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Buy PSL, target Rs 416: HDFC Sec

Published on Tue, Aug 28, 2007 at 09:36 | Source : Moneycontrol.com

Updated at Tue, Aug 28, 2007 at 10:25

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PSL

BSE | NSE 25/05/12

Are Mutual Funds betting on PSL?

HDFC Securities is bullish on PSL and has maintained buy rating on the stock with a target price of Rs 416.

HDFC Securities research report on PSL

Recently, the company bagged a prestigious order worth Rs. 1.65 billion from IOCL for the supply of pipes for the Dadri-Panipat pipeline project. This order takes PSL's current pending order book position to Rs.23 billion, which will be executed over a period of 12 months.
The aggregate value of bids outstanding stands at Rs. 65 billion (exports Rs.50 billion), which includes some form big oil & gas majors like Petronas, Saudi Aramco etc. The new HSAW (75000 tons) facility at Sharjah is operational now and the company has received orders worth USD 2.4 million from this facility. It will be supplying steel pipes for the domestic water sector. Following this order, it has filed an application for API accreditation for this mill and the certification process is currently underway.

Financial Highlights

For Q1 FY08, PSL has achieved a net turnover of Rs. 4.1 billion, a growth of 9.5% over Q1 FY07.
Operating profit margins increased by 16 bps during Q1 FY08 to 9.9% from 9.7% in Q1 FY07, due to a marginal decline in employee and other costs as a percentage of sales.
Operating profits during the quarter were up by 11.3% y-o-y at Rs. 406.3 million and PAT showed an increase of 15.2% to Rs. 171.3 million.

Outlook & Valuation

The performance of the company in FY07 and in Q1FY08 was not robust compared to other pipe manufactures despite significant capacity addition. We believe that this was on the back of less than expected orders from domestic oil & gas majors. However, given the nature and quantum of investments in the production and refining of crude oil/natural gas in the region, it has become imperative to create support infrastructure for efficient and reliable supply of oil/gas products to key industrial and individual users.

We believe domestic orders will be floated aggressively in the coming quarters to create this infrastructure. Being the cheapest mode of transport, pipelines have become the ideal form of oil and gas transportation. Another key market segment of the company is pipes for water supply projects. With water normally transported by large diameter pipes, which can only be manufactured using HSAW technology employed by the company, going forward, there is tremendous potential from this sector also.

We expect PSL's revenues to grow at a CAGR of 21% over FY07-09E and net profits to grow at a more robust CAGR of 39.3% over the same period. The stock currently trades at a P/E multiple of 13.1x FY08E and 10.1x FY09E, which looks reasonable. We maintain our BUY rating on the stock with a target price of Rs. 416 (upside of 29%).