PIPES Gaining traction: Q3FY11 Result Preview: Edelweiss

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PIPES
Gaining traction: Q3FY11 Result Preview: Edelweiss



􀂄 Key highlights of the sector during the quarter
• The rupee appreciated with respect to the dollar during the quarter, with
INR/USD average being 44.9 (up 4.0% Q-o-Q). Thias may have a marginal
negative impact on the companies as most earnings are USD denominated.
• Welspun Corp (~277 KMT pipes and ~57 KMT plates) and Jindal Saw (~105
KMT LSAW) announced new order accretion during the quarter

􀂄 Result expectations for the sector and stocks under coverage
Q3FY11 results for pipe manufacturing companies are expected to be better than
Q2FY11 results due to increased pipe sales volumes. Going forward, we expect
orders to pick up as pipeline capex in India fructifies and the oil & gas sector
gathers momentum globally. We expect global EBITDA margins to sustain at
current ~USD 200/MT levels for SAW pipes. However, the domestic environment
will continue to stay highly competitive at margin levels of USD 70-80/MT.
While we expect Welspun to report higher sales volume for HSAW pipes (115 KT
Vs ~79 KT for Q2FY11) and higher plate sales (155 KT Vs ~128 KT for Q2FY11),
EBITDA margins for the company should be lower (INR 11,000/MT, INR 11,800 in
the previous quarter) in Q3FY11 due to absence of high margin orders executed
during the previous quarter. For Jindal Saw, we expect blended EBITDA margins
to normalize in this quarter from USD 13,700/mt in Q2FY11 to INR 11,650/MT in
Q3FY11. JSAW’s sales volume is expected to remain flat during the quarter. For
PSL, we continue to maintain blended pipes EBITDA margins at USD 70/MT.
􀂄 Outlook over the next 12 months
We have a positive outlook on the sector on higher global oil & gas capex and
higher domestic traction of GAIL orders. Our long term crude price outlook is
positive, which is one of the catalysts for spending on pipeline infrastructure. We
remain positive on order pick-up as the global oil & gas capex picks-up. Day rates
for rigs have increased recently which is a leading indicator for fructification of oil
& gas capex globally. The large TransCanada order, in which Welspun Corp is a
contender, seems to be moving forward with government approval and is
expected to increase margins across the industry. On the domestic front, GAIL
orders have been slower than expected inspite of the recent auction of GAIL’s
Dabhol – Bangalore pipeline. Order traction from GAIL is expected to pick up with
a significant capacity expansion by FY12/13.
􀂄 Recommendations
Top Picks: Jindal Saw.