The annual rise and fall of railway stocks

As in each year, the share prices of companies whose business is related to the railways have started moving up, ahead of the latter's budget, to be presented on February 24.

The share prices of Kalindee Rail Nirman Engineers, Simplex Casting, Kernex Microsystems, Titagarh Wagons, Texmaco, Stone India and Hind Rectifiers witnessed a sharp rise of between five to 20 per cent in today's trading. Those of public sector companies like Container Corporation, BEML and Bharat Heavy Electricals witnessed modest gains: these, too, make products for the railways.

GATHERING STEAM SHARE PRICE ON BSE IN RS
Company	Price	% Rise
Hind Rectifiers	70.00	20.00
Titagarh Wagon	463.50	16.19
Texmaco	162.55	12.70
Stone India	71.90	10.00
Simplex Casting	88.05	9.20
Kalindee Rail	208.00	5.00
Kernex Micro	181.15	5.00
Price rise over Feb 10

"Over the past few years, there have been no negative surprises in the Railway Budget and expectations are high. Prior to the Budget, these stocks are safe bets, as only these companies get all the railway-related orders for whatever initiatives are announced in the Budget," said equity advisor S P Tulsian.

He said these stocks generally witness a sharp run-up ahead of the Budget and fall significantly after the announcements.

There was an up move of five to 28 per cent in these stocks in three trading sessions after June 20 last year, before minister Mamata Banarjee was to present her first budget on July 3, following the victory of the United Progressive Alliance in Parliament elections. The stocks cooled off significantly after the budget.

Kalindee Rail, involved in installation of signalling and telecommunication projects and execution of gauge conversion, gained nearly 30 per cent in 10 trading sessions and was trading at over Rs 500 a share, before then railway minister Lalu Prasad was to present the Budget in 2008. The stock, however, slipped to around Rs 350 within the next few days, post-Budget.

In 2008, Kernex Micro, involved in monopoly business of train anti-collusion dividers, gained around 45 per cent in 10 trading sessions from a level of Rs 160 to Rs 230. In the 10 trading sessions, post-budget, the stock slipped back to around Rs 155.

Prior to the 2007 Railway Budget, Kernex Micro had gained 17 per cent in the five trading sessions from Rs 145, and post-Budget, the stock was back to the same level. In 2007, Kalindee Rail had gained 23 per cent in 10 trading sessions from Rs 160 prior to the Budget announcements. The stock was again traded at around Rs 160 in the next three trading sessions. A similar pattern was witnessed in 2006 as well and stocks which had gained significantly prior to the Budget fell sharply.

Tulsian said the government had said it would spend Rs 3,500 crore on anti-train collision devices. But, a majority of the money is still unused and Kernex Microsystems is the only listed company in the country involved in this business. The cost rises over three-fold if these devices are imported.

Usage of Pipes in Drilling

Source: Edelweiss Research

Pipes - continued

SAW pipes - are pirmarily used in transportation
They are of two types

1. Longitudnal SAW (LSAW) - manufactured from steel plates - dia 16'' OD to 56'' OD
   
2. Helical SAW (HSAW) - manufactured from hot rolled coil - dia 20''OD to 108''OD
   

Price of LSAW > Price of HSAW as Steel plates > Hot rolle coil
The difference between the prices of steel plates and hot rolled coils can be in the range of $250-300
HSAW have double the length as  compared to LSAW of 12m

The pipes are used fro structural and piling applications.

Manufacturing process
LSAW: Both UOE and JCO process (J-ing, C-ing, O-ing)

Ductile Iron pipes
- used in water and sewage transportation
- dia of pipes varies from 80mm to 1000mm with length of 5.5m to 6m

Indian pipe sector is teh third largest after Japan and Europe
The oil and gas penetration level in india is 32% as compared to 59% in te USA and 79% globally
Demand triggers
- Higher exports markets due to promitity to middle east
- Lower cost of production by Indian pipe producers

There are differnet types of coatings that can be applied on a pipe
-Polyethylene
Fusion bond epoxy
Coal tar enamel
Concrete weight coating
Internal coating

Pipes - cutomers, suppliers

Major players in the seamless Industry

1. Domestic
1. Maharashtra seamless
2. Indian seamless metals
3. Jindal Saw
   
2. International
1. Tenaris
2. Vallourec
3. TMK
4. Tinajin pipe corporation
5. Sumitomo
   
6. Kawasaki steel corporation

Consumes of pipes

1. Oil and gas sector
   
1. ONGC, OIL,GAIl etc
   
2. Automotive sector
1. Bajaj, M&M, LML, Telco
   
3. Hydrocarbon and refineries
1. IOCL,BPCL,HPCL,MRPL
   
4. Bearing industry
1. FAG, NEI
   
5. Boiler and heat exchangers
1. ABB,BHEL, Mitsui Babcock, Thermax, Cethar vessels, Paharpur cooling towers
   
6. Hydraulic cylinder
1. UT ltd, Salzgitter hydraulic
   
7. Indian railways

SAW pipes and ERW pipes are interchangable but SAW pipes have a higher diamater as compared to ERW pipes. ERW can be manufactured upto 24'' but SAW upto 100'' OD and are used for transportation of large amount of liquids. ERW are welded only longitudnally while saw pipes can be welded both longitudnally and spiral welded.

To manufacture seamless pipes in india the technology used are as follows

1. CPE technology - upto 7''OD
2. Plug mill technology - from 7'' OD to 14'' OD
3. High frequency induction welding for ERW pipes upto 21''OD
   

Billets are procured from

1. JSPL, JSW, Kalyani steel

HR Coils are procured from

1. SAIL, Essar, Ispat, JSW
   

Oil Country Tubular goods

Oil country tubular  goods includes three types of seamless pipes

1. Drill pipe - heavy seamless tubes that rotate the drill bit and circulate the drilling fluid.
2. Casing pipe - is used to line the hole.
3. Tubing -a pipe through which the oil or gas is produced from the wellbore

1 km = 250tonnes
1 km = 3281 feet
5 million km of pipeline to be replaced in USA.
out of which 85000km in the next year

Demand for pipes depends on

1. No of oil wells being drilled, reworked and completed
2. Depth and drilling conditions of the wells
3. level of E&P and production activities
4. Level of spending by E&P companies
   

Demand for steel pipes in india

The demand for steel pipes can be of two pipes one is the seamless pipes and the other is the Submerged arc welded pipes. The seamless pipes are generally made out of carving a cylinder and using a lathe to create a hollow. They are used for high pressure applications while the SAW pipes are used to manufacture the transport pipelines as they donot require high pressure operation. Moreover the demand for pipes generaly stems majorly from oil and gas exploration and drilling related activites. Once a successful well is found the requirement is that of SAW pipes to transport the oil found to the mainland and moreover as more and more blocks found are offshore the pipeline infrastructure required is huge. The number of rigs operational is an indicator of the requirement of pipes as more rigs means more pipes required.  Oil country tubular goods segment is the major consumer of pipes in India.

The NELP is also a major source to find out how many blocks has been awarded. Since NELP generally operates with a lag of 2-3 years the Projects awarded in NELP now do not have a material impact on the order book of the companies. Moreover in NELP VIII the enthusiasm has not been very much from the players and out of the 70 blocks on auction only 35 blocks have been awarded so far.

Seamless pipes are also used in refinery operations. For internal transfer of fluids and distillates within the plant we donot require seams to be present in the pipes and hence seameless pipes form the bulk of operation there. According to the working group on petroleum and natural gas pipes in india the expected capacity was to grwot at a CAGR of 10% to around 240mtpa but we can assme that the capacity will reach only 224mtpa by 2012.

For irrigation infrastructure build up we require huge amounts of spending on the same. The pipes used here are ERW pipes. This is the major driver for Consumption of these kind of pipes.

Seamless pipes are also used in boilers of thermal power plants to a large extent and any demand pickup here would lead to a consequent demand pick up. It is expected that 50000MW of capacity addition would take place over the next 3 years which would result in huge demand generation of pipes in these sector for the boilers.
50000MW= 2,00,000cr. Out of this 40% goes in BTG and the rest in BoP and civil works. Out of this the boiler segment comprises 50% which translates into 40,000cr opportunity space.

Manufacturing process
Steel billets/HRC form form 98% of the Raw material cost and 75% of the production cost.
A fully integrated player benefits as it is not dependent on the vagaries of price volatility but companies like Maharashtra seamless are dependent on the price of steel which fluctuates and hence their margins. ERW pipes are generally pass through contracts but seamless pipes are not and are fixed rate contracts. A  gap of 2-3 months between procurement of raw matearial and supply to the end customer.

Chinese seamless pipes are an opportunity for Indian players. The USA banned the dumping of chinese pipes in US by imposing an antidumping duty of 10.9% to 30% on these pipes and similarly EU also followed with 24% duty. With teh US inventory going down there can be significant order inflows from US to Indian players.

Drilling segment requires pipes of 6 inches.
EBITDA margin per ton of Rs. 18000 for seamless pipes and for ERW at 2000-5000


Market share of various players in India
Jindal Saw - 10%
Maharashtra seamless - 50%
Imports - 15%
ISMT - 25%

Maharashtra seamless
The company plants are located close to ports of Nava sheva in mumbai raigarh. It alos allows for easy import of steel billets. Also the company has acquired foreign assets at distress prices and imported them in India. It did a similar thing with a 50,000mtpa coating plant facility and is in the process of doing a similar thing for at Rs 325cr.

Types of Pipes
The steel pipe sector can be divided into various categories according to their manufacturing process. The major types of pipes
are – Longitudinal Submerged Arc Welded (LSAW), Helical Submerged Arc Welded (HSAW), Seamless pipe, Electric Resistant
welded (ERW) pipes and Ductile pipes. ERW and DI pipes are also used to transport water but of late SAW pipes are fast replacing them due to their distinct advantages.

Financial strength

Defining Financial Strength

"A strong financial position is something that is measured not so much by the presence of assets as by the absence of significant encumbrances."

Source: http://www.sanjaybakshi.net/Sanjay_Bakshi/Articles_files/Learning_To_Look_Down_Before_Looking_Up.HTM