With the news coming in that Arcelor Mittal may bid $36bn for Tenaris, World’s largest steel pipe maker, the already rallying saw pipe sector has reacted positively in last couple of trading session.

Growing oil and gas demand across the world and the zeal with which oil companies are investing on adding pipeline infrastructure promise higher revenues for Indian steel pipes makers. Indian pipe manufacturers are well positioned to capitalize on the booming demand of pipes with a US$118 billion global opportunity likely to unfold over the next five years.

Rising crude prices and the depletion of global crude reserves has lead to massive investments in creating oil & gas transportation infrastructure. This has stimulated a huge demand for submerged arc welded (SAW) pipes and seamless pipes, which are used in oil & gas exploration. The participation of Indian manufacturers is already visible form their expanding order book. ICICI Direct.com believes tight supply situation for FY08 and FY09E is expected to keep realizations firm. 

Global demand-supply scenario favours Indian manufacturers: 

US, Middle East and the domestic market would be key volume drivers for Indian pipe manufacturers. The three geographies account for over 40% of the total global demand of around 75 million tonne of SAW pipes. Indian pipe companies are expected to corner around 19% of total demand. The current US$ 3.85 billion order book lends credence to the view.

Depleting crude reserves stimulating demand for seamless pipes:

Depleting oil reserves have led to increased exploration efforts, resulting in more wells in the same rig. Demand for seamless pipes is directly proportional to the increase in digging of wells. Additional demand for about 35 million tonne of seamless pipes is expected to emerge in the next 5 years.

Concerns:

Capacity expansion by players worldwide, or by new entrants, may put pressure on realizations. In a rising steel prices scenario, a large number of players or oversupply could increase the bargaining power of buyers and the manufacturers may not be able to pass on increased costs to the buyer. These factors could put pressure on margins. 

Valuations: Among pipe manufacturers, the companies that are diversified in terms of product offering, have higher RoNW and RoCE and are trading at a lower P/E multiple are preferred. Both ICICI Direct.com and Edelweiss Securities has given buy recommendation on Jindal SAW, Man Industries, PSL and Maharashtra Seamless. ICICI direct.com has given hold recommendation on Welspun Gujarat Stahl Rohren.

Movement of stock prices in last one month: