUPL/DPPL Others Total Source: Company, SPA Research; Capacity mmscmd

1.30

0 Road Rail Pipes

Pipe Penetration Level

80% 79% 60% 59% 40% 32% 20%

The company plans to add further 6,663 km of pipeline to its existing network of 7,220 km by FY13 through an investment of Rs 303.1bn. GAIL has a retail presence in 15 cities and it plans to expand its reach to 50 cities by 2012-13.

GAIL - New Pipeline Capacity Build Up

Pipeline Vijaipur Dadri Pipelines Dahej-Vijaipur Upgradation Chainsa-Jhajjhar-Hissar Dadri-Bawana-Nangal Dabhol Bangalore Kochi-Mangalore-Bangalaore Jagdishpur Haldia Total Length (Km) 505 610 349 646 1,389 1,114 2,050 6,663 Capacity 80 78 47 31 16 16 32 300 Project Cost (Rs Bn) 51.6 56.7 23.5 12.6 76.0 50.1 32.6 303.1

0% India USA Global Average

Source: Company, SPA Research, Capacity mmscmd

Source: Industry, SPA Research

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

THE FINANCIAL ADVISORS

Other than the expansion of trunk lines, GAIL is also expanding its distribution network of pipelines by increasing its spur line capacity.

Huge investments in the South/East India

Large nds in the KG basin along the east coast of India have triggered huge investments by the oil & gas companies. A vast network of more than 8,700km is planned and to be executed over the next ve years.

GAIL - New Spur Pipeline Capacity Build Up

Pipeline KMKR Pipeline Focus Energy Consortium Ramgarh Terminal Capacity Augmentation - Agra & Ferozadabad Vijaipur Kota Pipeline Upgradation Bawana Nangal Spurlines Total Source: Company, SPA Research, Capacity mmscmd Length (Km) 185 90 71 290 270 906 Capacity 2.5 1.2 2.0 2.0 4.0 12 Cost (Rs Bn) 2.5 1.0 2.0 4.6 5.4 15.6

Pipelines in South/East India

Pipeline Dabhol Bangalore Kochi-MangaloreBangalaore Jagdishpur Haldia Kakinada-Haldia Kakinada-Chennai Chennai-Tuticorin Chennai-MangaloreBangalore Mallavaram-Bhilwara Total Source: Company, SPA Research Company GAIL GAIL GAIL RGTIL RGTIL RGTIL RGTIL GSPL Length (Km) 1,389 1,114 2,050 928 577 585 538 1,585 MT 277,800 222,800 410,000 185,600 115,400 117,000 107,600 317,000 Cost (Rs Bn) 13.1 10.5 19.3 8.7 5.4 5.5 5.1 0.3 67.8

GSPL is also planning to add 5,675 km of additional pipelines.

GSPL Proposed Pipelines

Pipeline Mehsana-Bhatinda Bhatinda-Jammu-Srinagar Surat-Paradip Mallavaram-Vijapur-Bhilwara Total Source: Company, SPA Research Length (Km) Tonnage (MT) 1,670 740 1,680 1,585 5,675 334,000 148,000 336,000 317,000 1,135,000 Cost (Rs Bn) 16.7 7.4 16.8 15.9 56.8

8,766 1,753,200

Reliance Gas Transportation Infrastructure Ltd. is a new entrant in the oil & gas distribution segment. However, on the back of huge nds by Reliance Industries in the KG basin, RGTIL has plans of laying more than 2,500km of pipelines along the east and south coast of India.

With the governments increased thrust on Oil & Gas sector, improved water supply & sanitation infrastructure and irrigation, the line pipe demand is expected to remain robust in the coming 3-5 years. The XI planning commission has allocated investments worth Rs 168.6bn and Rs 1,437.3bn towards Gas and Water supply & sanitation sector respectively.
Schemes Rajiv Gandhi Drinking Water Mission Addition to irrigation facilities National Gas Grid City Gas Distribution Total Source: Planning Commission, SPA Research Rs Bn 73 1,580 210 100-150 ~2,000

RGTIL Proposed Pipelines

Pipeline Kakinada-Haldia Kakinada-Chennai Chennai-Tuticorin Chennai-Mangalore-Bangalore Total Source: Company, SPA Research Length (Km) Tonnage (MT) 928 577 585 538 2,628 185,600 115,400 117,000 107,600 525,600 Cost (Rs Bn) 9.3 5.8 5.9 5.4 26.3

In India, the capacity addition in the pipeline network had been slow due to the absence of any regulatory body. However, with the formation of Petroleum & Natural Gas Regulatory Board (PNGRB) in 2007, the pipeline projects are likely to be rolled out at a faster pace. Currently, Natural Gas contributes to 10% of the total energy requirement and the demand for the same is expected to increase from 35bcm (billion cubic meters) to 142bcm by 2025. Rapid growth in the development and energy consumption has led to a pressing need for the use of a cleaner fuel. The government of India has setup the National Gas Grid project with an investment of more than Rs 200bn. PNGRB has earmarked investments of Rs 500bn. and has identied 250 cities to be covered by the City Gas Distribution network.

With huge investments over Rs 400bn expected to come on stream over the next 5 years by domestic companies, we believe the pipe companies are well placed to tap the buoyed demand for pipelines.

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

THE FINANCIAL ADVISORS

Following are the water supply, sanitation and irrigation projects undertaken by the government.

Year 2011-12 2016-17

Capacity 930 992

Consumption 989 1453

Decit 59 461

Water Projects
Project Gujarat Urban Development Program Bihar Kosi Flood Recovery Project Water Supply Scheme (Patna) Storm Water Drainage Scheme (Ludhiana) Water Supply Scheme (East Godavari) Irrigation (Limbdi) Project Others Total Source: World Bank, Projects Today, SPA Research Cost (Rs Mn) 8,460.0 12,173.0 4,270.0 239.8 162.3 128.4 335.0 25,768.5

Source: Steelworld, SPA Research, Capacity (000 tonnes)

The growing decit is indicative of high prospects in the seamless pipe and tube industry.

ERW Tubes & Pipes - Eyeing Newer Markets

Apart from the traditional markets, steel pipes & tubes manufacturers are now targeting newer markets such as construction, urban infrastructure airports, malls, metros, piped gas distribution, re safety segments and commercial passenger vehicles. These markets are nding newer applications for steel pipes and tubes like scaffolding, fencing, cabling, bus body parts, re safety, etc.

These projects are benecial to the HSAW, ERW pipe players as these pipes are used in water distribution. We believe that with increasing discoveries of new elds, investments in oil & gas transportation and water transportation are expected to remain robust over the coming years.

Infrastructure & Real Estate

Government is keen on developing Indias infrastructure and continues to put more thrust on investments in its core sectors such as power, ports, roads, airports, etc. The government has increased its budgetary allocation towards infrastructure to Rs 1,735.5bn. The rise in demand for housing and commercial spaces in the urban region has led to a huge demand in hollow section and ERW pipes. In the infrastructure space, the company has already started supplying to prestigious projects like the Delhi and Bengaluru airports and metros. Each airport and metro station requires 15,000MT and 400MT of branded steel pipes and tubes. With the real estate growing at a robust rate, the demand for steel pipes and tubes is also expected to grow as it is used in scaffolding, re safety and cabling. Increasing numbers of malls and high rise buildings have led to an increased demand for structural/hollow steel products as they are stronger and also have better aesthetic sense.

Seamless Pipes
Seamless pipes nd their applications in variety of industries such as Oil & Gas, Power, Automobiles, Fertilisers, etc. Power and fertiliser sectors are the important sectors after oil & gas for demand for pipelines as they together contribute for more than 50% of the total demand. The GoIs increasing efforts to reduce dependence on import of Oil and Gas has led to increased E&P activities in the past few years. The government through the past seven rounds of NELP has offered 227 blocks for exploration and plans to offer 70 blocks comprising of more than 160,000sq. km. of area under exploration for the eighth round. In a power plant, seamless tubes & pipes are used in boilers and heat exchangers. Central Electricity Authority has estimated that steel requirement in the power sector during the 11th and 12th plan is about 25mn tonnes.
Plan 11 12 Total Source: SPA Research Target (MW) 62,374 100,000 162,374 Mn T 6.2 10.0 16.2 Rs Bn 374.2 600.0 974.2

Automobiles
In Automobile sector, the bus body parts segment is coming up as a huge segment. The government has also increased the budgetary allocation under JNNURM to Rs 128.9bn. With ~100,000 buses to be manufactured over the next few years, steel pipes and tube companies see a huge opportunity in this segment. The automobile sector has shown robust growth in FY10. The sales of Passenger and Commercial Vehicles grew by 26.9% and 35.0% respectively over FY09. With the domestic economy on a strong growth track, we expect this sector to post robust growth.

Steelworld estimates that the seamless tubes/pipes consumption is expected to grow at CAGR of 9.9% till FY12 and thereafter moderate to 8% till FY17. By 2012, the total capacity of seamless pipes is expected to be around 1.2mn tonnes, however this is only the name plate capacity, the actual capacity is would be 0.9mn tones. The consumption is expected to be around 1mn tones resulting in a decit of 60,000MT. 8
Executive summary Sector coverage Welspun Corp Maharashtra Seamless PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

Welspun Corp
CMP: Rs 251 RECOMMENDATION: BUY TARGET PRICE: Rs 351
THE FINANCIAL ADVISORS

SAW AND ERW PIPES

Welspun Corp is one of the largest line pipe companies in India and among the top 3 line pipe (Large diameter) manufacturer in the world. Its ~1.6mtpa line pipe capacity offers major variants of pipe i.e. LSAW, HSAW and ERW. WCL has integrated backward and forward and has a signicant presence across various stages of pipeline value chain.

Investment Arguments
WCLs is expanding its LSAW capacity by 350,000MT and HSAW capacity by 100,000MT at a cost of Rs 5,600mn. These capacities are expected to come on stream by the end of FY11, taking the total capacity to 2.0mtpa. We expect revenues to grow at a CAGR of 17.9% from Rs 76,287.7mn to Rs 105,962.1mn during FY10-12E WCL has recently integrated backwards to manufacture plates and coils through its 1.5mn tonnes capacity. The backward integration will improve EBIDTA margins and allowing the company to execute shorter lead time orders. WCL acquired close to 57% stake in MSK Projects through its wholly owned subsidiary Welspun Infratel for Rs 2,733mn. This acquisition will make WCL a complete pipe solution provider having presence across the linepipe value chain from pipe manufacturing to laying of pipes and also gain a foothold in the infrastructure space.

WCL recently bagged orders to supply 120,000MT of pipes worth Rs 7bn taking the total order book to supply 0.8mn tonnes of pipes worth Rs 57bn. This order book is slated to be executed over the next 9-12 months.

The company is targeting to produce 1mn tonnes of pipes and 0.6mn tonnes of plates and coils in FY11.

Valuation
At the CMP of Rs 250.9, the stock is available at a P/E of 6.0x based on consolidated FY12E EPS of Rs 41.8 and EV/EBIDTA of 3.2x. With the improvement in demand for pipes and more than 50 accreditations from major oil & gas companies, we believe that WCL will capture the larger share of line pipe demand both globally and domestically. We initiate coverage on the stock with a Buy recommendation. At current P/E multiple of 8.4x based on consolidated FY12E EPS of Rs 41.8 we arrive at a one year target price of Rs 351/share.

Share Holding, June '10 Promoter FII DII Others Total

% Holding 40.8 19.5 18.0 21.6 100

KEY DATA BSE Code NSE Code Bloomberg Code Reuters Code Sensex No. of Shares (Mn) Face Value (Rs) M-Cap (Rs Mn) 532144 WELCORP WLCO:IN WGSR.BO 20,260.6 204.6 5.0 51,325.4 296.4/212.1 198,000

(Rs Mn) Gross Sales Growth EBIDTA EBIDTA Margin PAT Growth EPS (Rs) P/E (x) EV/EBIDTA (x) RoE RoCE

FY09 59,709.0 43.6% 6,534.6 11.1% 2,135.1 -37.3% 11.4 21.9 9.6 13.7% 11.4%

FY10 76,287.7 27.8% 13,371.6 17.9% 6,104.2 185.9% 29.9 8.4 4.3 21.0% 19.5%

FY11E

FY12E

92,806.1 105,962.1 21.7% 14,305.9 15.7% 6,906.2 13.1% 33.8 7.4 4.1 20.3% 19.2% 14.2% 16,436.4 15.8% 8,099.6 17.3% 39.6 6.3 3.2 19.4% 20.2%

Relative Price Performance vis-a-vis Sensex

160 120 80 40 0

July-10

Jan-10

Mar-10

Apr-10

Oct-09

Jun-10

May-10

Aug-10

Nov-09

Dec-09

Sep-10

Feb-10

Oct-10

52 week H/L 2Wk Avg. Daily Vol. BSE

WCL

Sensex

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

THE FINANCIAL ADVISORS

Company Background
Welspun Corp is one of largest line pipe companies in India. It produces high-grade submerged arc welded pipes, both Spiral and Longitudinal pipes (HSAW and LSAW pipes respectively) and Electric Resistance Welded (ERW) pipes with a current capacity of close to 1.6mtpa. The companys manufacturing facilities are located across Gujarat, Karnataka and USA. The manufacturing facility at Anjar, Gujarat also has a capacity to produce 1.5mtpa of plates and coils. Company manufactures pipes size ranging from 0.5 to 100 diameter of upto 40mm wall thickness. This enables it to be a one-stop solution to its clients. WCL over the years has supplied pipes for some of the most critical and prestigious projects around the globe including the worlds deepest pipeline project in the Gulf of Mexico, which makes it the most preferred line pipe supplier. Further, it has also received approval from more than 50 leading oil & gas companies such as TransCanada, Exxon Mobil, Shell, British Petroleum and Chevron.

Entering new markets in India

In lieu of the surge in domestic demand, WCL has started expanding its HSAW capacity by 200,000MT by setting up two manufacturing facilities each of 100,000MT at a total cost of Rs 2.0bn. These mills are located at Mandya in Karnataka and in Central India. The spiral mill in Mandya, Karnataka was commissioned in Q1FY11. The other spiral mill in Central India is expected to become operational by the end of FY11. These mobile spiral plants will cater to the Water/Sewage segment. The mobile spiral plants in Mandya and Central India will prove advantageous to WCL as they can be relocated as per the requirements of the customer. Many companies have chalked out plans of laying pipelines in the southern parts of India. These projects require close to 1.8mn tonnes of pipelines over the next 3-4 years. We expect the commissioning of new plants to drive up the volumes from FY12 onwards.

Plant Details
Location Anjar Dahej Mandya Little Rock, USA Total Source: Company, SPA Research Unit TPA TPA TPA TPA LSAW 350,000 350,000 HSAW 500,000 50,000 100,000 350,000 1,000,000 ERW 200,000 Total 750,000 400,000 100,000 350,000

Foray into the Infrastructure Sector

WCL acquired close to 57% stake in MSK Projects through its wholly owned subsidiary Welspun Infratel for Rs 2,733mn. This acquisition will make WCL a complete pipe solution provider having presence across the linepipe value chain from pipe manufacturing to laying of pipes and it will also help to gain a foothold in the infrastructure space. MSK has an order book of around Rs 4bn with 9 BOOT (Build Own Operate Transfer) projects. The management expects Rs 100bn in BOT assets under creation and scale up the EPC turnover business to Rs 25-30bn by FY16. MSK is expected to report a topline of Rs 5.3bn in FY11 and Rs 10bn by FY12.

200,000 1,550,000

Investment Rationale
Pipe capacity to increase to 2.0 million tonnes
The increase in the global demand for pipes has led WCL to embark upon an expansion plan to add another 0.45mn tonnes of line pipe to its existing capacity of 1.55mtpa. The total outlay for the expansion has been marked at Rs 5.6bn. Post expansion, LSAW capacity will increase to 0.7mtpa from the current 0.35mtpa and similarly HSAW capacity will increase to 1.1mtpa from the current 1.0mtpa. Commercial production is expected to commence by the end of FY11.

Stronger Foothold in Middle East

In addition to its expansion plans in India, WCL has also forayed into the Middle East by acquiring a controlling stake in the Saudi Arabia based Aziz Pipe Company. WCL is planning a browneld expansion to enhance this capacity from the current 270,000tpa to 350,000tpa. WCLs total investment outlay in the company is pegged at Rs 3,500mn and the same will be nanced by 75% through debt and 25% through internal accruals. The acquisition will enable WCL to provide complete solution to oil & gas majors and water companies in the Gulf region. We have not factored contribution from Aziz Pipe in our estimates, as we wait for further clarity.

Expansion Plans
Product LSAW HSAW ERW Total Source: Company, SPA Research Unit TPA TPA TPA Current 350,000 1,000,000 200,000 1,550,000 Expansion 350,000 100,000 450,000 Total Capacity 700,000 1,100,000 200,000 2,000,000 Cost (Rs Mn) 4,600 1,000 5,600

10

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

THE FINANCIAL ADVISORS

Backward integration into Plates and Coils

Company by setting up Plate and CoilMill (PCM) at its Anjar facility has de-risked its supplies for its SAW pipe production. This division has already stabilised and have started ramping up its plates and coils production. We expect WCL to produce 561,750MT of plates and 240,750MT of Coils by FY12E as against 387,223MT of Plates and Coils in FY10. WCL imports more than 75% of its raw material requirements. Going ahead the management expects the total production of this division to reach 0.6mn tonnes by the end of FY11 and 0.8mn tonnes by FY12E. It is expected that 50% of the produce will be consumed internally and balance sold in the market. The commissioning of coil production will not only help the company to bid for short gestation orders but will also result in savings in raw materials thereby being margin accretive.

Expanding international footprint

WCL derives more than 85% of its revenues from exports. With capacity of 2.35mtpa by FY12, we believe WCL is well poised to capture global opportunities to supply close to 74mn tonnes of pipes worth USD88bn over the next 5 years.

TransCanadas Alaska Pipeline Project

TransCanada and Exxon Mobil are working together to advance on the Alaska Pipeline Project. Depending on the option selected, the demand exists to setup more than 1,300km length of pipes resulting an opportunity of more than USD360mn. The project being critical in nature only 3-4 players are expected to be invited to submit their bids. WCL being on the preferred list of suppliers for both the TransCanada and Exxon Mobil is expected to be one of the bidders for the project.
TransCanadas Alaska Pipeline Project Total Length - Alberta Option (Km) Point Thomson Transmission Pipeline Total Tonnes Required (Mn. MT) Business Opportunity (USD Mn.) 2,737 93 0.6 735.8 TransCanadas Alaska Pipeline Project Total Length - Valdez Option (Km) Point Thomson Transmission Pipeline Total Tonnes Required (Mn. MT) Business Opportunity (USD Mn.) 1,293 93 0.3 360.4

Strong order book Rs 57bn 0.8x FY10 sales

With more than 50 accreditations from major oil and gas companies, WCL is in a strong position, to capture market share in the SAW pipes market. Given that WCL has moved higher up the value chain with its niche products we expect it to capture a larger share of the high-margin niche pipe segment. It currently has order book of Rs 57bn translating to 0.8x FY10 sales.

Source: TransCanada Project; SPA Research

SAW Pipes to mark 1 million tonnes by FY11E

The management has indicated SAW pipes division to produce 1mn tonne in FY11. With the ongoing capex plans, the companys SAW pipes production capacity is expected to increase by 25% in next 6-9 months to 2.0mtpa. We estimate WCLs Pipes division to produce close to 1.0mn tonnes in FY11E and 1.1mn tonnes in FY12E against 0.8mn produced in FY10. Pipes & Plates/Coils Production (MT)
Thousands 1,200 1,000 800 600 400 200 0 FY08 FY09 Pipes FY10 FY11E FY12E

Order Book Break Up

Break Up as on 2-Sep-10 Product LSAW HSAW ERW External Plates Other Services Total 815,000 Source: Company, SPA Research Tonnage (MT) 200,000 550,000 50,000 15,000 Value (Rs Mn) 12,000 37,000 2,500 550 4,950 57,000 (%) 18% 56% 4% 1% 8% 100% Realisation (Rs) 60,000 67,273 50,000 36,667

Enhanced visibility for new orders

We believe there will be improvement in demand for pipes from the US, Europe, Africa and the Middle East. The company last month won orders to supply 120,000MT of HSAW and ERW pipes worth Rs 7bn. WCL has entered in several bids to supply 2.0mn tonnes of pipes over the next 12-15 months both globally and domestically. WCL has a strong presence in the international markets and exports form 87% of its order book. It expects at least a million tonne of pipe orders to be awarded by March 2011.

Plates/Coils

Source: Company, SPA Research

Financial Analysis
Revenues to grow at a CAGR of 17.9%
We estimate revenues to grow at a CAGR of 17.9% during FY1012E, backed by rising pipe volumes, faster ramp up of PCM Division and better realisations. Revenues during the period are expected to increase from Rs 76.3bn to Rs 106.0bn in FY12E.

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

11

THE FINANCIAL ADVISORS

Pipes and Plates/Coils Volume (MT) and Realisation (Rs)

Thousands

Valuation
At the CMP of Rs 250.9, the stock is available at a P/E of 6.0x based consolidated on FY12E EPS of Rs 41.8 and EV/EBIDTA of 3.2x. With the improvement in demand for pipes and more than 50 accreditations from major oil & gas companies, we believe that WCL will capture the larger share of line pipe demand both globally and domestically. Recent backward and forward integration by the company will establish it across the line pipes entire value chain and improve margins. We initiate coverage on the stock with a Buy recommendation. At current P/E multiple of 8.4x based on consolidated FY12E EPS of Rs 41.8 we arrive at a one year target price of Rs 351/share.

1,200 1,000 800 600 400 200 0 FY09 FY10 Pipe Volumes Pipe Realisation FY11E FY12E

90,000 75,000 60,000 45,000 30,000 15,000 0

Plate/Coil Volumes Plate/Coil Realisation

Source: Company, SPA Research

Sales from PCM division are expected to grow from 308,990MT in FY10 to 802,500MT by FY12E. The revenues from this division are expected to grow at a CAGR of 54.5% from Rs 15.1bn to Rs 36.1bn during FY10-12E. During the same period, share of PCM Division in the total revenues WCL is expected to increase from 19.8% to 34.1%.

Contribution from MSK

MSK Revenues Margins PAT WCL's Share Cont. from MSK WCL's PAT Consol. PAT WCL's FY12E EPS Consol FY12E EPS EPS Accretion FY12E 10,000.0 8% 800.0 57% 456.0 8,099.6 8,555.6 39.6 41.8 5.6%

PAT to grow at a CAGR of 15.2%

During FY10-12E we estimate PAT to grow by 15.2% annually from Rs 6.1bn in FY10 to Rs 8.1bn in FY12E. WCL recently raised Rs 5bn for a period of 15 years to repay its high cost debt and thereby save on higher interest outgo. WCL commands premium pricing for its products, this makes us believe that WCL will not go for aggressive bids thereby lowering its margins. WCL bids in orders where it can get EBIDTA margins for the pipes in the range of Rs 10,000-11,000 per tonne and that for plates and coils in range of Rs 5,000-6,000 per tonne. EBITDA margins for the company have remained stable around past few quarters at 16% and we expect the company to report margins in this range through FY12E. Sales (Rs Mn), EBIDTA & PAT Margins
120,000 100,000 80,000 60,000 40,000 20,000 0 FY08 FY09 FY10 FY11E FY12E PAT Margins 8% 4% 0% 20% 16% 12%

Forward Bands
750 600 15x 450 10x 300 150 0 Apr-08 Apr-09 Apr-10 Jul-08 Jul-09 Jan-09 Oct-08 Oct-09 Jan-10 Jul-10 Oct-10
Forward P/E

20x

5x

200,000 160,000

Forward EV/EBIDTA

16x 12x

120,000 8x 80,000 40,000 0 Apr-08 Apr-09 Apr-10 Jul-08 Jul-09 Jan-09 Oct-08 Oct-09 Jan-10 Jul-10 Oct-10 4x

Gross Sales

EBIDTA Margins

Source: Company, SPA Research

12

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

THE FINANCIAL ADVISORS

Financials
(Rs Mn) Gross Sales Excise Duty Net Sales Other Income Total Income Raw Materials Power Cost Other Mfg. Exp. Employee Cost

Income Statement
FY08 41,570.3 1,626.0 39,944.6 107.4 40,051.9 25,939.3 350.1 1,508.4 773.4 2,607.1 2,211.1 33,389.4 6,662.5 608.8 818.1 5,235.7 1,827.9 3,407.8 FY09 59,709.0 2,313.7 57,395.3 187.0 57,582.2 38,700.6 1,332.1 4,743.1 1,252.6 3,121.4 1,897.9 51,047.6 6,534.6 1,432.8 1,766.3 3,335.5 1,200.4 2,135.1 FY10 76,287.7 2,785.0 73,502.7 185.3 73,688.1 45,802.6 1,681.6 3,972.5 2,670.5 4,872.5 1,316.9 60,316.5 13,371.6 2,060.6 2,070.9 9,240.1 3,135.9 6,104.2 FY11E 3,248.2 223.9 58,581.2 2,045.7 5,104.3 3,712.2 4,640.3 1,392.1 75,475.8 14,305.9 2,117.0 1,847.6 10,341.4 3,435.1 6,906.2 FY12E 3,708.7 255.6 66,893.6 2,225.2 5,827.9 4,238.5 5,298.1 1,589.4 86,072.7 16,436.4 2,381.6 1,926.4 12,128.3 4,028.7 8,099.6 92,806.1 105,962.1 89,557.9 102,253.4 89,781.8 102,509.1

Basic
(Rs) EPS Growth (%) Cash EPS Book Value DPS Payout (%) EBIDTA/Tonne EV/Tonne FY08 19.2 88.0% 22.6 83.2 1.5 9.2% 10,720.3 101,715.4 FY09 11.4 -40.3% 19.1 83.6 1.5 15.3% 8,907.2 96,596.5 FY10 29.9 160.9% 40.0 142.0 1.5 7.8% 13,255.3 89,444.7 FY11E 33.8 13.0% 44.1 166.7 1.5 8.7% 9,011.6 63,393.0 FY12E 39.6 17.3% 51.2 204.6 1.5 4.4% 8,696.5 52,535.8

Valuation Ratios
(x) P/E Cash P/E P/ BV EV/Sales EV/EBDITA ROE RoCE FY08 13.1 11.1 3.0 1.5 8.9 23.0% 15.9% FY09 21.9 13.1 3.0 1.1 9.6 13.7% 11.4% FY10 8.4 6.3 1.8 0.8 4.3 21.0% 19.5% FY11E 7.4 5.7 1.5 0.6 4.1 20.3% 19.2% FY12E 6.3 4.9 1.2 0.5 3.2 19.4% 20.2%

Admin & Other Exp. Freight Charges Total Expenditure EBDITA Depreciation Interest PBT Tax Expense Net Prots

Margin Balance Sheet

(Rs Mn) Liabilities Share Capital Reserves & Surplus NetWorth Secured Loans Unsecured Loans Total Liabilities Assets Fixed Assets (Net) Investments Current Assets Current Liabilities Preliminary Expenses Total Assets 26,807.0 3,250.2 26,121.5 19,829.8 0.1 38,086.8 36,835.0 1,140.0 45,848.9 42,043.3 0.1 44,267.8 38,333.4 1,595.5 51,471.1 36,862.7 0.1 57,889.5 41,389.5 1,595.5 56,306.2 39,179.0 63,464.4 39,507.8 1,595.5 69,812.6 44,802.9 69,465.3 888.8 14,783.1 15,671.9 20,570.5 106.5 38,086.7 932.5 14,663.9 15,596.3 26,434.7 103.4 44,622.4 1,021.6 28,064.1 29,085.7 18,654.4 6,821.5 57,914.0 1,022.6 33,075.1 34,097.7 19,196.0 6,818.5 63,464.4 1,022.6 40,815.5 41,838.0 17,456.5 6,818.5 69,465.3 FY08 FY09 FY10 FY11E FY12E (%) EBDITA EBIT PBT PAT FY08 16.4% 15.2% 13.1% 8.5% FY09 11.1% 8.9% 5.8% 3.7% FY10 17.9% 15.4% 12.6% 8.3% FY11E 15.7% 13.6% 11.5% 7.7% FY12E 15.8% 13.7% 11.9% 7.9%

Turnover Ratios
(x) Asset T/o (x) Inventory T/o (x) Debtors T/o (x) Debtors (Days) Inventory (Days) Creditors (Days) FY08 1.8 3.6 6.1 60 102 150 FY09 1.8 2.4 9.7 38 152 202 FY10 2.0 2.7 11.6 31 134 216 FY11E 2.2 3.3 10.8 34 111 162 FY12E 2.5 3.4 9.5 38 108 159

Leverage Ratios
(x) FY08 1.4 7.4 FY09 1.7 2.9 FY10 0.9 5.5 FY11E 0.8 6.6 FY12E 0.6 7.3 D/E Int. Cov.

Cash Flow Statement

(Rs Mn) Cash from Ops. Net Cash from Ops. Cash from Inv. Cash from Financing Net Change Op. Cash Cl. Cash FY08 3,684.9 2,854.6 (14,998.3) 11,273.5 (870.3) 3,573.6 2,703.3 FY09 13,746.9 13,194.9 (7,437.6) 1,009.6 6,766.7 2,703.6 9,470.3 FY10 5,661.5 3,821.0 (3,862.7) 2,766.6 2,724.9 9,470.3 17,028.1 FY11E 11,571.1 9,055.8 (6,964.9) (1,508.4) 582.5 17,028.1 17,610.7 FY12E 13,892.2 10,863.5 (3,429.3) (3,705.7) 3,728.5 17,610.7 21,339.1

Growth Ratios
(%) Gross Sales Expenses EBDITA PBT PAT EPS Cash EPS FY08 49.1% 39.9% 125.4% 183.2% 139.0% 139.0% 88.0% FY09 43.7% 52.9% -1.9% 115.9% -36.3% -37.3% -40.3% FY10 28.1% 18.2% 104.6% 17.2% 177.0% 185.9% 160.9% FY11E 21.8% 25.1% 7.0% -10.8% 11.9% 13.1% 13.0% FY12E 14.2% 14.0% 14.9% 4.3% 17.3% 17.3% 17.3%

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

13

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Maharashtra Seamless
CMP: Rs 435 RECOMMENDATION: BUY TARGET PRICE: Rs 528
THE FINANCIAL ADVISORS

SEAMLESS AND ERW PIPES

Maharashtra Seamless is the agship company of Rs 300bn D.P. Jindal Group. The company is a leading manufacturer of seamless pipes and tubes (350,000tpa) and ERW tubes (200,000tpa). MSL has also diversied into wind power generation with a capacity of 7MW. MSLs manufacturing and power generation facilities are located in Maharashtra.

Investment Arguments
Uptick in global and domestic E&P activities, robust growth in power (planned addition of 160,000MW in 11th and 12th plan) and auto sector are expected to drive the seamless volumes to 270,000MT by FY12E. We expect ERW volumes to increase to 150,000MT on the back of implementation of government programmes such as City Gas Distribution (Rs 100-150bn) and strengthening the water infrastructure (Rs 1,673bn). MSL is expanding its seamless manufacturing capacity by 200,000tpa by the end of FY11 at a capital outlay of Rs 3,250mn. Post expansion the company will undertake debottlenecking of its old plant to enhance the capacity by another 50,000tpa.

Total Revenues are expected to grow by 20.4% annually during FY10-12E to touch Rs 24,530.0mn on the back of increased volumes and inclusion of value added products.

As of Q1FY11, MSLs order book stands at Rs 4,470mn which translates to 0.3x its FY10 revenues.

Valuation
At CMP of Rs 434.8, MSL is trading at a P/E multiple of 8.2x based on its FY12E EPS of Rs 52.8 and at EV/EBIDTA multiple of 4.7x. Increase in global E&P activities and huge opportunities in the power, automobiles and water sector will keep the demand robust. We initiate coverage with a BUY recommendation on the stock. We have assigned a P/E multiple of 10x on FY12E EPS of Rs 52.8 and have arrived at a one year target price of Rs 528/share.

Share Holding, Sep 10 Promoter FII DII Others Total

% Holding 53.9 13.6 15.1 17.5 100

KEY DATA BSE Code NSE Code Bloomberg Code Reuters Code Sensex No. of Shares (Mn) Face Value (Rs) M-Cap (Rs Mn) 52 week H/L 500265 MAHSEAMLESS MHS:IN MHSM.BO 20,260.6 70.5 5.0 30,667.9 451.0/309.0 12,339

(Rs Mn) Total Income Growth EBIDTA EBIDTA Margin PAT Growth EPS (Rs) P/E (x) EV/EBIDTA (x) RoE RoCE

FY09

FY10

FY11E

FY12E

21,835.1 16,912.2 20,347.1 24,530.0 41.7% 4,145.2 19.0% 2,599.2 33.1% 36.6 11.9 7.3 21.5% 29.7% -19.9% 4,528.4 26.8% 2,846.1 9.5% 40.3 10.8 6.9 15.8% 22.6% 23.6% 5,018.8 24.7% 3,070.8 7.9% 43.5 10.0 6.1 12.8% 18.4% 22.9% 6,196.6 25.3% 3,723.9 21.3% 52.8 8.2 4.7 14.1% 20.3%

Relative Price Performance vis-a-vis Sensex

140 120 100 80 60 40 20 0 Oct-09

Dec-09

Feb-10

Apr-10

Jun-10

Aug-10

Oct-10

MSL

Sensex

2Wk Avg. Daily Vol. BSE

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

15

THE FINANCIAL ADVISORS

Company Background
Corporate Prole
Maharashtra Seamless Ltd. is the agship company of the Rs 300bn D.P, Jindal group. Incorporated in 1988, MSL is one of the largest seamless manufacturers in India with an installed capacity of 350,000tpa. The company is also engaged in manufacturing ERW pipes with an installed capacity of 200,000tpa respectively. The companys manufacturing facilities are located in Raigad, Maharashtra. MSL has a 7MW wind power facility at Satara, Maharashtra.

Investment Rationale
Increased E&P activities to benet MSL
Rise in crude prices (over USD80/barrel) and revival of global economy has led to a rise in global E&P activities. Global rig counts which are the barometer to judge the E&P activities show a rise of 28.1% to 2,911 in Jan-Sep 2010 as compared to the corresponding period in the previous year. Exports contribute more than 35% of the total revenues for FY10 and we expect MSL will be benetted by the uptick in the global upstream activities.

Plant Locations
Product Seamless Pipes ERW Pipes Wind Power Source: Company, SPA Research Unit TPA TPA TPA Location Raigad Raigad Satara Capacity 350,000 200,000 7

Global Rig Counts

Region Latin America Europe Africa Middle East Far East Canada U.S. Total Jan-Sep 2009 357 83 60 253 239 202 1,078 2,272 Jan-Sep 2010 383 92 83 263 267 332 1,491 2,911 Growth 7.3% 10.8% 38.3% 4.0% 11.7% 64.4% 38.3% 28.1%

MSL manufactures seamless pipes in the size range from 0.5 to 14 OD and wall thickness upto 40mm. The wide size range caters to various industries like E&P in the Oil & Gas sector, Boilers & Heat Exchangers in the Power Sector, Automotive, etc. MSL to widen its product base set up an ERW pipe manufacturing facility in 2000. The company manufactures pipes in the size range from 8 to 20 OD and from 3.2mm to 12.7mm of wall thickness. ERW pipes are mainly used in transportation of oil & gas, drinking water and they are also used in sewage/water treatment. The company set up wind power generation facility of 7MW in 2001 in Satara, Maharashtra.

Source: Baker Hughes, SPA Research

NELP rounds opened by the government have been a major success and have led to huge nds of oil & gas reserves across the country. Subsequently, the gas nds in the KG basin have led to increase in the E&P activities. NELP VIII also presents huge opportunities for the E&P players as the government plans to offer 70 blocks comprising of more than 160,000sq.km.

Power Sector A huge opportunity

MSL supplies seamless pipes and tubes to the boilers and heat exchangers segment in the power plants. Typically, ~5% of the total capex in setting up a power plant is incurred towards seamless pipes & tubes. 160,000MW of planned capacity addition in the power sector during the 11th and 12th ve year plan will provide an opportunity of more than Rs 400bn for seamless pipes.

Key Clientele
MSL boasts of wide and marquee clientele. Key clients in domestic market include ONGC, Engineers India and GAIL. The company has formed a JV with Tenaris for upstream premium threading connections.

Key Clientele
Domestic Clients Oil & Natural Gas Corpn.Ltd. Engineers India Ltd. Oil India Ltd. Gas Authority of India Ltd. Indian Oil Corpn.Ltd. Bharat Petroleum Corpn.Ltd. Steel Authority of India Ltd. Bharat Heavy Electrical Ltd. National Thermal Power Corpn. Indian Railways International Clients Sat Joint Operation, Saudi Arabia & Kuwait Kuwait Oil Company (KOC), Kuwait Mobile Producing Nigeria, Ministry of Oil & Gas, Oman Arabian Gulf Oil Company, Libya Malaysian International Trading Corpn. Saudi Aramco, Saudi Arabia Occidental of Oman (OXY), Oman Chevron, USA Oxydental Petroleum, USA

Volumes to grow
We believe increase in global as well as domestic E&P activities, capacity addition in power sector and robust growth in automobiles will boost the volumes for seamless pipes to 270,000MT by FY12E from 206,242MT in FY10. Further, increase in water/sewage treatment projects across the country and governments thrust on water distribution and sanitation will keep the demand for ERW pipes robust. We expect ERW volumes to grow by 16.3% during FY10-12E from 110,939MT to 150,000MT.

16

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

THE FINANCIAL ADVISORS

Production (MT) and Realisation (Rs)

Thousands
300 250 200 150 10 50 0 FY08 FY09 Seamless Seamless Utilisation FY10 FY11E ERW ERW Utilisation FY12E 20% 0% 60% 40% 80%

Order Book @ 0.3x FY10 revenues

As of Q1FY11, MSL has an order book of Rs 4,470mn which is executable over the next four months. The order book translates to 0.3x its FY10 revenues. Seamless pipes form close to 70% of the order book. Exports also form close to 36% of the total order book.

Order Book (Rs Mn)

Order Book as on Q1FY11 Seamless ERW Total Source: Company, SPA Research 3,100 1,370 4,470 69.4% 30.6% 100.0% Domestic Exports 2,870 1,600 4,470 64.2% 35.8% 100.0%

Source: Company, SPA Research

Integration Plans
Romanian Plant
In FY08, MSL had acquired a manufacturing plant from Romania with a capacity of 200,000tpa. The plant can manufacture seamless as well as drill pipes upto 6 and is being erected 35km away from the companys existing manufacturing site. This plant is expected to be commissioned by the end of FY11. Post commissioning, MSL will undertake de-bottlenecking of its existing facilities and enhance the capacity by 50,000MT. The total project cost is estimated around Rs 3,250mn. Post expansion/debottlenecking seamless pipe capacity will increase from 350,000tpa to 600,000tpa. MSL is also looking at augmenting its product portfolio by increasing the share of value added products such as drill pipes and 13 Chrome pipes. These value added products will help MSL to boost its topline as well as bottomline as they yield higher realisations and better margins then the seamless pipes.

Financial Analysis
Revenues to grow at a CAGR of 20.2%
In FY10, the company witnessed a dip in its realisations. Volumes were subdued because of decrease in global E&P activities leading to decreasing pace of order ows. Further, fall in steel prices led to decline in average realisation/tonne from Rs 64,537.7 in FY09 to Rs 51,915.5. Going ahead we expect average realisation/tonne to reach Rs 56,980.2 by FY12E. Revenues (Rs Mn) and Realisations (Rs)
20,000 16,000 12,000 40,000 8,000 4,000 0 FY08 FY09 FY10 FY11E FY12E 20,000 0 80,000 60,000

Steel Billet Plant

MSL plans to integrate backwards and secure raw material availability by setting up a steel billet plant with a capacity of 500,000tpa. The company has already acquired 50% of the total land required in Karnataka and is waiting for the remaining to be allocated. Till date the company has spent close to Rs 200mn for acquiring the land.

Seamless Revenues Seamless Realisation

ERW Revenues ERW Realisation

Source: Company, SPA Research

Coal Block
MSL has a 30% interest in a coal block near Nagpur having reserves of ~97mn tonnes.

Power Plant
MSL is planning to build up a 20MW power plant near its existing manufacturing sites in Maharashtra at a capital outlay of Rs 800900mn to meet its power requirements.

The recovery in the upstream activities (NELP VIII), governments thrust on power (Rs 400bn) and water sectors (Rs 1,673bn) augur well for MSL. We expect revenues to grow by a CAGR of 20.4% during FY10-12E to reach Rs 24,530.0mn from Rs 16,912.2mn. The growth in revenues can be attributed to the growth in seamless division as post FY11, MSL will ramp up its Romanian facility and also increase the share of value added products such as 13 chrome pipe in its product portfolio.

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

17

THE FINANCIAL ADVISORS

MSL is focusing on its strategy of pushing up value added products in its product mix. However, we believe the company will be able to scale up its niche products volumes post FY12. We expect the EBIDTA to grow by 17.0% annually from Rs 4,528.4mn to Rs 6,169.6mn during FY10-FY12E. We dont expect PAT to grow at the same pace as EBIDTA margins because of increase in depreciation costs due to capitalisation of Romanian plant. PAT is expected to grow at a CAGR of 14.4% during FY10-12E from Rs 2,846.1mn to Rs 3,723.9mn. Revenues (Rs Mn), EBIDTA and PAT Margins
25,000 20,000 15,000 10,000 5,000 0 30% 25% 20% 15% 10% 5% FY08 FY09 Revenues FY10 EBIDTA Margins FY11E FY12E 0%

Valuation
At CMP of Rs 434.8, MSL is trading at a P/E multiple of 8.2x based on its FY12E EPS of Rs 52.8 and at EV/EBIDTA multiple of 4.7x. Increase in global as well as domestic E&P activities and huge opportunities in the power, automobiles and water sector will keep the demand robust. We initiate coverage with a BUY recommendation on the stock. We have assigned a P/E multiple of 10x on FY12E EPS of Rs 52.8 and have arrived at a one year target price of Rs 528/share. Forward Bands
900 800 700 600 500 400 300 200 100 0 Dec-08 Dec-09 Aug -08 Aug -09 Aug -10 Jun-08 Jun-09 Apr -08 Apr -09 Apr -10 Jun-10 Oct-08 Oct-09 Feb-09 Feb-10 Oct-10 Forward P/E

PAT Margins

Source: Company, SPA Research

60,000 50,000 40,000 30,000 20,000 10,000 0

Forward EV/EBIDTA

Aug -10

Jun-08

Jun-09

Aug -08

Aug -09

Oct-08

Apr -09

Oct-09

Jun-10

Apr- 08

18

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Apr -10

Dec-08

Dec-09

Zenith Birla (India)

Oct-10

Feb-09

Feb-10

THE FINANCIAL ADVISORS

Financials
(Rs Mn) Gross Sales Excise duty Net Sales Other Income Total Income Raw Materials Power & Fuel Manufacturing Exp.

Income Statement
FY08 16,403.7 1,427.1 14,976.5 437.1 15,413.6 9,549.5 1,082.8 714.2 606.8 230.0 12,183.1 3,230.5 174.0 37.5 3,018.9 1,066.7 1,952.3 FY09 21,835.1 1,446.5 20,388.6 720.8 21,109.4 13,327.9 1,293.9 1,029.6 1,074.2 238.6 16,964.2 4,145.2 179.3 115.6 3,850.3 1,251.2 2,599.2 FY10 16,912.2 980.5 15,931.7 529.4 16,461.1 9,502.1 1,090.3 668.5 398.9 272.9 11,932.7 4,528.4 183.4 34.0 4,310.9 1,464.9 2,846.1 FY11E 20,347.1 1,096.8 19,250.3 712.1 19,962.5 12,146.0 1,191.0 1,047.1 305.2 254.3 14,943.7 5,018.8 381.8 38.8 4,598.2 1,527.4 3,070.8 FY12E 24,530.0 1,220.5 23,309.5 735.9 24,045.4 14,475.9 1,435.9 1,262.4 367.9 306.6 17,848.7 6,196.6 583.0 37.5 5,576.2 1,852.3 3,723.9

Basic
(Rs) EPS Growth (%) Cash EPS Book Value DPS Payout (%) EBIDTA/Tonne EV/Tonne FY08 27.7 -17.2% 30.1 155.0 5.0 18.1% 9,407.4 77,312.2 FY09 36.6 32.1% 39.1 185.7 5.0 13.7% 12,685.8 85,056.4 FY10 40.3 10.4% 42.9 324.3 6.0 14.9% 14,277.0 90,777.9 FY11E 43.5 7.9% 48.9 355.3 6.0 13.8% 14,038.5 78,763.2 FY12E 52.8 21.3% 61.1 394.7 7.0 13.3% 14,753.9 63,249.7

Admin. & Selling Exp. Personnel Expenses Op Expenditure EBIDTA Depreciation Interest PBT Tax PAT

Valuation Ratios
(x) P/E Cash P/E P/ BV EV/EBDITA ROE RoCE FY08 15.7 14.4 2.8 9.0 19.4% 26.5% FY09 11.9 11.1 2.3 7.3 21.5% 29.7% FY10 10.8 10.1 1.3 6.9 15.8% 22.6% FY11E 10.0 8.9 1.2 6.1 12.8% 18.4% FY12E 8.2 7.1 1.1 4.7 14.1% 20.3%

Margin Balance Sheet

(Rs Mn) Liabilities Share Capital Reserves & Surplus NetWorth Loaned Funds Total Liabilities Assets Fixed Assets (Net) Investments Current Assets Current Liabilities Total Assets 3,374.6 893.8 10,031.5 2,344.3 12,375.4 3,906.4 4,198.7 8,032.0 2,213.7 14,350.8 12,078.3 6,284.0 7,478.0 2,163.6 24,111.1 12,946.5 6,284.0 8,986.9 2,405.8 26,246.0 12,863.5 6,284.0 12,343.1 2,902.0 29,023.0 352.7 10,581.3 10,934.0 1,021.6 12,375.4 352.7 12,747.1 13,099.8 823.6 14,350.8 352.7 22,523.1 22,875.7 801.0 24,111.1 352.7 24,709.0 25,061.6 750.0 26,246.0 352.7 27,485.9 27,838.6 750.0 29,023.0 FY08 FY09 FY10 FY11E FY12E (%) EBDITA EBIT PBT PAT FY08 19.7% 18.6% 18.4% 11.9% FY09 19.0% 18.2% 17.6% 11.9% FY10 26.8% 25.7% 25.5% 16.8% FY11E 24.7% 22.8% 22.6% 15.1% FY12E 25.3% 22.9% 22.7% 15.2%

Turnover Ratios
(x) Asset T/o (x) Inventory T/o (x) Debtors T/o (x) Debtors (Days) Inventory (Days) Creditors (Days) FY08 5.3 3.9 7.0 52 114 37 FY09 6.0 4.6 8.0 46 76 37 FY10 2.1 2.8 7.3 50 157 45 FY11E 1.6 3.0 9.1 45 120 45 FY12E 1.9 3.3 8.7 45 120 45

Cash Flow Statement

(Rs Mn) Cash from operations Net Cash from Oper. Cash from Invstment Cash from Financing Net Change Op. Cash Cl. Cash FY08 1,244.4 185.6 (814.4) (54.8) (683.6) 3,232.1 2,548.5 FY09 4,189.8 3,024.7 (3,777.2) (689.8) (1,442.3) 2,548.5 1,106.2 FY10 3,819.0 2,301.5 (2,880.0) (444.1) (1,022.5) 1,106.3 83.8 FY11E 4,273.4 2,419.1 (1,250.0) (584.9) 584.2 83.8 668.0 FY12E 4,784.3 2,708.1 (500.0) (615.2) 1,593.0 668.0 2,260.9

Leverage Ratios
(x) D/E Int. Coverage Ratio FY08 0.1 81.5 FY09 0.1 34.3 FY10 0.0 127.7 FY11E 0.0 119.6 FY12E 0.0 149.7

Growth Ratios
(%) Gross Sales Expenses EBDITA PBT PAT EPS Cash EPS FY08 7.9% 15.4% -13.3% -14.4% -16.5% -17.2% -15.7% FY09 33.1% 39.2% 28.3% 27.5% 33.1% 32.1% 29.7% FY10 -22.5% -29.7% 9.2% 12.0% 9.5% 10.4% 9.9% FY11E 20.3% 25.2% 10.8% 6.7% 7.9% 7.9% 14.0% FY12E 20.6% 19.4% 23.5% 21.3% 21.3% 21.3% 24.7%

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

19

This page has been intentionally left blank.

PSL
CMP: Rs 116 RECOMMENDATION: BUY TARGET PRICE: Rs 142
THE FINANCIAL ADVISORS

HSAW PIPES

PSL Ltd. is one of the largest HSAW pipe manufacturers across the globe. It has an installed capacity of close to 1.8mtpa, with manufacturing facilities at 5 locations across India and one each at USA and Sharjah. PSL also provides ancillary products and services such as bending, rebar coating besides undertaking turnkey pipe projects.

Investment Arguments
PSL has a huge presence in the domestic markets and it is well positioned to take advantage of the domestic gas distributors massive expansion plans of Rs ~330bn over the next ve years. The company is expanding its facility in Middle East by adding 75,000MT at a capital outlay of USD30mn. This capacity is expected to be commissioned by FY12. Revenues are expected to grow by 9.7% annually from FY10-12E to touch Rs 47,440.5mn. Huge gas reserves have been found in the KG basin across the south/east India and the need to setup the necessary infrastructure for its transportation will require investments of more than Rs 65.0bn. We expect the company to benet from this demand as it has 450,000MT of capacity in that region.

PSLs plants are mobile which enables it to relocate its plants near the customers site. This helps in reducing freight costs and being margin acrretive.

Valuation
At CMP of Rs 116.0, PSL is trading at a P/E multiple of 3.7x based on its FY12E EPS of Rs 31.6 and at EV/EBIDTA multiple of 5.1x. PSLs presence in key international markets and huge domestic share coupled with robust domestic opportunities augur well for the company. Strategically located mobile plants help the company to bid for larger orders with short gestation time and save on freight costs also. We initiate coverage with a BUY recommendation on the stock. At current P/E multiple of 4.5x we have arrived at a one year target price of Rs 142/share based on FY12E EPS of Rs 31.6.

Share Holding, June '10 Promoter FII DII Others Total

% Holding 39.3 11.6 15.8 33.4 100

KEY DATA BSE Code NSE Code Bloomberg Code Reuters Code Sensex No. of Shares (Mn) Face Value (Rs) M-Cap (Rs Mn) 526801 PSL PSLL:IN PSLH.BO 20,260.6 53.5 10.0 6,198.8 188.4/115.0 155,000

(Rs Mn) Gross Sales Growth EBIDTA EBIDTA Margin PAT Growth EPS (Rs) P/E (x) EV/EBIDTA (x) RoE RoCE

FY09

FY10

FY11E

FY12E

35,599.5 39,410.5 44,410.7 47,440.5 58.3% 3,100.7 8.7% 948.7 12.3% 22.2 5.2 4.6 15.1% 14.3% 10.7% 3,550.9 9.0% 1,226.6 29.3% 25.5 4.5 8.0 15.2% 10.3% 12.7% 4,310.4 9.7% 1,406.3 14.7% 26.3 4.4 6.0 14.5% 9.9% 6.8% 4,733.7 10.0% 1,691.7 20.3% 31.6 3.7 5.1 15.6% 11.3%

Relative Price Performance vis-a-vis Sensex

160 120 80 40 0

Jan-10

Apr-10

Oct-09

Jul-10

Mar-10

Feb-10

Jun-10

May-10

Aug-10

Nov-09

Dec-09

Sep-10

Oct-10

52 week H/L 2Wk Avg. Daily Vol. BSE

PSL

Sensex

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

21

THE FINANCIAL ADVISORS

Company Background
Corporate Prole
PSL is one of the largest manufacturers of high grade large diameter helical submerged arc welded (HSAW) pipes in the world. It has an annual installed capacity of 1,775,000tpa. Incorporated in 1987, PSL started out as pipe coating company and later started manufacturing pipes from 1995. The company manufactures pipe using both conventional process (825,000MT) and through a two-step process (950,000MT). PSL has 11 HSAW pipe and pipe coating mills spread across India in Ahmedabad, Chennai, Jaipur, Kandla and Vizag. The company has also established its presence out of India through its subsidiaries with pipe mills located at Sharjah, UAE and Mississippi, USA.

to be beneted with domestic gas distribution players massive expansion plans to lay close to 15,000km of pipeline over the next ve years.

Buoyed Demand in south to benet PSL

KG basin in the eastern coast of India has become the largest base for gas reserves in the country. Domestic gas distribution players such as GAIL, GSPL and RGTIL have plans to lay 8,766km of pipelines entailing investments of more than Rs 65bn over the next ve years for transporting the fuel across the country. GAIL alone has plans to lay 6,663km of pipeline by FY13. PSL which has a 450,000tpa capacity in the south/east India is expected to be the major beneciary of this upcoming opportunity. The other segments from where demand is picking up are the water and sewage treatment projects which are coming up in the southern region. World Bank and government of India have allocated Rs 1,673bn towards water, sanitation, irrigation and

Plant Locations
Location Chennai Kandla Vizag Ahnmedabad Jaipur Sharjah Mississippi Total Source: Company No. of Pipe Mills 1 6 2 1 2 1 1 14 Capacity (tpa) 75,000 725,000 375,000 75,000 150,000 75,000 300,000 1,775,000

sewage treatment projects. HSAW pipes due to their large outer diameters and lower cost score over other pipes.

Volumes to grow at a CAGR of 12.0% during FY1012E

Domestic demand is expected to continue on a strong trajectory on the back of planned investments by the domestic players We expect the volume growth for PSL to be 12.0% over FY10-12E which is higher than the 3.5% CAGR volume growth achieved during the past two years. Volumes are expected to increase to 555,000MT by FY12E from 442,452MT in FY10. GAIL is one of the largest customers for PSL and we expect PSL to contract a huge share of GAILs upcoming orders. Pipe Production (MT)
Thousands 2,000 1,600 1,200 20% 800 400 0 FY08 FY09 Capacity FY10 Production FY11E FY12E Utilisation 10% 0% 40% 30%

PSL can manufacture pipes from 18-120 in diameter with wall thickness of 5mm to 25mm. Other than pipe manufacturing, the company also provides ancillary products and services such as induction bending, rebar coating, sacricial anodes and undertaking turnkey pipe projects. PSL develops equipment for pipe manufacturing and pipe coating in house and most of PSLs mills have been developed by the company itself. These capabilities have helped to control costs. PSL has also executed orders to design and setup pipe mills.

Investment Rationale
Established presence in India
PSL has a pan India presence with capacity of 1.4mtpa. Domestic markets contribute majority of PSLs order book. PSL is bound

Source: Company, SPA Research

22

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

THE FINANCIAL ADVISORS

Order Book
PSL recently bagged several orders to supply 119,000MT of pipes worth Rs 5,650mn of which IOC has awarded the company order worth Rs 2,000mn. As on Q2FY11, PSL has an order book to supply close to 300,000MT of pipes worth Rs 15.4bn. This roughly translates to ~0.4x its FY10 revenues and is expected to be executed over the next 9-12 months.

PAT is expected to grow by 17.4% annually from Rs 1,226.6mn in FY10 to Rs 1,691.7mn in FY12E. Sales (Rs Mn), EBIDTA and PAT Margins
50,000 40,000 30,000 20,000 10,000 0 FY08 FY09 Gross Sales FY10 EBIDTA Margin FY11E FY12E PAT Margin 12% 10% 8% 6% 4% 2% 0%

Expansion in Middle East

PSL is also expanding its existing capacities in the middle east by 75,000MT at a capital outlay of USD30mn. The facility is expected to be commissioned by FY12 and post expansion the company will have a capacity of 150,000MT. As per the latest Simdex data, 49,953km of pipelines are planned in Middle East over the next ve years, with investments of USD12.0bn. We believe PSL is well placed to take advantage of this opportunity.

Source: Company, SPA Research

Valuation
At CMP of Rs 116.0, PSL is trading at a P/E multiple of 3.7x based on its FY12E EPS of Rs 31.6 and at EV/EBIDTA multiple of 5.1x. PSLs presence in key international markets and huge domestic share coupled with robust domestic opportunities augur well for the company. Strategically located mobile plants help the company to bid for larger orders with short gestation time and save on freight costs also. We initiate coverage with a BUY recommendation on the stock. At current P/E multiple of 4.5x we have arrived at a one year target price of Rs 142/share based on FY12E EPS of Rs 31.6. Forward Bands
450 360 270 180 90 Forward P/E 12x

Pan India Presence

PSL has 11 pipe mills across India in locations such as Chennai, Kandla, Jaipur, Ahmedabad and Vizag. Further, as spiral mills uses lighter equipment, these mills can be relocated near the project site and help save freight costs. HSAW pipes are best suited for onshore transportation as they have cost advantages over LSAW pipes. The other segments from where demand is arising are the water and sewage treatment projects which are coming up in the southern region.

Financial Analysis
Revenues
PSL volumes have grown moderately from FY08-10 at a CAGR of 3.5%. Going ahead we expect volumes to drive revenues from Rs 39,410.5mn in FY10 to reach Rs 47,440.5mn by FY12E, registering CAGR of 9.7% during FY10-12E. Volumes (MT) and Realisation (Rs)
Thousands 600 450 300 150 0 75,000 60,000 45,000 30,000 15,000 FY08 FY09 FY10 FY11E FY12E 0

9x 6x

3x 0 Jun-10 Aug -08 Aug -09 Aug -10 Jun-08 Jun-09 Apr -09 Apr -10 Apr- 08 Feb-09 Feb-10 Oct-08 Oct-09 Dec-08 Dec-09 Oct-10

35,000 30,000 25,000 20,000 15,000 10,000

Forward EV/EBIDTA 8x

Sales Volumes

Avg. Realisation

6x

Source: Company, SPA Research

4x 2x Aug -08 Aug -09 Apr- 08 Apr -09 Apr -10 Jun-10 Jun-08 Jun-09 Aug -10 Oct-08 Oct-09 Feb-09 Feb-10 Dec-08 Dec-09 Oct-10

EBIDTA margins in FY12E are expected at 10.0%, an increase of 100bps from FY10 margins. On an absolute basis, EBIDTA is expected to grow at 15.5% annually from Rs 3,550.9mn to Rs 4,733.7mn during FY10-12E.

5,000 0

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

23

THE FINANCIAL ADVISORS

Financials
(Rs Mn) Gross Sales Excise Duty Net Sales Other Income Total Income Raw Materials Mfg. Expenses

Income Statement
FY08 22,483.3 1,749.3 20,734.0 448.2 21,182.2 15,493.2 1,762.5 1,555.3 18,810.9 2,371.2 578.6 539.4 1,253.3 408.9 844.4 FY09 35,599.5 3,294.3 32,305.2 889.9 33,195.1 25,724.7 2,481.2 1,888.5 30,094.4 3,100.7 1,027.5 687.7 1,385.6 436.9 948.7 FY10 39,410.5 1,721.4 37,689.2 524.9 38,214.0 31,501.2 1,447.1 1,714.9 34,663.1 3,550.9 1,169.3 816.1 1,565.6 339.0 1,226.6 FY11E 44,410.7 2,220.5 42,190.2 777.2 42,967.4 32,550.5 3,330.8 2,775.7 38,657.0 4,310.4 1,153.1 1,051.5 2,105.9 699.5 1,406.3 FY12E 47,440.5 2,372.0 45,068.5 830.2 45,898.7 34,641.9 3,558.0 2,965.0 41,165.0 4,733.7 1,049.4 1,151.1 2,533.2 841.5 1,691.7

Basic
(Rs) EPS Cash EPS Book Value DPS Payout (%) EBIDTA/Tonne EV/Tonne FY08 22.0 36.0 133.4 5.2 30.9% 5,746 25,009 FY09 22.2 38.3 161.7 5.0 26.2% 6,478 29,877 FY10 25.5 42.5 172.2 4.0 20.3% 8,025 64,639 FY11E 26.3 46.0 189.5 4.0 17.8% 8,095 48,509 FY12E 31.6 53.2 215.9 4.5 16.6% 8,529 43,659

Selling & Admin. Exp. Total Expenditure EBIDTA Interest Depreciation PBT Tax Expense Net Prots

Valuation Ratios
(x) P/E Cash P/E P/BV EV/Sales EV/EBDITA ROE RoCE FY08 5.3 3.2 0.9 0.5 4.3 18.3% 14.4% FY09 5.2 3.0 0.7 0.4 4.6 15.1% 14.3% FY10 4.5 2.7 0.7 0.8 8.0 15.2% 10.3% FY11E 4.4 2.5 0.6 0.6 6.0 14.5% 9.9% FY12E 3.7 2.2 0.5 0.5 5.1 15.6% 11.3%

Balance Sheet
(Rs Mn) Liabilities Share Capital Reserves & Surplus Networth Secured Loans Unsecured Loans Total Liabilities Assets Fixed Assets (Net) Investments Current Assets Current Liabilities Total Assets 6,391.2 42.6 16,973.1 8,380.8 15,208.9 12,973.4 42.6 47,901.4 42,315.9 18,454.7 16,011.3 45.0 31,739.9 13,240.7 34,521.4 16,209.8 45.0 31,863.2 17,080.2 31,037.8 15,808.7 45.0 35,006.0 18,196.9 32,574.8 425.8 5,450.7 5,698.6 9,216.9 99.9 15,208.9 425.8 6,752.8 6,905.6 11,295.6 127.4 18,454.7 533.3 8,888.1 9,205.9 24,521.2 612.9 34,521.4 533.3 9,647.0 10,130.5 20,357.4 500.0 31,037.8 533.3 11,007.4 11,540.8 20,622.1 500.0 32,574.8 FY08 FY09 FY10 FY11E FY12E

Margin
(%) EBDITA EBIT PBT PAT FY08 10.5% 8.8% 5.6% 3.8% FY09 8.7% 7.5% 3.9% 2.7% FY10 9.0% 7.3% 4.0% 3.1% FY11E 9.7% 7.7% 4.7% 3.2% FY12E 10.0% 7.9% 5.3% 3.6%

Turnover Ratios
(x) Asset T/o (x) Inventory T/o (x) Debtors T/o (x) Debtors (Days) Inventory (Days) Creditors (Days) FY08 2.9 2.8 6.5 46 133 146 FY09 2.8 1.4 6.6 46 256 308 FY10 2.2 1.3 7.6 49 274 315 FY11E 2.2 2.1 7.8 45 180 180 FY12E 2.2 2.1 8.1 45 180 180

Cash Flow Statement

(Rs Mn) Cash from Ops. Net Cash from Ops. Cash from Inv. Cash from Financing Net Change Op. Cash Cl. Cash FY08 1,347.8 1,095.3 (1,748.9) 3,396.1 2,742.5 1,264.3 4,006.8 FY09 4,730.1 4,339.8 (7,235.2) 1,023.1 (1,872.3) 4,005.1 2,132.7 FY10 (8,777.9) (9,229.9) (3,808.7) 13,711.2 672.6 2,132.6 2,805.2 FY11E 6,095.3 5,395.8 (1,250.0) (5,643.5) (1,497.8) 2,805.2 1,307.5 FY12E 4,487.1 3,645.6 (750.0) (1,025.3) 1,870.3 1,307.5 3,177.8

Leverage Ratios
(x) D/E Int. Coverage Ratio FY08 1.6 3.2 FY09 1.7 2.3 FY10 2.7 2.3 FY11E 2.1 2.8 FY12E 1.8 3.4

Growth Ratios
(%) Gross Sales Expenses EBDITA PBT PAT EPS Cash EPS FY08 40.5% 45.6% 32.6% 37.9% 29.2% 11.4% 8.6% FY09 58.3% 60.0% 30.8% 10.6% 12.3% 1.2% 6.5% FY10 10.7% 15.2% 14.5% 13.0% 29.3% 14.8% 10.9% FY11E 12.7% 11.5% 21.4% 34.5% 14.7% 3.1% 8.2% FY12E 6.8% 6.5% 9.8% 20.3% 20.3% 20.3% 15.7%

24

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

Man Industries
CMP: Rs 86 RECOMMENDATION: BUY TARGET PRICE: Rs 128
THE FINANCIAL ADVISORS

SAW PIPES

Man Industries (India) Ltd. was incorporated in 1988 as an aluminium extrusion company, the company diversied its operations to SAW pipes segment in 1994. MIL is one of the established manufacturers of large diameter carbon steel pipes in India. The companys total installed capacity is 1mtpa, with plants located at Anjar and Pithampur in Gujarat and Madhya Pradesh.

Investment Arguments
Revenues are expected to grow by 16.6% annually from FY10-12E to touch Rs 20,460.1mn. Higher margin orders are expected to drive up the EBDITA and PAT margins by 40bps to 8.6% and 5.1% respectively. EBIDTA and PAT are expected at Rs 2,352.1mn and Rs 1,053.6mn respectively for FY12E. MIL has an order book of Rs 25.0bn which translates to ~1.7x its FY10 revenues. This provides the company with long term visibility in revenues. MIL has diversied its operations into Real Estate, and related sectors through its subsidiary. The company holds more than 1.5mn sq.ft. of prime area in and around Mumbai and Indore.

Valuation
At CMP of Rs 85.6, MIL is trading at a P/E multiple of 4.5x based on its FY12E EPS of Rs 18.9 and at EV/EBIDTA multiple of 1.4x. MILs global presence and huge domestic opportunities along with strategically located plants augur well for the company. We initiate coverage with a BUY recommendation on the stock. At current P/E multiple of 6.8x and FY12E EPS of Rs 18.9 we arrive at a one year target price of Rs 128/share.

Share Holding, June '10 Promoter FII DII Others Total

% Holding 53.4 0.2 7.4 39.0 100

KEY DATA BSE Code NSE Code Bloomberg Code Reuters Code Sensex No. of Shares (Mn) Face Value (Rs) M-Cap (Rs Mn) 52 week H/L 513269 MANINDS MAN:IN MIND.BO 20,260.6 53.5 5.0 4,579.9 110.0/42.0 103,000

(Rs Mn) Total Income Growth EBIDTA EBIDTA Margin PAT Growth EPS (Rs) P/E (x) EV/EBIDTA (x) RoE RoCE

FY09

FY10

FY11E

FY12E

18,948.0 15,054.3 18,278.1 20,460.1 30.3% 1,510.9 6.7% 474.3 78.0% 8.9 9.6 3.9 11.6% 14.1% -20.5% 1,743.4 8.2% 670.9 151.8% 12.5 6.8 2.2 16.4% 16.7% 21.4% 2,179.4 9.0% 968.0 263.3% 17.4 4.9 1.6 20.8% 21.1% 11.9% 2,352.1 8.6% 1,053.6 295.5% 18.9 4.5 1.4 19.1% 20.6%

Relative Price Performance vis-a-vis Sensex

240 200 160 120 80 40 0 Apr-10 Jul-10 Oct-09 Jun-10 May-10 Aug-10 Dec-09 Mar-10
Nov-09

Sep-10

Feb-10

Oct-10

Jan-10

MIL

Sensex

2Wk Avg. Daily Vol. BSE

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

25

THE FINANCIAL ADVISORS

Company Background
Corporate Prole
Man Industries (India) Ltd., company started its operations in 1988 as an aluminium extrusion company. In 1994, the company diversied its operations to SAW pipes segment. MIL is one of the established manufacturers of large diameter carbon steel pipes in India with its own coating facility. The companys SAW pipes manufacturing facilities are located at Anjar and Pithampur with a combined capacity of 1mtpa. MIL has two broad categories of products HSAW Pipes LSAW Pipes

LSAW Volumes to Dominate in FY11

MILs 25,000mn order book consists of LSAW orders worth ~70%. We believe LSAW volumes to signicantly outgrow HSAW in FY11. However, going forward, with huge opportunities in the domestic market for HSAW pipes we expect the HSAW production to grow from 137,227MT to 197,500MT in FY1012E as compared to LSAWs volume growth of 144,278MT to 187,500MT during FY10-12E. LSAW and HSAW Production (MT)
Thousands
240 200 160 120 50% 40% 30% 20% 10% 0%

Plant Locations
Location Anjar Pithampur Total Source: Company, SPA Research Unit TPA TPA LSAW 365,000 135,000 500,000 HSAW 435,000 65,000 Total 800,000 200,000

80 40 0 FY09 FY10 LSAW Production LSAW Utilisation FY11E FY12E

HSAW Production HSAW Utilisation

500,000 1,000,000

Source: Company, SPA Research

Foray into Real Estate

In 2008, MIL established Man Infraprojects, a subsidiary to enter Real Estate, Hospitality and Infrastructure sector. The company has more than 1.5 million sq.ft of saleable land in Mumbai and Indore.

Established presence in domestic markets

The company is one of the leading pipe producers in India, and it has its manufacturing facilities located in western and central India. The massive expansion plans of GAIL, GSPL and RGTIL which entails pipeline projects of close to 15,000km are sure to benet MIL.

Investment Rationale
Robust Order Book
MIL recently bagged orders worth Rs 12,000mn taking the total order book to Rs 25,000mn roughly translating to ~1.7x its FY10 revenues. LSAW comprises close to 70% of the total. MIL has established its presence in the international markets such as Middle East, Brazil and Africa leading to higher export orders worth Rs 23,650mn. MIL has currently bid for projects worth more than Rs 50,000mn. The robust order book provides the company with revenue visibility in the longer term.

Man Infraprojects
MIL has diversied its operations to enter into Real Estate, Hospitality and Infrastructure sector through its subsidiary Man Infraprojects Ltd. in 2008. Man Infraprojects possesses more than 900,000sq.ft. of saleable land in the prime areas in and around Mumbai. The companys ongoing projects are located at Bandra and Vile Parle in Mumbai and at Nerul in Navi Mumbai. The Mumbai projects are of commercial in nature and are expected to be completed by Q4FY11. The companys agship project in Nerul which is commercial and residential in nature is expected to be completed by FY12-13. MIL also has more than 600,000sq.ft. of saleable land in Indore. However, due to lack of clarity, we have not built in any revenues owing from this subsidiary in our estimates. Also, any value unlocking of Man Infraprojects in the future will be an upside to our estimates.

Order Book as on Sep - 2010

Order Book Exports Domestic Total Rs Mn 23,650 1,350 25,000 Pipes LSAW HSAW MT 336,200 147,850 484,050

26

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

THE FINANCIAL ADVISORS

Financial Analysis
Rising Demand and Stable Prices to lead revenue growth
MIL has orders to supply 336,200MT of LSAW pipes over the next 12-15 months. In FY11E, we expect LSAW volumes to rise by 51.7% to 207,500MT and then fall by 9.6% to 187,500MT by FY12E. HSAW volumes are expected to rise by a modest 6.7% to 147,500MT in FY11E and by 33.9% to 197,500MT by FY12E. Total volumes expected to grow at a CAGR of 18.3% during FY10-12E. Stable steel prices will fuel topline growth of 16.6% annually over FY10-12E from Rs 15,054.3mn to Rs 20,460.1mn. Volumes (MT) and Realisations (Rs)
Thousands 400 300 200 100 0 80,000 60,000 40,000 20,000 0

Sales (Rs Mn), EBIDTA & PAT Margins

25,000 20,000 15,000 10,000 5,000 0 FY08 FY09 Gross Sales FY10 FY11E FY12E PAT Margins 10% 8% 6% 4% 2% 0%

EBIDTA Margins

Source: Company, SPA Research

Valuation
At CMP of Rs 85.6, MIL is trading at a P/E multiple of 4.5x based on its FY12E EPS of Rs 18.9 and at EV/EBIDTA multiple of 1.4x. Exports form 70% of the MILs order book. With LSAW forming a huge share in the revenues, margins are expected to grow at a faster pace than revenues. MILs global presence and huge domestic opportunities along with strategically located plants augur well for the company. We initiate coverage with a BUY recommendation on the stock. At current P/E multiple of 6.8x and FY12E EPS of Rs 18.9 we arrive at a one year target price of Rs 128/share. We have not built in any revenues generating from MILs subsidiary. Any signicant uptick may pose an upside risk to our estimates. Forward Bands
300 250 200 150 100 50 0 Apr-08 Apr-09 Jun-08 Jun-09 Apr-10 Aug-08 Aug-09 Jun-10 Aug-10 Aug-10 Oct-08 Oct-09 Feb-09 Dec-08 Dec-09 Feb-10 Oct-10 4x 3x 2x 1x Apr-08 Apr-09 Apr-10 Jun-08 Jun-09 Aug-08 Aug-09 Jun-10 Oct-08 Oct-09 Feb-09 Dec-08 Dec-09 Feb-10 Oct-10 12x 9x 6x 3x Forward P/E

FY08

FY09

FY10

FY11E Avg. Realisation

FY12E

Sales Volumes

Source: Company, SPA Research

PAT to grow at a CAGR of 25.3% during FY10-12E

EBIDTA margins in FY12E are expected at 8.6%, an increase of 40bps from FY10 margins. On an absolute basis, EBIDTA is expected to grow at 16.2% annually from FY10-12E from Rs 1,743.4mn to Rs 2,352.1mn. One of the major reasons for increase in operating margins is because of increase in share of LSAW pipes. On the back of increasing HSAW orders and rising share of revenues from domestic markets, we believe EBIDTA margins will fall from 9.0% in FY11E to 8.6% in FY12E. Falling interest costs are expected to drive up PAT margins from 4.5% in FY10 to 5.1% in FY12E. On an absolute basis, PAT is expected to grow by 25.3% from Rs 670.9mn to Rs 1,053.6mn.

9,000 7,500 6,000 4,500 3,000 1,500 0

Forward EV/EBIDTA

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

27

THE FINANCIAL ADVISORS

Financials
(Rs Mn) Gross Sales Excise Duty Net Sales Other Income Total Income Raw Materials Power Cost Other Mfg. Exp. Employee Cost

Income Statement
FY08 14,545.5 77.7 14,467.9 532.9 15,000.8 10,997.6 129.0 459.9 327.3 355.4 1,048.9 13,318.1 1,682.6 281.7 314.2 1,086.7 374.6 712.1 FY09 18,948.0 359.2 18,588.7 240.5 18,829.3 14,733.1 156.0 465.4 401.0 578.7 984.2 17,318.4 1,510.9 349.9 449.5 711.5 237.2 474.3 FY10 15,054.3 317.3 14,736.9 506.0 15,242.9 11,306.1 135.9 408.4 365.7 892.1 391.3 13,499.5 1,743.4 368.2 369.8 1,005.5 334.6 670.9 FY11E 18,278.1 457.0 17,821.2 534.6 18,355.8 13,590.3 201.1 462.5 420.4 967.5 534.6 16,176.4 2,179.4 429.0 300.9 1,449.4 481.5 968.0 FY12E 20,460.1 511.5 19,948.6 598.5 20,547.1 15,380.5 225.1 490.0 470.6 1,030.4 598.5 18,194.9 2,352.1 437.8 336.7 1,577.7 524.1 1,053.6

Basic
(Rs) EPS Growth (%) Cash EPS Book Value DPS Payout (%) EBIDTA/Tonne EV/Tonne FY08 13.4 -35.6% 18.7 68.7 1.5 13.1% 5,388 19,750 FY09 8.9 -33.4% 15.5 76.5 1.5 19.7% 5,515 21,504 FY10 12.5 -6.2% 19.4 86.9 1.8 16.3% 6,338 13,708 FY11E 17.4 38.5% 25.0 98.7 2.5 16.9% 6,139 10,066 FY12E 18.9 8.9% 26.7 114.7 2.5 15.5% 6,109 8,398

Valuation Ratios
(x) P/E Cash P/E P/ BV EV/Sales EV/EBDITA ROE RoCE FY08 6.4 4.6 1.2 0.4 3.7 19.4% 19.5% FY09 9.6 5.5 1.1 0.3 3.9 11.6% 14.1% FY10 6.8 4.4 1.0 0.2 2.2 16.4% 16.7% FY11E 4.9 3.4 0.9 0.2 1.6 20.8% 21.1% FY12E 4.5 3.2 0.7 0.2 1.4 19.1% 20.6%

Admin & Selling Exp. Freight Charges Total Expenditure EBDITA Depreciation Interest PBT Tax Expense Net Prots

Margin Balance Sheet

(Rs Mn) Liabilities Share Capital Reserves & Surplus NetWorth Secured Loans Unsecured Loans Total Liabilities Assets Fixed Assets (Net) Capital WIP Investments Current Assets Current Liabilities Miscellaneous Expenditure Total Assets 2,825.5 1,052.1 333.8 8,746.3 6,250.9 50.3 7,178.3 4,353.1 126.7 426.6 12,238.9 9,459.7 37.8 8,250.5 4,146.4 75.5 338.2 10,509.5 7,358.2 25.0 8,282.0 3,792.9 250.0 338.2 12,905.8 8,626.7 12.5 9,288.5 3,605.2 250.0 338.2 14,869.3 9,316.9 10,451.7 266.4 3,395.5 3,662.0 1,026.8 2,068.2 7,178.3 266.4 3,812.3 4,078.7 1,614.7 2,030.0 8,250.5 287.4 4,365.1 4,652.5 1,247.2 1,836.9 8,282.0 278.9 5,228.9 5,507.9 1,374.4 1,790.5 9,288.5 278.9 6,119.4 6,398.3 1,556.9 1,790.5 10,451.7 FY08 FY09 FY10 FY11E FY12E (%) EBIDTA EBIT PBT PAT FY08 7.9% 9.6% 7.5% 4.9% FY09 6.7% 6.1% 3.8% 2.5% FY10 8.2% 9.1% 6.7% 4.5% FY11E 9.0% 9.6% 7.9% 5.3% FY12E 8.6% 9.4% 7.7% 5.1%

Turnover Ratios
(x) Asset T/o (x) Inventory T/o (x) Debtors T/o (x) Debtors (Days) Inventory (Days) Creditors (Days) FY08 3.8 4.3 5.3 69 85 133 FY09 4.2 6.7 5.2 71 54 154 FY10 3.6 4.5 4.5 82 81 211 FY11E 4.5 5.2 7.7 47 71 165 FY12E 5.3 5.1 5.9 62 72 164

Leverage Ratios
(x) D/E % Int. Cov. Ratio FY08 0.8 4.5 FY09 0.9 2.6 FY10 0.7 3.7 FY11E 0.6 5.8 FY12E 0.5 5.7

Cash Flow Statement

(Rs Mn) Cash from operations Net Cash from Oper. Cash from Invstment Cash from Financing Net Change Op. Cash Cl. Cash FY08 2,262.0 1,940.4 (1,110.5) 186.6 1,016.5 145.8 1,162.3 FY09 1,639.0 1,507.5 (816.7) 42.7 733.4 1,162.3 1,895.7 FY10 2,524.4 2,208.1 489.7 (1,027.4) 1,670.4 1,895.7 3,566.2 FY11E 917.3 518.8 297.1 (345.2) 470.6 3,566.2 4,036.8 FY12E 912.9 479.1 360.9 (317.3) 522.7 4,036.8 4,559.5

Growth Ratios
(%) Gross Sales Expenses EBDITA PBT PAT EPS Cash EPS FY08 28.4% 33.0% 27.7% 29.4% 28.8% -35.6% -31.2% FY09 30.3% 30.0% -10.2% -34.5% -33.4% -33.4% -17.1% FY10 -20.5% -22.1% 15.4% 41.3% 41.5% 40.8% 25.5% FY11E 21.4% 19.8% 25.0% 44.2% 44.3% 38.5% 29.0% FY12E 11.9% 12.5% 7.9% 8.9% 8.9% 8.9% 6.8%

28

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

APL Apollo Tubes

CMP: Rs 158 RECOMMENDATION: BUY TARGET PRICE: Rs 253
THE FINANCIAL ADVISORS

ERW PIPES

APL Apollo Tubes Ltd. is a leading manufacturer of steel pipes and tubes. The company along with its subsidiaries has a current installed capacity of 490,000tpa. APL manufactures more than 250 variants of tubes (0.5 to 12 outer diameter) through its four plants located in India.

Investment Arguments
We expect an exponential growth in volumes from 166,260MT in FY10 to 450,000MT by FY12E supported by increasing pipes and tubes capacity from 250,000tpa in FY10 to 600,000tpa by FY12E. Sales to grow at a CAGR of 71.6% from Rs 6,659.5mn to Rs 19,617.2mn during FY10-12E. We expect higher volumes and increase in share of value added products to drive topline and fuel operating margins. EBIDTA is expected to grow from Rs 643.1mn in FY10 to 1,902.0mn by FY12E, registering a CAGR of 72.0%. The new user industries such as real estate, infrastructure, telecom, commercial vehicles are expected to grow exponentially. These segments present a market of more than 1mn tonnes over the next ve years. APL is a pioneer in manufacturing pre-galvanised pipes. Being the rst mover in this segment, we expect APL to command premium pricing.

Post the commissioning of Hosur plant and acquisition of Lloyds Pipes, the company has signicant presence in North as well as South and Western India. APL due to its pan India presence will be able to save on the freight costs and working capital requirements.

Valuation
At the CMP of Rs 157.9, APL is trading at a P/E multiple of 3.8x based on its FY12E EPS of Rs 42.1 and at EV/EBIDTA multiple of 3.3x. With the improvement in demand for pipes and robust growth in the new user industries, we believe that APL is poised to do well. We initiate coverage with a BUY recommendation on the stock. We have assigned a P/E of 6x on FY12E EPS of Rs 42.1 and arrived at a one-year target price of Rs 253/share.

Share Holding, Sep 10 Promoter FII DII Others Total

% Holding 40.7 0.1 2.6 56.6 100

KEY DATA BSE Code NSE Code Bloomberg Code Reuters Code Sensex No. of Shares (Mn) Face Value (Rs) M-Cap (Rs Mn) 590059 NA APAT:IN BIHR.BO 20,260.6 20.3 10.0 3,204.8 170.3/52.2 160,000

(Rs Mn) Gross Sales Growth EBIDTA EBIDTA Margin PAT Growth EPS (Rs) P/E (x) EV/EBIDTA (x) RoE RoCE

FY09 5,729.2 81.3% 340.9 4.0% 25.4

FY10

FY11E

FY12E

6,659.5 11,028.8 19,617.2 16.2% 643.1 8.6% 293.1 65.6% 1,053.6 8.7% 523.9 78.7% 24.0 6.6 4.9 19.2% 19.9% 77.9% 1,902.0 8.9% 988.8 88.7% 42.1 3.8 3.3 25.1% 24.9%

Relative Price Performance vis-a-vis Sensex

300 250 200 150 100 50 0
Apr-10 Oct-09 Dec-09 Feb-10 Jun-10 Aug-10 Oct-10

-84.2% 1054.2% 1.3 126.3 11.9 1.5% 9.1% 14.4 11.0 7.0 15.3% 17.0%

52 week H/L 2Wk Avg. Daily Vol. BSE

BTL

Sensex

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

29

THE FINANCIAL ADVISORS

Company Background
Corporate Prole
APL Apollo Tubes Ltd. is a leading manufacturer of steel pipes and tubes. APL along with its subsidiaries has a current installed capacity of 490,000tpa. The company manufactures more than 250 variants of tubes (0.5 to 12 outer diameter) through its ve plants located in India two in Uttar Pradesh and one each in Karnataka, Tamil Nadu and Maharashtra. APL has installed high speed mills based on the technology supplied by Kusakabe, Japan. APLs product portfolio includes ERW Black Pipes, Galvanised Pipes, Pre-Galvanised Pipes and Hollow Section Pipes.

Investment Rationale
Installed Capacity to reach 0.6mtpa
APL is aggressively expanding its production facilities through organic and inorganic route. The company fully commissioned its 200,000tpa manufacturing facility at Hosur with a capital outlay of Rs 1,000mn during Q2FY11. The company acquired Lloyds Pipes based in Maharashtra for Rs 400mn. Current capacity of Lloyd Pipes is 90,000tpa which will be enhanced to 100,000tpa by FY12E. This acquisition was funded through cash and stake sale of close to 1.6mn shares to share holders of Lloyd Pipes and strategic sale to Shankara Pipes at Rs 176/share. Subsequent to the companys strategy to widen its product mix, APL recently acquired a 100,000tpa capacity steel tube mill in Germany for Rs 300mn and the same will be erected in India. Through this plant the company will enter the range of high diameter pipes of upto 14. We expect this plant to come online by FY12. Post the companys acquisition and enhancement plans the total installed capacity will increase to 0.6mtpa. Expansion Plans (MT)
Thousands
600 500 400 300 200 100 0 FY08 FY09 Capacity FY10 FY11E Expansion FY12E

Plant Details
Company Bihar Tubes Ltd. - Unit I Bihar Tubes Ltd. - Unit II Apollo Metalex Ltd. (100% Subsidiary) Shri Lakshmi Metal Udyog Ltd. (100% Subsidiary) Lloyd Pipes (Subsidiary) Total Source: Company, SPA Research Location Sikandarabad Hosur Sikandarabad Bengaluru Maharashtra Capacity (tpa) 125,000 200,000 25,000 50,000 90,000 490,000

Wide Distribution Network

APL has a strong distribution network to push its sales. It has a Pan-India presence with a direct marketing team in over 15 states and more than 10,000 retail network. The company also has plans to open 10 branches in the next one year, of which 6 are already opened. APL has an export presence in 35 countries, which is supported by distribution networks in USA, UK, France, Germany, Ireland, UAE and Sri Lanka. The company sells its products under the APL Apollo brand which is very well perceived in the market.

Source: Company, SPA Research

Product Prole
Product Galvanised Pre Galvanised ERW Black Use Water, Gas, Oil Transportation Fencing, Cabling & Ducting, Automobiles, Green Houses Major Clients BSNL, BHEL, UP Jal Nigam, Gujarat Gas, HPCL, IGL, Era Infra Tata Marcopolo, Ashok Leyland, Jain Irrigation, ACGL

APL has also preferentially allotted close to 1.7mn shares to the promoters at Rs 176/share to shore up their holding in the company.

Emerging Newer Markets

Apart from the traditional markets, the company is now targeting newer markets such as construction, urban infrastructure airports, metros and piped gas distribution, real estate commercial and residential, re safety segments and commercial passenger vehicles.

Fire Fighting, Conveyor Systems, DMRC, BMRC, BHEL, HPCL, BPCL, Scaffolding, Transmission Towers, L&T, Gammon, Airtel Power Projects and Industrial Uses Infrastructure, Metro, Airports, Stadiums and Industrial Applications Suzlon, Adani, L&T, B. L. Kashyap, Moser Baer, Simplex

Hollow Section

30

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

THE FINANCIAL ADVISORS

Urban Infrastructure Metros and Airports

Urban infrastructure presents a huge opportunity especially in metros, Tier I and II cities. APL has already started supplying to prestigious projects like the Delhi and Bengaluru airports and metros. Under the 11th Five Year Plan, the government has a target to 4 metro and 35 non-metro airports resulting an opportunity to supply more than 0.5mn tonnes of steel tubes and pipes.

Product Mix
FY10

22% 25%

Water and Piped Gas Distribution

The XI planning commission has allocated investments worth Rs 168.6bn and Rs 1,437.3bn towards Gas and Water supply & sanitation sector respectively. This is expected to push the volumes of galvanised and pre-galvanised pipes.
18%

35%

Bus Body
APL entered the bus body segment and is supplying more than 1,000 tonnes of hollow sections to bus body manufacturers for models of low rise and JNNURM buses manufactured by TATA Marcopolo and Ashok Leyland. The government has increased the budgetary allocation under JNNURM to Rs 128.9bn. With ~100,000 buses to be manufactured over the next few years, the company sees a huge opportunity in this segment.
Hollow Section Hot Dip Galvanised Tubes Pre Galvanised Tubes ERW Black Round Tubes

FY12E

Malls, High Rise Buildings, Green Houses and Fire Safety

With real estate growing at a robust rate, the demand for steel pipes and tubes is also expected to grow as it is used in scaffolding, re safety and cabling. Advent of malls in metros and Tier I & II cities have led to an increased demand for structural/hollow steel products as they are stronger and also have better aesthetic sense. High rise buildings, malls and greenhouses require water pipes and sprinklers to be spread across the buildings and ats. Increasing number of these buildings is expected to push the demand for steel tubes & pipes signicantly. Apart from the normal growth of 5-10% in the traditional markets, the newer markets are expected to grow exponentially over the next few years. These segments present a market for more than 1 million tonnes demand over the next ve years.

10%

38%

35%

17%

Hollow Section Hot Dip Galvanised Tubes

Pre Galvanised Tubes ERW Black Round Tubes

Augmenting the Product Portfolio

APL plans to foray into the manufacturing of high thickness low diameter tubes and widen its product mix. The acquisition of the German plant will also catapult the company into manufacturing high diameter pipes of upto 14. Inclusion of value added products will give a boost to APLs topline and improve its EBIDTA margins.

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

31

THE FINANCIAL ADVISORS

Only organised player in Pre-Galvanised segment

Galvanised pipes nd applications in water infrastructure related projects. Pre galvanised pipes are quickly replacing the galvanised pipe segment, as they have uniform and smoother zinc coating. It also helps in saving raw material costs as zinc consumption is reduced by ~70%. The company being a pioneer in this segment commands premium pricing.

products and stable steel prices will drive the average realisation/ tonne from Rs 36,761.1 to Rs 41,924.4. On the back of rising volumes and realisations we expect, APLs revenues to grow at a CAGR of 71.6% during FY10-12E from Rs 6,659.5mn in FY10 to Rs 19,617.2mn in FY12E. Volumes (MT), Realisation (Rs)
Thousands 500 400 300 40,000 200 100 0 FY08 FY09 FY10 FY11E FY12E 35,000 30,000 50,000 45,000

Pan-India presence to provide better operational efciencies

With 25 years in existence, APL has a well established network in North India. In South India, the Hosur plant is the largest steel tubes plant and is located in close proximity to its suppliers as well as customers. With its manufacturing facilities strategically located in North and South India and now in Western India through recent acquisition, APL will be able to capture the opportunities arising in the nearby regions and help to penetrate the market more effectively. The pan India presence of companys manufacturing locations, well established distribution network and close proximity to suppliers and customers will help save freight costs and reduce working capital requirement.

Sales Volume (MT)

Avg. Realisation

Source: Company, SPA Research

Net Prot to grow at a CAGR of 83.7% in FY1012E

Net Prots are estimated to increase by 83.7% annually during FY10-12E, backed by rising sales volume, inclusion of value added products and lower freight costs. Net prots during the period are expected to increase from Rs 316.9mn to Rs 988.8mn in FY12E. During the same period we estimate EBIDTA to grow by 72.0% annually from Rs 643.1mn in FY10 to Rs 1,902.0mn in FY12E. EBITDA margins for the company have remained quite volatile over the past few quarters. However, we expect EBIDTA margins to stabilise around 8-10% as APLs EBIDTA/tonne is expected to increase with the increase in share of value added products in its product portfolio. Sales (Rs Mn), EBIDTA and PAT Margins

Diverse base of customers

Steel pipes & tubes are used in various industries such as agriculture, oil & gas, telecom, infrastructure, real estate, automobiles, etc. APLs user industries are doing well and expected to outpace the GDP growth over the next few years. The company exports to 35 countries such as USA, France, UK, UAE, Germany, Jamaica, Bangladesh, etc. APL is not dependent on any industry/country and hence this provides a scalable and de-risked model for future growth.

Customer Base
Industry Agriculture, Irrigation & Water Supply Real Estate & Construction Urban Infrastructure Automobiles Metal Engineering & Fabrication Exports Dealers Total Share 24% 8% 7% 4% 11% 11% 35% 100%

20,000 16,000 12,000 8,000 4,000 0

10% 8% 6% 4% 2% 0%

FY08

FY09

FY10

FY11E

FY12E PAT Margin

Gross Sales

EBIDTA Margin

Financial Analysis

Volumes to drive Revenues

Sales volumes are expected to rise from 167,986MT in FY10 to 450,000MT by FY12E on the back of capacity addition and robust growth in user industries. Increase in share of value added

Source: Company, SPA Research

32

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

THE FINANCIAL ADVISORS

Valuation & Recommendation Valuation

At the CMP of Rs 157.9, APL is trading at a P/E multiple of 3.8x based on its FY12E EPS of Rs 42.1 and at EV/EBIDTA multiple of 3.3x. The company has de-risked itself from any single user industry and has created a scalable model to expand and enter into new markets. With the improvement in demand for pipes and robust growth in the new user industries, we believe that APL is poised to do well. We initiate coverage with a BUY recommendation on the stock. The company is trading at a P/E multiple of 10.9x based on FY10 EPS of Rs 14.4. Considering the huge expansion plan we feel this P/E is justied. We have assigned a P/E of 6x on FY12E EPS of Rs 42.1 and arrived at a one-year target price of Rs 253/share.

Forward Bands
250 200 150 100 50 0 Dec-08 Aug -08 Dec-09 Aug -10 Aug -10 Aug -09 Jun-08 Jun-09 Apr -08 Apr -09 Apr -10 Oct -08 Oct -09 Jun-10 Feb-09 Feb-10 Oct -10 Oct -10 Forward P/E

8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Dec-08 Aug -08

Forward EV/EBIDTA

Aug -09

Dec-09

Jun-08

Jun-09

Apr -08

Apr -09

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Apr -10

Oct -08

Feb-09

Oct -09

Feb-10

Zenith Birla (India)

Jun-10

33

THE FINANCIAL ADVISORS

Financials
(Rs Mn) Gross Sales Excise Duty Net Sales Other Income Total Income Raw Materials Power & Fuel Manufacturing Exp.

Income Statement
FY08 3,159.8 423.2 2,736.6 29.5 2,766.1 2,206.9 47.2 41.2 34.3 110.9 2,440.5 325.7 11.2 65.6 (0.7) 248.1 87.5 160.6 FY09 5,729.2 535.6 5,193.6 112.7 5,306.3 4,511.7 86.6 89.8 85.3 192.1 4,965.4 340.9 21.0 186.4 (55.6) 77.9 52.5 25.4 FY10 6,659.5 479.4 6,180.1 68.9 6,249.0 5,072.0 116.4 111.2 105.1 201.1 5,605.9 643.1 36.1 172.2 21.5 456.3 163.2 293.1 FY11E 11,028.8 937.5 10,091.4 91.0 10,182.4 8,356.8 187.5 145.4 143.4 295.8 9,128.8 1,053.6 76.5 192.6 784.5 260.6 523.9 FY12E 19,617.2 1,667.5 17,949.7 147.1 18,096.8 14,802.0 333.5 281.3 313.9 464.1 16,194.8 1,902.0 128.0 293.3 1,480.7 491.8 988.8

Basic
(Rs) EPS Growth (%) Cash EPS Book Value EBIDTA/Tonne EV/Tonne FY08 15.0 -28.7% 16.1 63.7 4,292 31,955 FY09 1.3 -91.7% 2.3 81.8 2,669 32,871 FY10 14.4 1048.4% 16.1 94.1 3,883 26,843 FY11E 24.0 67.0% 27.5 124.9 4,099 19,041 FY12E 42.1 75.5% 47.5 167.7 4,227 13,500

Valuation Ratios
(x) P/E Cash P/E P/BV EV/Sales EV/EBDITA ROE RoCE FY08 10.5 9.8 2.5 0.8 7.5 23.6% 21.0% FY09 126.3 69.1 1.9 0.7 11.9 1.5% 9.1% FY10 11.0 9.8 1.7 0.7 7.0 15.3% 17.0% FY11E 6.6 5.7 1.3 0.5 4.9 19.2% 19.9% FY12E 3.8 3.3 0.9 0.3 3.3 25.1% 24.9%

Gen., Selling & Other Exp. Freight Charges Total Expenditure EBDITA Depreciation Interest Extraordinary Items PBT Tax Expense Net Prots

Margin
(%) EBDITA PBT FY08 9.4% 7.9% 5.1% FY09 4.0% 1.4% 0.4% FY10 8.6% 6.8% 4.5% FY11E 8.7% 7.1% 4.8% FY12E 8.9% 7.5% 5.0%

Balance Sheet
(Rs Mn) Liabilities Share Capital Reserves & Surplus NetWorth Secured Loans Unsecured Loans Total Liabilities Assets Fixed Assets (Net) Investments Current Assets Current Liabilities Total Assets 307.1 17.6 1,478.1 330.6 1,497.7 649.3 20.4 3,038.6 259.0 3,506.0 1,209.4 2,765.5 503.8 3,580.1 1,832.9 3,649.7 675.6 4,916.0 2,954.9 5,213.4 1,143.4 7,133.9 106.8 508.6 615.4 661.8 130.6 1,433.2 203.0 1,457.3 1,660.3 1,788.8 0.2 3,506.0 203.0 1,707.6 1,910.5 1,567.5 3,587.1 218.6 2,511.8 2,730.4 2,081.9 4,921.2 235.0 3,706.1 3,941.1 3,087.3 7,137.4 FY08 FY09 FY10 FY11E FY12E

PAT

Turnover Ratios
(x) Asset T/o (x) Inventory T/o (x) Debtors T/o (x) Debtors (Days) Inventory (Days) Creditors (Days) FY08 13.2 5.3 10.0 53 36 21 FY09 12.0 9.6 10.0 33 36 13 FY10 7.2 9.0 8.6 34 42 13 FY11E 7.3 9.8 10.9 35 40 10 FY12E 8.2 12.1 11.7 30 40 10

Leverage Ratios
(x) D/E Int. Cov. FY08 1.2 5.0 FY09 1.1 1.8 FY10 0.8 3.7 FY11E 0.8 5.5 FY12E 0.8 6.5

Cash Flow Statement

(Rs Mn) Cash from Ops. Net Cash from Ops. Cash from Inv. Cash from Financing Net Change Op. Cash Cl. Cash FY08 (249.5) (326.7) (311.9) 680.2 41.6 8.6 50.2 FY09 226.3 (61.0) (644.7) 1,592.9 887.2 50.2 937.5 FY10 146.7 138.8 (364.7) (441.2) (667.1) 938.9 271.9 FY11E 422.5 108.3 (623.5) 596.6 81.4 271.9 353.2 FY12E 890.3 390.5 (1,250.0) 943.6 84.1 353.2 437.3

Growth Ratios
(%) Net Sales Op. Expenses EBDITA PBT PAT EPS Cash EPS FY08 35.8% 29.3% 134.5% 140.7% 138.0% -28.7% -30.8% FY09 89.8% 103.5% 4.7% -68.6% -84.2% -91.7% -85.8% FY10 19.0% 12.9% 88.2% 483.8% 1073.5% 1048.4% 606.1% FY11E 63.3% 62.8% 64.3% 72.6% 76.0% 67.0% 70.2% FY12E 77.9% 77.4% 80.5% 88.7% 88.7% 75.5% 73.0%

34

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

Ratnamani Metals & Tubes

CMP: Rs 142 RECOMMENDATION: BUY TARGET PRICE: Rs 174
THE FINANCIAL ADVISORS

SS AND CS STEEL PIPES Ratnamani Metals & Tubes Ltd. is one of leading manufacturers and exporters of Stainless Steel Welded/ Seamless Tubes & Pipes and Carbon Steel Welded Pipes with an installed capacity of 21,900tpa and 350,000tpa respectively. RMLs plants are located at Chhatral and Kutch in Gujarat.

Investment Highlights
RML is a dominant player in the Stainless Steel segment with 40% domestic share in niche market applications. Stainless Steel Tubes being a matured industry, we expect the share of carbon steel pipes to increase gradually. Higher stainless steel prices and higher volumes of carbon steel pipes will annually push revenues of respective segments by 17.7% and 19.7%. We expect the total revenues to reach Rs 12,582.5mn by FY12E. RML has lined up a capex of Rs 130mn to set up a Titanium Tube manufacturing capacity with an installed capacity of 300 tonnes. The company has already started trial runs from this line. RML is expanding its Stainless Steel Heater Tubes capacity with a projected cost of Rs 350mn. This project is expected to be commissioned by Q3FY11.

The company has close to 20.5MW of wind power generation capacity, of which it has entered into a PPA for 20 years to sell 10.5MW to GEB. This arrangement is adding Rs 150mn to the companys EBIDTA in terms of savings in power cost.

Valuation
At CMP of Rs 142.3, RML is trading at a P/E multiple of 6.5x based on its FY12E EPS of Rs 22.0 and at EV/EBIDTA multiple of 4.1x. It is a dominant player in the stainless steel tubes & pipes segment. The company also has the advantage of rst mover in titanium tubes segment. We believe RML is poised well to exploit any opportunities in this sector. We initiate coverage with a BUY recommendation on the stock. At current P/E multiple of 7.9x and FY12E EPS of Rs 22.0 we estimate one year target price of Rs 174 /share.

Share Holding, June '10 Promoter FII DII Others Total

% Holding 57.7 7.2 2.7 32.4 100

KEY DATA BSE Code NSE Code Bloomberg Code Reuters Code Sensex No. of Shares (Mn) Face Value (Rs) M-Cap (Rs Mn) 52 week H/L 520111 RATNAMANI RMT:IN RMT.BO 20,260.6 46.3 2.0 6,587.9 148.6/85.0 42,000

(Rs Mn) Gross Sales Growth EBIDTA EBIDTA Margin PAT Growth EPS (Rs) P/E (x) EV/EBIDTA (x) RoE RoCE

FY09 10,027.6 14.2% 1,564.2 15.2% 712.0 -20.9% 15.8 9.0 5.0 27.5% 26.4%

FY10

FY11E

FY12E

8,847.9 10,792.9 12,582.5 -11.8% 1,690.1 16.9% 814.3 14.4% 17.9 7.9 5.6 24.9% 20.7% 22.0% 1,697.6 15.3% 836.3 2.7% 18.2 7.8 5.1 20.9% 17.7% 16.6% 2,037.7 15.8% 1,011.6 21.0% 22.0 6.5 4.1 21.1% 20.7%

Relative Price Performance vis-a-vis Sensex

200 160 120 80 40 0
Apr-10 Oct-09 Jun-10 Aug-09 Aug-10 Dec-09 Feb-10 Oct-10

RML

Sensex

2Wk Avg. Daily Vol. BSE

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

35

THE FINANCIAL ADVISORS

Company Background
Corporate Prole
Ratnamani Metals & Tubes Ltd. is a leading manufacturer and exporter of Stainless Steel Seamless and Welded Tubes & Pipes with an installed capacity of 21,900tpa. RML also has presence in Carbon Steel Welded Pipes segment with an installed capacity of 350,000tpa. Companys manufacturing facilities are located at Kutch and Chhatral in Gujarat. RML manufactures Stainless Steel Tubes & Pipes in the range of 0.25 to 60 OD. It also manufactures Carbon Steel pipes in the range of 6 to 110 NB. RML manufactures circumferential LSAW pipes which have the diameter of upto 147. These pipes are used in water, sewage & power project segments. RMLs power requirement is largely met through its captive wind power plant with an installed capacity of 20.5MW.

Investment Rationale
Dominant Player in Stainless Steel Tubes & Pipes Segment
RML is a dominant player in Stainless Steel tubes and pipes segment with close to 40% domestic market share in niche applications. Stainless Steel Pipes & Tubes Production (MT)
30,000 25,000 20,000 15,000 10,000 5,000 0 FY08 FY09 SS Capacity FY10 Production FY11E FY12E 80% 60% 40% 20% 0%

Utilisation

Source: Company, SPA Research

Wide base of User Industries

Oil & Gas and Power sector are the core revenue generators for RML as these sectors contribute around 70% of the total revenues. Reneries, Petrochemicals and Oil & Gas segments altogether account for 48% and Power Sector account for 22% of the total revenues. RML has also supplied tubes & pipes to critical sectors such as Space and Nuclear Power. Revenue Break Up

Robust growth in Oil & Gas, Reneries, Petrochemicals and Power sector to increase the demand for stainless steel tubes & pipes. We expect volumes from stainless steel division to reach 14,520MT by FY12E from 10,190MT in FY10. RML is spending Rs 350mn on the expansion of Stainless Steel Heater Tubes. Post commissioning of this project RMLs stainless steel tubes capacity will increase by 2,300MT to 24,200tpa.

Rising opportunities in Carbon Steel Pipe segment

RML has been supplying Carbon Steel pipes to plant and process applications which yield better margins. It has been catering to the water sector. Since last 4 years, it has also started supplying pipes to oil & gas for cross country line pipes and gas distribution networks. Carbon Steel Pipes Production (MT)
Thousands

11% 4%

9% 48%

400 300 200 100

60%

40%

22%

20%

6%

FY08

FY09 CS Capacity

FY10 Production

FY11E

FY12E Utilisation

0%

Oil & Gas Power Pharma, F&B and Sugar

Desal., Fert. & Chem. Plants Infrastructure Others

Source: Company, SPA Research

Source: Company, SPA Research

36

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

THE FINANCIAL ADVISORS

RML plans to tap the increasing opportunities in the oil & gas sector and water segments in the domestic markets. We expect Carbon Steel pipes volumes to register a CAGR of 14.6% to reach 148,750MT by FY12E.

The company also has plans to expand its Carbon Steel pipe capacities through the Greeneld route with a capex of Rs 400mn. The same is still at a planning stage and hence, we dont expect any incremental capacity by FY12. RML has plans to expand its capacity in Stainless Steel tubes capacity for power plants. It is also scouting opportunities to enter manufacturing hot extrusion nickel alloy tubes and Super Duplex mother pipes via the Greeneld route.

Order Book @ 0.4x FY10 revenues

90% of RMLs revenues are driven through its order book and the remaining 10% are off the shelf sales. As of Q1FY11, RML has an order book of Rs 4,510mn, which translates to 0.4x its FY10 revenues. This order book is executable over a period of 4-5 months.

Green Energy
RML has wind power generation capacity of 20.5MW, of which 10MW is used for captive consumption. RML has entered into a PPA in 2007 with the Gujarat Electricity Board to sell the remaining 10.5MW to the state grid at the rate of Rs 3.37 per unit. This 20-year PPA is slated to expire in 2027. The company earned Rs 74.9mn in FY10. We expect the company to earn Rs 69.6mn each year from the state electricity board.

Order Book as on June 2010

Product Stainless Steel Pipes & Tubes Carbon Steel Pipes Total Source: Company, SPA Research Rs Mn 3,130 1,380 4,510

New Project - Titanium Tubes

RML is currently manufacturing titanium tubes on its Stainless Steel tubes manufacturing line. In view of increasing demand it has set up a dedicated titanium tube manufacturing line. The project with an installed capacity of 300MT has been commissioned with a capital outlay of Rs 130mn. The company imports 100% of raw material requirements as titanium sheets are not available in India. As on date there are no organised players present in India in this segment which gives the company the advantage of being the rst mover. In terms of cost, titanium is competitive with higher-end specialty steels and alloys. Titaniums exceptional corrosion resistance often allows a zero corrosion allowance, which means that thinner-walled titanium tube or pipe may be substituted for other materials with heavier walls.

Financial Analysis
Stainless Steel Tubes & Pipes
Stainless Steel Pipes Sales (MT)
16,000 12,000 8,000 200,000 4,000 0 100,000 FY08 FY09 FY10 FY11E FY12E 0 500,000 400,000 300,000

SS Tubes & Pipes - Sales

Avg. Realisation (Rs)

Source: Company, SPA Research

Capacity Enhancement Plans

The company had lined up expansion plans of Rs 600mn which were to be funded through internal accruals. These projects are expected to be completed by the end of FY11. RML is spending Rs 350mn on the expansion of Stainless Steel Heater Tubes. It has already incurred Rs 250mn on the project and the balance will be incurred in the current scal. This project is expected to be commissioned by Q3FY11. Post commissioning of this project RMLs stainless steel tubes capacity will increase by 2,300MT to 24,200tpa. RML is enhancing the size range of ERW pipes from existing 16 OD to 18 OD and adding certain balancing equipments at a capex of Rs. 250mn. This expansion is expected to be completed by the end of FY11.
Executive summary Sector coverage Welspun Corp Maharashtra Seamless PSL

Investments in the oil & gas sector over the next ve years are expected to be over Rs 400bn. Power sector which accounts for 22% of RMLs revenues is also expected to add capacity of more than 120GW in the next 5-7 years. With robust growth in user industries, volumes are expected to touch 14,520MT, an annual growth of 19.3% during FY10-12E. Though Stainless Steel prices have come down from their peak of Rs 250,000/MT in FY08, we expect them to stay rm around current levels of Rs 160,000-170,000/MT. We expect revenues from Stainless Steel tubes & pipes division to grow at a CAGR of 17.7% during FY10-FY12E and reach Rs 4,886.3mn in FY12E.

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

37

THE FINANCIAL ADVISORS

Carbon Steel Pipes

RML is expecting Carbon Steel pipe segment to gain traction in the coming years. This segment currently contributes 60% of the total revenues. Carbon Steel Pipes Sales (MT)
160,000 120,000 80,000 40,000 0 70,000 60,000 50,000 40,000 30,000 20,000 10,000 FY08 FY09 CS Pipes -Sales FY10 FY11E FY12E 0

Gross Sales (Rs Mn), EBIDTA & PAT Margins

12,000 10,000 8,000 6,000 4,000 2,000 0 FY08 FY09 FY10 FY11E FY12E PAT Margin 24% 20% 16% 12% 8% 4% 0%

Gross Sales

EBIDTA Margin

Source: Company, SPA Research

Valuation & Recommendation

At CMP of Rs 142.3, RML is trading at a P/E multiple of 6.5x based on its FY12E EPS of Rs 22.0 and at EV/EBIDTA multiple of 4.1x. The company is a dominant player in the stainless steel tubes & pipes segment, robust demand in user industries are expected to drive the companys revenues. The company also has the advantage of rst mover in titanium tubes segment. We believe RML is poised well to exploit any opportunities in this sector. We initiate coverage with a BUY recommendation on the stock. At current P/E multiple of 7.9x and FY12E EPS of Rs 22.0 we estimate one year target price of Rs 174 /share. Forward Bands
300 250 200 150 100 50 0 6x 3x Forward P/E 12x 9x

Avg. Realisation (Rs)

Source: Company, SPA Research

Setting up of National Gas Grid and Governments increased thrust on water infrastructure presents an opportunity over Rs 1,800bn. On the back of buoyed demand, the company has witnessed steady rise in the sales volume of carbon steel pipes over the past three years. The volumes have grown by 37.0% annually from 60,373MT to 113,305MT during FY08-10. Going ahead we expect the volumes to grow at a CAGR of 14.6% during FY10-12E to touch 148,750MT. We expect revenues from Carbon Steel pipes division to grow at a CAGR of 19.7% during FY10-FY12E and reach 7,626.5mn.

Continued focus on Stainless Steel segment

RML will continue its focus on the Stainless Steel tubes & pipes segment as it yields better margins as compared to Carbon Steel pipes. However, we expect with better demand for Carbon Steel pipes across the country, its share in the companys revenue mix will gradually increase.

Apr-08

Apr-09

Aug-08

Aug-09

Apr-10

EBIDTA levels to stay between 15-16%

As revenues from carbon Steel division are expected to grow at a faster pace than those from stainless steel division, EBIDTA margins are expected to fall 90bps from 16.9% in FY10 to 15.8% in FY12E. EBIDTA is expected to reach Rs 2,037.7mn by FY12E from Rs 1,690.1mn in FY10, registering a growth of 9.8% annually. PAT margins are however, expected to grow at a faster pace than EBIDTA on the back of lower interest costs. PAT is expected to increase at a CAGR of 11.5% from Rs 814.3mn in FY10 to Rs 1,011.6mn in FY12E.
12,000 10,000 8,000 6,000 4,000 2,000 0

Forward EV/EBIDTA

Apr-08

Apr-09

Apr-10

Aug-08

Aug-09

38

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

Aug-10

Dec-08

Dec-09

Aug-10
6x 4.5x 3x 1.5x

Dec-08

Dec-09

THE FINANCIAL ADVISORS

Financials
(Rs Mn) Gross Sales Excise Duty Net Sales Windmill Income Other Income Total Income Raw Materials Power & Fuel Manufacturing Exp.

Income Statement
FY08 8,780.4 444.1 8,336.4 114.5 19.4 8,470.3 5,368.5 171.5 508.6 243.8 361.7 6,654.1 1,816.2 238.3 184.0 1,393.9 493.7 900.3 FY09 10,027.6 636.0 9,391.6 160.5 14.2 9,566.3 6,298.2 221.8 565.2 533.9 383.0 8,002.1 1,564.2 297.2 167.2 1,099.7 387.6 712.0 FY10 8,847.9 479.3 8,368.6 150.9 168.4 8,687.9 5,662.7 176.4 539.0 145.6 474.1 6,997.8 1,690.1 368.8 17.5 1,303.7 489.5 814.3 FY11E 10,792.9 647.6 10,145.3 150.0 21.6 10,316.9 6,995.0 215.9 620.6 302.2 485.7 8,619.3 1,697.6 390.9 58.5 1,248.2 411.9 836.3 FY12E 12,582.5 754.9 11,827.5 150.0 25.2 12,002.7 8,071.3 251.6 723.5 352.3 566.2 9,965.0 2,037.7 400.2 97.9 1,539.7 528.1 1,011.6

Basic
(Rs) EPS Growth (%) Cash EPS Book Value EBIDTA/tonne EV/Tonne 25.3 51.1 24,005 100,674 FY08 20.0 FY09 15.8 -20.9% 22.4 64.0 16,533 81,211 FY10 17.9 13.2% 26.0 81.0 12,994 72,179 FY11E 18.2 1.7% 26.7 94.9 11,445 58,120 FY12E 22.0 21.0% 30.7 113.4 12,016 48,696

Valuation Ratios
(x) P/E Cash P/E P/BV EV/Sales EV/EBIDTA ROE RoCE FY08 7.1 5.6 2.8 0.9 4.3 39.1% 36.9% FY09 9.0 6.3 2.2 0.8 5.0 27.5% 26.4% FY10 7.9 5.5 1.8 1.1 5.6 24.9% 20.7% FY11E 7.8 5.3 1.5 0.8 5.1 20.9% 17.7% FY12E 6.5 4.6 1.3 0.7 4.1 21.1% 20.7%

Gen., Selling & Other Exp. Personnel Expenses Total Expenditure EBDITA Depreciation Interest PBT Tax Expense Net Prots

Margin
(%) EBDITA PBT FY08 20.2% 15.9% 10.3% FY09 15.2% 11.0% 7.1% FY10 16.9% 14.7% 9.2% FY11E 15.3% 11.6% 7.7% FY12E 15.8% 12.2% 8.0%

Balance Sheet
(Rs Mn) Liabilities Share Capital Reserves & Surplus NetWorth Secured Loans Unsecured Loans Total Liabilities Assets Fixed Assets (Net) Investments Current Assets Current Liabilities Total Assets 2,852.4 0.1 3,134.6 2,168.0 4,273.7 3,858.5 0.1 3,290.1 2,360.0 5,324.2 3,629.1 500.5 4,396.0 1,676.9 7,429.6 3,718.2 500.5 4,833.0 2,194.4 7,310.2 3,568.0 500.5 6,475.0 2,409.3 8,488.2 90.0 2,211.3 2,301.3 1,262.2 255.5 4,273.7 90.0 2,792.0 2,882.0 1,272.5 634.1 5,324.2 91.9 3,555.3 3,647.2 2,705.0 496.5 7,429.6 91.9 4,266.2 4,358.1 2,299.2 200.0 7,310.2 91.9 5,116.5 5,208.4 2,675.9 250.0 8,488.2 FY08 FY09 FY10 FY11E FY12E

PAT

Turnover Ratios
(x) Asset T/o (x) Inventory T/o (x) Debtors T/o (x) Debtors (Days) Inventory (Days) Creditors (Days) FY08 3.1 4.4 7.7 47 62 86 FY09 3.0 6.4 8.5 43 37 78 FY10 2.4 5.2 6.1 60 69 72 FY11E 2.9 4.9 6.3 60 61 75 FY12E 3.5 4.9 6.6 60 66 75

Leverage Ratios
(x) D/E Int. Cov. FY08 0.7 9.9 FY09 0.7 9.4 FY10 0.9 96.6 FY11E 0.6 29.0 FY12E 0.6 20.8

Cash Flow Statement

(Rs Mn) Cash from Ops. Net Cash from Ops. Cash from Inv. Cash from Financing Net Change Op. Cash Cl. Cash FY08 1,483.7 923.1 (502.2) (335.6) 85.3 113.0 198.4 FY09 1,839.3 1,361.1 (1,179.9) 141.6 322.8 198.4 521.1 FY10 (478.8) (893.0) (784.9) 1,399.8 (278.1) 521.1 243.0 FY11E 2,003.3 1,425.3 (539.4) (820.5) 65.4 243.0 308.5 FY12E 1,467.5 748.4 (250.0) 292.3 790.7 308.5 1,099.2

Growth Ratios
(%) Net Sales Op. Expenses EBDITA PBT PAT EPS Cash EPS FY09 12.7% 20.3% -13.9% -21.1% -20.9% -20.9% -11.4% FY10 -10.9% -12.6% 8.1% 18.6% 14.4% 13.2% 16.0% FY11E 21.2% 23.2% 0.4% -4.3% 2.7% 1.7% 2.7% FY12E 16.6% 15.6% 20.0% 23.3% 21.0% 21.0% 15.0%

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

39

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Zenith Birla (India)

CMP: Rs 12 RECOMMENDATION: HOLD TARGET PRICE: Rs 12
THE FINANCIAL ADVISORS

ERW PIPES

Zenith Birla (India) Ltd. is engaged in the business of manufacturing steel pipes. The company manufactures black pipes, galvanised pipes and tubular, square and rectangular hollow section pipes. Hollow sections form ~10% of the total sales. Zenith currently has an installed capacity of 210,000tpa. The companys manufacturing facilities are located at Khopoli, Murbad and Tarapur in Maharashtra.

Investment Arguments
Zenith is expanding its capacity by setting up a 75,000MT HSAW plant and 150,000MT ERW pipe plant with a total capital outlay of Rs 1,300mn. These capacities are expected to commission by the end of FY11. Revenues are expected to grow at a CAGR of 24.1% during FY10-12E on the back of rising ERW volumes, commissioning of HSAW pipe plant and improvement in average realisation. Revenues are expected to reach Rs 7,754.9mn by FY12E. Inclusion of higher margin SAW pipes in the product offering will improve EBIDTA and PAT margins. EBIDTA and PAT are expected to post a CAGR of 33.5% and 58.1% to reach Rs 788.7mn and 294.1mn respectively by FY12E. As of Q1FY11, the company has an order book of Rs 900mn, translating to 0.2x of its FY10 revenues.

Investment Concerns
We believe the company will face huge competition from the existing HSAW players and will nd it difcult to scale up its production. The companys equity share capital has tripled in the past 2 years on the basis of amalgamation, fund raising and bonus issue. Zenith also has plans to further dilute its share capital, thereby limiting earnings upside.

Valuation
At CMP of Rs 12.0, Zenith is trading at a P/E multiple of 5.3x based on its FY12E EPS of Rs 2.3 and at EV/EBIDTA multiple of 3.6x. Expansion and new investments in increasing capacities along with geographical spread bodes well for the company. However, continuous fund raising and resulting equity dilution will limit the earnings upside. We recommend Hold. At current P/E multiple of 5.4x and FY12E EPS of Rs 2.3 we estimate one year target price of Rs 12/share.

Share Holding, June '10 Promoter FII DII Custodians Others Total

% Holding 25.1 2.2 0.3 47.8 24.7 100

KEY DATA BSE Code NSE Code Bloomberg Code Reuters Code Sensex No. of Shares (Mn) Face Value (Rs) M-Cap (Rs Mn) 52 week H/L 531845 ZENITHBIR ZB:IN ZNTH.BO 20,260.6 129.7 10.0 1,556.6 27.7/11.9 981,000

(Rs Mn) Gross Sales Growth EBIDTA EBIDTA Margin PAT Growth EPS (Rs) P/E (x) EV/EBIDTA (x) RoE RoCE

FY09 6,276.6 22.2% 478.7 5.7% 154.6 -19.5% 3.9 3.1 2.9 7.0% 13.3%

FY10 5,039.3 -19.7% 442.3 3.9% 117.7 -23.9% 2.2 5.4 3.4 5.7% 12.0%

FY11E 5,884.9 16.8% 596.4 5.2% 218.5 85.7% 1.7 7.1 3.8 9.3% 14.5%

FY12E 7,754.9 31.8% 788.7 5.9% 294.1 34.6% 2.3 5.3 3.6 9.9% 15.6%

Relative Price Performance vis-a-vis Sensex

160 120 80 40 0

July-10

Mar-10

Apr-10

Jun-10

May-10

Aug-10

Nov-09

Dec-09

Sep-10

Feb-10

Oct-10

Oct-09

Jan-10

2Wk Avg. Daily Vol. BSE

ZBL

Sensex

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

41

THE FINANCIAL ADVISORS

Company Background
Corporate Prole
Zenith Birla (India) Ltd. was incorporated in 1960 as a steel pipe manufacturing company. Zenith shifted its manufacturing process from ERW technology to HFIW technology in 1971. The company also manufactures tubular, square and rectangular hollow section pipes. Hollow sections form ~10% of the total sales. Zenith currently has an installed capacity of 210,000tpa. Zeniths manufacturing facilities are located at Khopoli, Tarapur and Murbad in Maharashtra. It has 135 acres of land in Khopoli of which only 20 acres have been used by its plants. The plant is strategically located near Mumbai port and JNPT which helps the company is reducing its freight costs. Exports contribute ~40% of Zeniths total revenues. USA and Middle East are the major markets for the company.

ERW Volumes (MT)

Thousands 375 300 225 150 75 0 80% 70% 60% 50% 40% 30% FY08 FY09 Capacity FY10 Production FY11E FY12E 20%

Utilisation

Source: Company, SPA Research

Investment Rationale
Expansion Plans
Zenith has laid down plans of Rs 1,300mn in order to enhance its manufacturing capacities. The company plans to setup an ERW plant at its existing manufacturing site in Khopoli with an installed capacity of 150,000tpa. This plant is being set up at an estimated cost of Rs 1,000mn and is expected to come online by the end of 2011. The company had raised Rs 1,030mn through a GDR issue in order to fund its expansion plans. Zenith is also setting up a 75,000tpa mobile SAW pipe plant in the southern or eastern part of India with an outlay of Rs 300mn. This plant is expected to be commissioned by Q3FY11. The company is also considering to raise Rs 3,500mn through GDR issue to increase its total ERW capacity by almost 50% over the next three years and increase its product range. The new plants are expected to come in other geographical locations in order to achieve better geographical spread and save on freight and working capital costs.

GoI has also allocated Rs 1,653bn to improve the irrigation and water supply in the rural areas. Zeniths plants are API certied and are poised well to harness the rising demand led by City Gas Distribution. On the back of huge demand expected especially for the distribution/branch pipelines, we expect Zenith to sell 141,000MT of ERW Pipes by FY12 from 115,949MT in FY10. On the HSAW front, volumes are expected to reach 15,000MT by FY12E.

Order Book
Zeniths revenues are derived from its order book as well as from off the shelf items. As of Q1FY11, Zenith has an order book of Rs 900mn, which translates to 0.2x of its FY10 revenues. This order book is executable over the next 3-4 months.

Established Brand Name

The company has over the 50 years have developed a strong brand name of Zenith Birla in the domestic as well as international markets. On the back of established brand, goodwill of the Birla group and experience of 50 years, the company commands premium pricing over its peers.

ERW volumes to grow at a CAGR of 12.9% during FY10-12E

The user industries for ERW pipes are expected to grow at a rapid rate. We believe upcoming sectors like, infrastructure, real estate, automobiles and telecom will give a boost to the companys volumes other than the traditional industries such as oil & gas, water and agriculture.

Investment Concerns
Scaling up HSAW volumes to be a challenge
Zenith is foraying into the HSAW pipes segment with an installed capacity of 75,000tpa. However, with recently established and huge capacities coming up especially in southern and eastern India by established SAW pipe players, we expect Zenith to face intense competition while bidding for projects. We do not expect HSAW pipe division to ramp up volumes any faster.

42

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

THE FINANCIAL ADVISORS

Ballooning Equity Share Capital

The equity share capital of the company has more than tripled during the last 2 years from Rs 400.7mn in FY09 to current Rs 1,297.2mn on account of its amalgamation and fund raising plans. The company in FY10 demerged its tooling business and amalgamated Tungabhadra Holdings with the company. Zenith allotted 19 shares for every 7 shares held by the shareholders of Tungabhadra Holdings, resulting in an increase of equity share capital by Rs 136.7mn. Zenith had also raised Rs 1,030mn by the way of GDR to fund its expansion plans, resulting in increase in the share capital by Rs 543.6mn. The company also has plans to further raise Rs 3,500mn to expand its existing facilities and increase the product range. The company is also considering a preferential allotment of 10.8mn shares to promoters to shore up promoters holding. Zenith on the account of its Golden Jubilee celebration announced bonus issue of 1 share for every 5 shares held, taking the total equity capital to Rs 1,297.2mn.

PAT margins are expected to report an improvement on back of falling cost of debt. On an absolute basis, PAT is expected to grow at a CAGR of 62.2% from Rs 117.7mn to Rs 309.5mn.

Fund Raising to cap valuations

Over the past two years the companys share capital has tripled from Rs 400.7mn to Rs 1,297.2mn on the back of amalgamation with Tungabhadra Holdings, GDR issue and issue of bonus shares. Going ahead the company further plans to raise Rs 3,500mn through the GDR route for funding its future expansion plans and allot 10.8mn shares to promoters to increase their share holding. We believe huge equity dilution by the company will cap the valuations and limit the stocks upside.

Valuation
Valuation & Recommendation
At CMP of Rs 12.0, Zenith is trading at a P/E multiple of 5.3x based on its FY12E EPS of Rs 2.3 and at EV/EBIDTA multiple of 3.6x. After a checkered past, Zenith has initiated several measures to achieve better operational efciencies. Expansion and increasing the product range of ERW pipes and new investments in HSAW pipes along with geographical spread bodes well for the company. However, continuous fund raising and resulting equity dilution will limit the earnings upside. We recommend Hold. At current P/E multiple of 5.4x and FY12E EPS of Rs 2.3 we estimate one year target price of Rs 12/share.

Financial Analysis
PAT margins to grow at a CAGR of 62.2%
Zeniths revenues are expected to grow at a CAGR of 24.1% during FY10-12E on the back of rising ERW volumes and commissioning of SAW pipes plant by the end of 2011. We expect revenues from ERW division to grow by 20.0% annually from Rs 4,427.0mn to Rs 6,374.7mn during FY10-12E. The share from HSAW division is expected to be Rs 708.8mn by FY12E. Total revenues are expected to touch Rs 7,754.9mn by FY12E. Sales (Rs Mn), EBIDTA & PAT Margins
9,000 7,500 6,000 4,500 3,000 1,500 0 FY08 FY09 FY10 FY11E FY12E PAT Margin 8% 6% 4% 2% 0%

Forward Bands
45 40 35 30 25 20 15 10 5 0 8x 6x 4x 2x
Forward P/E

Dec-08

Dec-09

Aug -08

Aug -09

Aug -10
Aug -10

Jun-08

Apr -08

Apr -09

Jun-09

Apr -10

Jun-10

Oct-09

Oct-08

3,500 3,000 2,500 2,000 1,500 1,000 500 0

Feb-09

Forward EV/EBIDTA 6x 4.5x

Gross Sales

EBIDTA Margin

Source: Company, SPA Research Please write the source as done in Fig 2.

EBIDTA margins are expected to improve on the basis of improving realisations and inclusion of higher margin SAW pipes. We expect blended EBIDTA/tonne to increase from Rs 4,001.7 to Rs 5,056.0 by FY12E. EBIDTA is expected to grow at a robust CAGR of 30.8% from Rs 442.3mn to Rs 788.7mn during FY10-12E.
Executive summary Sector coverage Welspun Corp Maharashtra Seamless PSL

Feb-10

Oct-09

Apr -08

Apr -09

Aug -08

Aug -09

Apr -10

Feb-09

Dec-08

Dec-09

Feb-10

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

Oct-10

Oct-08

Jun-09

Jun-10

Jun-08

Oct-10
3x 1.5x

43

THE FINANCIAL ADVISORS

Financials
(Rs Mn) Gross Sales Excise Duty Net Sales Other Income Total Income Raw Materials Power & Fuel Manufacturing Exp.

Income Statement
FY08 5,136.1 516.4 4,619.6 237.2 4,856.9 3,467.8 68.7 261.1 334.1 245.1 4,376.8 480.1 46.6 204.1 229.4 37.2 192.1 FY09 6,276.6 447.0 5,829.6 123.8 5,953.4 4,519.4 75.7 214.7 402.2 262.8 5,474.7 478.7 50.1 220.8 207.7 53.1 154.6 FY10 5,039.3 237.7 4,801.6 246.9 5,048.5 3,828.8 107.7 154.0 364.2 151.5 4,606.2 442.3 52.6 190.0 199.7 82.0 117.7 FY11E 5,884.9 323.4 5,561.5 287.5 5,849.0 4,369.8 117.7 191.3 397.2 176.5 5,252.6 596.4 67.0 202.2 327.2 108.7 218.5 FY12E 7,754.9 442.4 7,312.5 327.5 7,640.0 5,707.4 155.1 252.0 504.1 232.6 6,851.2 788.7 83.5 264.8 440.4 146.3 294.1

Basic
(Rs) EPS Cash EPS Book Value DPS EBIDTA/tonne EV/Tonne FY08 4.8 6.0 53.7 0.7 5,110 13,687 FY09 3.9 5.1 56.2 0.6 5,504 17,515 FY10 2.2 3.2 29.1 4.0 4,002 14,970 FY11E 1.7 2.2 21.9 0.3 4,790 21,289 FY12E 2.3 2.9 23.8 0.4 5,056 20,618

Valuation Ratios
(x) P/E Cash P/E P/BV EV/Sales EV/EBIDTA RoE RoCE FY08 2.5 2.0 0.2 0.2 2.4 8.9% 14.3% FY09 3.1 2.3 0.2 0.2 2.9 7.0% 13.3% FY10 5.4 3.7 0.4 0.3 3.4 5.7% 12.0% FY11E 7.1 5.5 0.5 0.4 3.8 9.3% 14.5% FY12E 5.3 4.1 0.5 0.4 3.6 9.9% 15.6%

Gen., Selling & Other Exp. Personnel Charges Total Expenditure EBIDTA Depreciation Interest PBT Tax Expense Net Prots

Margin
(%) FY08 4.7% 4.5% 3.7% FY09 5.7% 3.3% 2.5% FY10 3.9% 4.0% 2.3% FY11E 5.2% 5.6% 3.7% FY12E 5.9% 5.7% 3.8% EBDITA PBT PAT

Balance Sheet
(Rs Mn) Liabilities Share Capital Reserves & Surplus NetWorth Secured Loans Total Liabilities Assets Fixed Assets (Net) Investments Current Assets Current Liabilities Total Assets 1,031.6 26.0 3,749.0 1,785.3 3,021.2 1,195.7 76.0 3,958.1 1,841.1 3,404.6 1,226.3 26.1 4,427.8 2,638.1 3,088.1 1,259.3 26.1 5,306.6 2,400.3 4,191.6 2,175.8 26.1 5,746.8 3,098.5 4,850.2 400.7 1,749.5 2,150.3 871.0 3,021.2 400.7 1,853.0 2,253.7 1,135.0 3,404.6 537.4 1,310.4 1,847.8 1,194.3 3,088.1 1,297.2 1,546.5 2,843.7 1,347.9 4,191.6 1,297.2 1,787.6 3,084.8 1,765.4 4,850.2 FY08 FY09 FY10 FY11E FY12E

Turnover Ratios
(x) Asset T/o Inventory T/o Debtors T/o Debtors (Days) Inventory (Days) Creditors (Days) FY08 5.0 4.2 7.8 47 73 185 FY09 5.6 5.0 10.5 35 64 154 FY10 4.2 3.9 7.0 52 86 184 FY11E 4.7 4.2 6.9 45 75 210 FY12E 4.5 4.7 8.2 60 75 180

Leverage Ratios
(x) FY08 0.4 2.1 FY09 0.5 1.9 FY10 0.6 2.1 FY11E 0.5 2.6 FY12E 0.6 2.7 D/E Int. Cov. Ratio

Cash Flow Statement

(Rs Mn) Cash from Ops. Net Cash from Ops. Cash from Inv. Cash from Financing Net Change Op. Cash Cl. Cash FY08 (19.0) (56.2) (13.1) (310.6) (380.0) 564.0 184.1 FY09 207.7 182.2 (265.6) 110.1 26.7 184.1 210.8 FY10 (232.6) (267.8) 292.9 (138.4) (113.3) 162.6 343.2 FY11E (40.3) (162.3) (100.0) 555.9 293.6 343.2 636.8 FY12E 695.4 583.6 (1,000.0) 268.0 (148.4) 636.8 488.3

Growth Ratios
(%) Net Sales Op. Expenses EBDITA PBT PAT EPS Cash EPS FY09 26.2% 25.1% -0.3% -9.5% -19.5% -19.5% -14.2% FY10 -17.6% -15.9% -7.6% -3.9% -23.9% -42.3% -37.3% FY11E 15.8% 14.0% 34.8% 63.9% 85.7% -24.3% -31.3% FY12E 31.5% 30.4% 32.2% 34.6% 34.6% 34.6% 32.3%

44

Executive summary

Sector coverage

Welspun Corp

Maharashtra Seamless

PSL

Man Industries

APL Apollo Tubes

Ratnamani Metals & Tubes

Zenith Birla (India)

THE FINANCIAL ADVISORS

Notes

THE FINANCIAL ADVISORS

Notes

THE FINANCIAL ADVISORS

Notes

THE FINANCIAL ADVISORS

Notes

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