B K Goenka to BS
What is the macro scenario?
There is a robust investment plan for pipelines globally and strong replacement demand in the US, Canada and Europe. Approximately $88 billion investment in the pipeline infrastructure is planned for the next five to seven years. Also, about one million miles of pipelines are due for replacement alone over the next two to three decades, which translates into an opportunity of $ 400 billion.
Further, there is going to be strong demand for pipes in India given the plans of Reliance, GAIL and Gujarat State Petroleum Corporation.
Are you geared to meet this demand?
By March 2009, we would have increased the capacities of LSAW from 3.5 lakh tonnes to 6.5 lakh tonnes and HSAW from 4 lakh tonnes to 8.5 lakh with an investment of $200 million. Our plate cum coil mill plant of 1.5 million capacity, one of the largest in the world, will be fully commissioned by March 2008.
It will not just financially, but also, operationally make us strong and among the top three pipe companies in the world. Thus, not only volumes will be robust, but margins will also improve. However, this will happen only in FY10, which is the first full year of operations.
What will be the share of exports?
Exports contribute about 90 per cent of our current order book of Rs 4,500 crore while the rest by the domestic market. US and Canada has a major share of 50 per cent and 30 per cent respectively in our exports, with the rest contributed by Latin America, Middle East and other regions. Contribution of exports is likely to decline to 80 per cent.
Is the company’s high growth sustainable?
Our net sales have grown at a CAGR of 60.85 per cent between FY03-07 while our net profit has grown manifold from around Rs 2 crore to Rs 143 crore in the same period. We achieved the highest ever realisation of $ 1600 in the December 2007 quarter.
Thus, going ahead, we expect to maintain the current pace of growth in sales and profitability. We expect realisation to be maintained followed by a robust volume growth of 30-40 per cent. More importantly we should see a larger bottom line growth on account of plate mill expansion.
How has the company coped with the rising rupee?
We have a natural hedge against rising rupee as imports of raw material form about 70 per cent of total raw material costs. Also, most of contracts have a back-to-back arrangement for foreign exchange-just like we have for raw material. Moreover, our Japanese and European competitors have also faced the similar situation of appreciating currency. Finally, our customers are not price sensitive as they are more focussed on quality.
What will be the impact of slowing US economy and softening of oil prices?
There is a strong replacement demand and the company's oil producing customers are cash rich (with positive large cash flows due to a high oil price for so long) to spend on the pipeline infrastructure. Softening of oil prices does not affect the company immediately, as there is a time lag of about three years in slowing down of exploration activities and investment in pipeline infrastructure.
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