Srikalahasthi Pipes Research Reports By Religare and Reliance Sec

Reliance Securities’ research report on Srikalahasthi Pipes

SPL is an Andhra Pradesh based integrated manufacturer of Ductile Iron (DI) pipes. Since it is integrated, it enjoys significant competitive advantage, while several cost-optimization measures – including commissioning of Sinter Plant – has led to sustained margin expansion

– Lack of adequate sanitation has been prompting the government to focus on improving water supply and sewerage infrastructure through multiple schemes like JNNURM & Swachh Bharat Mission and “Smart Cities Mission”. Thus we believe that the demand for DI pipes would witness a healthy growth in medium to long-term

– DI pipes – which are widely recognised as the industry standard for modern water and waste water system – find application in water transportation and sewage management

– With ~75% market share in Southern & Western markets augers well for SPL, as the industry enjoys strong entry barriers for being capital intensive having long gestation period”

Religare Capital’s research report on Srikalahasthi Pipes

– The Government’s continued thrust on water supply & sanitation infrastructure is reflected in steady increase in its allocations through related schemes over the years.

The Ministry of Drinking Water & Sanitation has been allocated Rs 200bn for FY18 (up 21% over FY17). The allocation under PMAY increased by 53% to Rs 230bn for FY18.

Further, open defecation free villages have now been given priority for piped water supply. This should boost the demand for DI pipes. With market leadership & steady capacity additions, SPL is well placed to capitalize on the available opportunities.

– SPL commands ~15% market share in DI pipes market across India and ~75% in South & Western Zone, which it primarily caters to. It has a fully backward integrated manufacturing facility which includes a sinter plant, coke oven plant, power plant and sewage treatment facilities, thus giving it a significant cost & competitive advantage.

– Alliance with Electrosteel Castings (ECL) has clearly provided SPL a strategic advantage. The experience and brand image of ECL in Ductile Iron Pipes arena in the domestic and export market has / would continue to help SPL for its DI Pipes business growth. ECL’s technical expertise has been adopted in SPL’s various backward and
forward integration projects, thus providing it competitive edge.

– SPL has recently expanded its DI pipes capacity by 75,000 TPA at its existing facility, which has become operational in Q4FY17. The company has also undertaken upgradation and modification of Blast Furnace. This should enable it meet its future demand requirements for DI pipes. Further, SPL is installing an additional coke oven battery and is enhancing its power plant capacity by 1.5MW, which is expected to go on stream by Q4FY18. This should result in meaningful cost savings.

– Led by capacity expansion and demand revival, SPL’s revenue and PAT are estimated to grow at a CAGR of 15% & 21.4% over FY17-19E with improved volume offtake. While growth in FY17 was subdued, we expect a meaningful revival over the next two years.

Higher input cost could keep the EBITDA margins under pressure in FY18E. However, we expect the same to improve in FY19E, led by better capacity utilization and backward integration initiatives. At CMP of Rs 320, SPL is trading at 6.2x FY19E EPS. The company deserves to trade at better valuations, given its impressive track record of growth, leadership position in DI pipes, bright growth prospects and declining debt-equity. We recommend a BUY on the stock with a target price of Rs 416.