12-Dec-2019 : Srikalahasthi Pipes Ltd is one of the top players in the DI pipe industry in India, and commands around 15% market share across India and around 70% in South which it primarily caters to. The company was established in 1991. Its plant is located at Rachagunneri, Srikalahasthi, Chittoor District, Andhra Pradesh near Tirupati and its key products include DI Pipes, Pig Iron, Coke & and Cement. DI is its main revenue generator, which contributes around 86% of the revenue. Srikalahasthi Pipes has a capacity of 3,00,000 MT. The company majorly supplies DI pipes to different Water Boards, Municipal corporations and turnkey contractors across the country for their water infrastructure Projects. Srikalahasthi Pipes has many competitive advantages over its peers e.g. 14.5 MW captive power plant, its own railway sliding, long-term leased limestone mines, Krishnapatnam, Chennai and Ennore Port are within 150 Km, long-term water arrangement with Tirupati Municipal Corporation.

Ductile Iron pipe is preferable to PVC pipe for its tensile strength. Ductile Iron retains the corrosion resistance of cast iron but has more than double the tensile strength. DI pipes are used for transmission of raw and potable water, transmission of domestic and industrial effluents, fire fighting systems, piling ash-slurry handling systems. Srikalahasthi manufactures and markets DI pipes under the brand name “SRIPIPES” and product ranges from 100 mm to 1100 mm.

The main advantage of Ductile Iron pipes are

Higher Tensile Strength – Is strong enough to withstand the most severe conditions, from high-pressure applications, to heavy earth and traffic loads, to unstable soil conditions.

Corrosion Resistant: It is resistant to corrosion in most soils, and typically requires only effective, economical polyethylene encasement in aggressive environments.

Longer Service Life: Projected service life is 70-90 Years.

Flexible and Leak Tight Joints: It has flexible push on joints which do not leak at high or low pressure

From 2009 to 2019, Srikalahasthi Pipe’s revenue increased from 680 crores to 1559 crores at CAGR of around 8.6%. In the same period, EBIDTA  increased from 91 crore to 238 crores at CAGR of 10%. PAT increased from 18 crore to 117 crores at CAGR of 20.5%.

Srikalahasthi has undergone some capacity expansion program in last couple of years.  In 2018-19, it has successfully installed fourth coke oven battery for expansion of Coke oven plant. This apart, the project of installation of additional boiler to facilitate higher power generation has been commissioned successfully in third quarter of the FY 2018-19. In the financial year 2019-20, the first and second furnaces of the ferro alloy project are expected to be commissioned. This project will make the company self-sufficient in meeting the captive requirements of Ferro silicon. In the next financial year, the company has plan to install additional annealing furnace and a new blast furnace of 380 meter cube.

In FY-2018-19, revenue from ductile iron pipe grew by about 6% to 1345 crores from Rs 1284 crores in the last financial year. The EBIDTA and PBT of the company were 187 crores and 160 crores down by 23% and 20% from earlier year. In FY-2018-19, the company had lower realization on execution of old orders on firm prices. Over and above, the profitability of the company was affected mainly on account of higher raw material cost especially coking coal, Iron ore and depreciation of rupee against dollar.

In the financial year 2018, the company raised 250 crores from the market through Qualified Institutional Placement in order to fund the organic and inorganic growth of the company, repayment of long term and short term debt, and meeting working capital requirements.  

Similar to the Bhagiratha water grid project of Telangana during 2016-17, the Government of Andhra Pradesh has started implementation of Jaldhara Water Grid project to provide potable water in the state. However, the implementation of Amravati project is in doubt. Srikalahasthi Pipes will be benefitted from all the water supply projects in Andhra Pradesh. Swatch Bharat Mission and implementation of irrigation project will generate higher demands of DI pipe in all states. Interlinking river projects is Government of India’s proposal to link 37 rivers through 30 links, dozens of large dams and thousand miles of canals. When this project is implemented, the DI pipe will see huge demand. As per Tata Metaliks estimate, the overall demand for DI pipe continues to be robust and is likely to have an expected annual growth rate of 10-12% over the next few years.

The balance sheet of Srikalahasthi is quite robust. Its debt equity ratio is around 0.33 and Interest Coverage Ratio 4.53 after the first half of the financial year 2019-20. Going forward, we believe that the new order will bring better realization for the company. Improved operational efficiency will add up to the margin. The demand for ductile iron pipe is going to be robust in the coming years. Currently the stock is trading at 156.15, which is at a PE of 5.5. Thus the valuation is much below its historical valuation. We believe that going forward the company will attract better valuation on back of higher demand and improved operating performance. We set a price target of Rs 246 in the next 12 months.

BSE Code : 513605

NSE Code : SRIPIPES

Written by Research Analyst (SEBI Registered) Suvendu Manna

Disclaimer : The research analyst has position in the stock as on the date of writing this article.

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