PSL- Results disappoint: Edelweiss

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PSL
Results disappoint


􀂄 Consolidated revenues dip; standalone pipe sales higher at 132,488 MT
PSL’s Q2FY11 net consolidated revenues dipped 15% Q-o-Q, to INR 7.4 bn, as
coating income receded from INR 2.1 bn in Q1FY11 to INR 1 bn during the
quarter. Revenues from pipes were marginally lower Q-o-Q, at INR 6.3 bn, with
consolidated pipe sales at 145 KT (+28.1% Q-o-Q). Although standalone pipe
sales were 37% higher Q-o-Q, at 132.5 KT, dip in sales from the US plant
impacted the blended EBITDA margins and overall profitability. The US plant was
lying idle for most of Q2FY11 due to lack of orders, but the management has
guided that, going forward, the plant has few orders in the pipeline.


􀂄 EBITDA margin at USD 64/MT; consolidated PAT below expectations
PSL reported consolidated EBITDA of INR 546 mn (down 39% Q-o-Q), with
blended EBITDA margin of USD 64/MT (50% fall Q-o-Q due to dip in coating
revenues and shutdown of the US plant). Blended standalone EBITDA margin
during the quarter stood at USD 73/MT, with standalone EBITDA at INR 449 mn
(19.7% lower Y-o-Y and 30.6% lower Q-o-Q). Interest expenses, at INR 371 mn,
increased 8% Q-o-Q, on the back of some working capital loans raised during
Q2FY11. Other income jumped to INR 383 mn (from INR 83 mn earlier) due to
an excise refund of INR 160 mn received from the Gujarat government for the
company’s HSAW mill at Kutch. Consolidated PAT for Q2FY11 was below
expectations at INR 139 mn (down 32% Q-o-Q). On standalone basis, PSL
reported higher PAT of INR 187 mn in the quarter on the back of higher pipe
sales. Its consolidated order book has remained flat at INR 15 bn (~230 KT).
This includes orders of 40 KT from IOCL and 35 KT from GAIL.

􀂄 Outlook and valuations: Positive on the sector; maintain ‘BUY’
After a disappointing set of results with its US plant remaining idle for most of
Q2FY11, we have revised down our earnings estimates for PSL to account for
below expected EBITDA margins (due to low margin orders booked in India) and
higher interest costs. We are also rolling forward our valuations to March 2012,
pegging the fair value at INR 160. With crude prices remaining stable at a higher
range, we are positive on volume pick-up in the pipes sector as oil & gas capex
picks up globally. However, due to PSL’s dependence on the hyper-competitive
domestic pipes market, its margins may continue to remain under pressure in the
near term. We maintain our ‘BUY’ rating on the stock but are downgrading it to
‘Sector Underperformer’ due to its disadvantageous positioning compared to its
peers. At CMP of INR 110, the stock is trading at P/E of 6.7x FY12E EPS and
EV/EBITDA of 5.9x FY12E.