Decline in steel prices, surge in orders, bring happy times for pipe makers

A Crisil report estimates 7-8 per cent growth in steel pipes demand by 2024 due to massive investment planned by the government in water supply, irrigation and sanitation projects
The profit margins of steel pipe manufacturers are likely to surge in the second half of the current financial year due to a sharp decline in steel prices and surge in orders following government’s increased focus on infrastructure development for transportation of water, oil and gas.

Companies manufacturing steel and other pipes and allied products have reported steady improvement in their profit margins over the last four quarters with around half a dozen leading producers posted 4.6 per cent of cumulative profit margins in the first quarter of financial year 2019-20 from around 2 per cent in the same period last year. Analysts forecast that the margin improvement continued in the second quarter as well.

A report from Edelweiss Research suggests 20-25 per cent decline in the prices of hot rolled coil (HRC) and steel raw materials. Since steel pipes manufacturers sell their products mostly on long term contract for delivery in 9-12 months, the steel price decline benefits them till the next contract is signed with consumer industries.

“The future looks promising for line pipe sector on the back of ramping up production in oil and gas to meet growing consumer demand. The government’s renewed focus on water sector gives additional opportunity for growth. With the required expertise and capabilities, we are fully poised to tap this opportunity,” said R C Mansukhani, Chairman and Managing Director, Man Industries.

Companies like Man Industries, Jindal Saw, Surya Roshni and others have reported upto 30 per cent increase in orders in the last three months from their customers in water, oil and gas sectors. The Rs 50,000 crore steel pipes industry contributes around 8 per cent of India’s 100 million tonnes of overall steel production.

A Crisil report estimates 7-8 per cent growth in steel pipes demand by 2024 due to massive investment planned by the government in water supply, irrigation and sanitation projects and also increased usage of structural pipes in infrastructure projects. According to industry sources, the government plans to spend Rs 130,000 crore on supply of water, irrigation, sanitation, oil and gas by 2024 under various schemes. With the government focus on “Nal se Jal” and “River linking Projects” huge potential is seen in water sector in addition to oil and gas. Total investment potential in water infra stands is estimated at $270 billion over next 15 years.

Rajeev Goyal, Assistant Vice President of Jindal Saw believes that the demand is good from oil and gas sector with the next driver of growth expected from water supply and sanitation projects with the government’s plan of Jalshakti Mission across the country.

Goyal said that the ongoing robust demand has improved capacity utilization of the sector over the last few months.

In export segment demand is coming from all major geographies like MENA region (19 countries including Iran, Iraq, Israel and several North west Asian countries or gulf nations) for oil and gas and refining; Asia Pacific for oil and gas, water; North America for liquefied natural gas (LNG) and oil and gas etc.

 
“Normally, steel pipe makers buy raw materials in advance. But, the incremental buying executed in the last three months would certainly benefit them in the second half due to a sharp decline in steel prices. With most stocks in this sector are trading at 5-6 PE multiple, we see big opportunity for these stocks to perform better in the next few years,” said Bajrang Bafna, Head of Research, Sunidhi Securities.

 


Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel