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9th December, 2009

Pipe Sector
PIPESINDUSTRYOVERVIEW Pipesaremanufacturedmainlyfromsteel,concreteandplastic,withsteel pipeshavingthelargestdemandpotentialinthenearfuture.Althoughconcrete pipes are used more in irrigation systems, sanitary sewers and storm drains, plasticpipesfindapplicationsinwatermains,drainage,irrigation,firesprinklers, etc.Steelpipesarepreferredforlongdistancehighpressuretransportationofoil, gasandwater. THEPIPEPIPERS

Keyplayersandareasofoperation
TypesofPipes Seamless HSAW LSAW ERW DI/CI Size RawMaterials IndianPlayers MaharashtraSeamless,IndianSeamlessTubes, JindalSAW JindalSAW,PSL,WelspunGujarat, ManIndustries JindalSAW,WelspunGujarat, ManIndustries MaharashtraSeamless,JindalPipes, WelspunGujarat ElectrosteelCastings,JindalSAW, KesoramIndustries

1/214 Roundsteelbillets 18100 1650 1/220 339 HRCoils SteelPlates HRCoils PigIron&Scrap

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9th December, 2009 GLOBALPIPELINEINVESTMENTLOOKSROBUST US$78BNPOTENTIAL According to the global consultancy, 710 pipeline projects of ~326,000km aretobeconstructedinthenextfiveyears,withprincipaldemandcomingfrom AsiafollowedbyNorthAmerica.TheincreaseddemandinAsiamaybefueled mainlybythegrowingeconomiesofChinaandIndia.Majorusersoflinepipes areregionssuchastheMiddleEast,Russia,theUSandUKandAfrica.Ofthese, theMiddleEast,RussiaandtheUStogetherabsorbmorethanhalfoftheentire globalproductionofweldedsteelpipesandtubes.Theglobalexportmarketof weldedpipesisestimatedtobeclosetoUS$1516bnayear. Globaldemandforpipesinthenextfiveyears
Region Asia NorthAmerica Europe MiddleEast LatinAmerica Africa Australasia Total

Numberofprojects 142 192 101 111 56 49 59 710

Totallength(km) 95,003 73,736 44,784 43,626 35,034 17,452 16,339 325,974

Region Asia NorthAmerica Europe MiddleEast LatinAmerica Africa Australasia Total

Global market potential US$78bn in five years, US$16bn market opportunity forIndianplayers Totallength Requiredtonnage TotalValue AddressableMarketfor EstMarketOpportunity
(km) 95,003 73,736 44,784 43,626 35,034 17,452 16,339 325,974 (mtonnes) 19 15 9 8.7 7 3.5 3.3 65 (US$bn) 23 18 11 10 8 4 4 78 IndianPlayers(%) 40 8 2 40 2 15 5 20 (US$bn) 9.1 1.4 0.2 4.2 0.2 0.6 0.2 16

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9th December, 2009 DOMESTICDEMANDGAINING MOMENTUM India is expected to have a spurt in the construction of pipeline infrastructurebecausethecountrysdomesticgasavailabilityispoisedtoincrease twofoldoverthenextfouryears.Inaddition,mostoftheexploratoryblocksthat havebeenofferedundervariousroundsoftheNewExplorationLicensingPolicy (NELP)willenterthedrillingphaseoverthenextfewyears. Indiasenergyrequirementtoberobustforthenext25years According to the EIA, energy demand grew by 3.5% pa in 19992005, whichweexpecttoincreaseto3.7%paduring200515andtoslowslightlytoa 3.5%CAGRfor201530.By2030,Indiatobethethirdlargestenergyconsumerin theworld,afterChinaandtheUS(itcurrentlyranksfourth).Also,Indiasenergy demand is expected to surpass the energy demand of the entire OECD Pacific region(whichcurrentlyequals60%). ShareofgasinIndiasenergybasketwillrise

Gasdemandexpectedtogrowat4.8%CAGR

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9th December, 2009 Gastransmissioninfrastructurepoisedtotriple Transportationinfrastructurehasbeenamajorbarriertothedevelopment of a full natural gas market in India. The planned investments and ongoing projects in the next few years should promote significant expansion of the transportationinfrastructureatlocal,intrastateandinterstatelevels,withthe eventualdevelopmentofanationalgrid. Pipelinelengthtotriplefrom5,826kmto13,685kminthe11thfiveyearplan o The current gas grid for gas transmission is not adequate to meet future naturalgassupply.Hence,thegovernmenthasmadethedevelopmentof pipelineinfrastructureatoppriority. o Companies such as GAIL, Reliance Group and GSPL have planned huge capitalexpenditurestoestablishgastransmissioninfrastructure. o Thegrowthofpipelineinfrastructuretobesynchronisedwithsupplyand demandtimelines. Developmentplansfortransmissioninfrastructure
GAIL DahejUranPuneDabholPL DadriBawanaNangalPL ChainsaGurgaonJhajjharHisarPL JagdishpurHaldiaPL DabholBangalorePL KochiKanjirkkodMangalore/BangalorePL DahejVijaipurIIPL VijaipurDadriPL VijaipurAuraiyaJagdishpurPL GSPL RajkotJamnagarVadinarPL BhadbhutGanaHadalaPL DarodPipavavPL MorbiMundraPL PadmlaGodhraPL MehsanaPalanpurPL Reliance KakinadaHyderabadUranBharuchAhmedabadPL KakinadaKolkataPL KakinadaChennaiTuticorinPL IOCL DadriPanipatPL 114km 2062km 1150km 580km 110km 190km 215km 182km 60km 70km 693km 610km 310km 876km 730km 820km 610km 505km 571km

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9th December, 2009 Waterrelateddemandwillcontinue Water and irrigation offers a very strong business opportunity for Indian pipe manufacturers, in addition to the opportunity from the energy sector. A combination of greater government focus on irrigation, higher multilateral lending for waterrelated sectors and enhanced private sector participation in water supply projects increase the potential for a rise in demand from this segment. The 11thplan envisages ~US$83bn of investmentsinirrigationand water supplyandsanitationoverFY0812.

Watersupply,sewageanddrainageprojectsaccountfor76%ofallproject approvals. The mass rapid transport system (MRTS) and roads follow with contributionsof10%and7%,respectively.Thetopsixsectorsaccountfor97%of alltheapprovedprojects.
Sectorprojectapprovals76%hasbeenforwaterrelatedsegments Sectors WaterSupply Sewerage Drainage Massrapidtransportsystem Roads/Flyovers Solidwastemanagement Urbanrenewal Otherurbantransport Developmentofheritageareas Preservationofwaterbodies Parking TOTAL No.ofprojects Approvals(Rsbn) 140 99 59 19 75 40 9 13 2 4 1 461 183.24 123.38 70.66 47.7 33.82 21.86 4.46 6.86 0.49 1.17 0.56 494.2 %ofapprovals 37% 25% 14% 10% 7% 4% 1% 1% 0% 0% 0% 100%

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9th December, 2009 DEMANDOUTLOOKSTRONGFORWELDED,SLUGGISHFORSEAMLESS Demandforweldedpipesremainsresilient Demand for SAW pipes remains strong given the continued need to connectnewareasofoilandgassuppliestoareasofnetdemand.Webelievethe demandforoilandgastransmissionpipelinesismoreoftendrivenbystructural factors like government policies, a need for infrastructure development to meet longtermdemand,geopoliticsandashifttocleanerfuels(gas)thanbyshortto mediumtermdemandfluctuations. DespitetheeconomicslowdownintheUnitedStates,expendituresonoil andgaspipelinesareactuallyexpectedtoincreasein2009.AccordingtotheOil& GasJournal,investmentincrudeandproductpipelinesisexpectedtoincreaseby 17% YoY and investments in natural gas pipelines are expected to increase by 64%in2009. Seamlesspipedemandrecoverytoremainsluggish Seamless pipe demand is very highly correlated with crude oil prices, which,inturn,dependontheglobaleconomicoutlook.Althoughtherehasbeen some increase in global drilling activities recently, the increase in activities remainsverylowgivenasignificantdeclineduringthepast12months. Demand in the domestic seamless pipe market is improving slowly, especially from local customers. Domestic mills prices of seamless pipes have increased by Rs. 2,0003,000/mt ($4065/mt) over the past months. Export quotations have risen by $50/mt over the same period. For last few months exports have been sluggish; however, there are now signs that a revival has startedintheinternationalmarkets. ORDERBOOKSLOOKROBUST Indian pipe makers have orders going up to 912 months on their books. ManIndustriescarriesaRs2,500croreorderbook.Besidestheorderbook,pipe companiesalsocarryalargerbid(thatcanbeconvertedintoorders)book.Man IndustriesMantrisaystheirbidbookisworthRs4,500crore,about25percentof whichislikelytobeconvertedintofirmorders.JindalSAWsorderbooktotalsRs 3,360crorewhileitsbidbookisclosetoRs4,800crore.Theconversionrateofits bid book is about 60 per cent. Welspun Gujarats order book is about Rs 6,800 crore. However, the size of the order books of both Jindal and Man, like many others,isfarsmallerthanwhattheyusedtobe.Indianpipelinemanufacturersare benefiting from largescale US gas pipeline expansion. More than 70,000km of pipelineisduetobechangedintheUSby2014becausethesearemorethan3540 years old. For the US, Indian manufacturers can offer lowcost quality options. Latin America also needs a replacement for 34,000km and Europe needs replacementof46,000kmofpipeline. www.ghallabhansali.com 6

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9th December, 2009 CLIENTACCREDITATION NOTAMAJORHURDLEANYMORE Given that oil and gas transportation is hazardous, there are stringent quality norms set by global oil majors for pipe manufacturers. Therefore, for Indian pipe manufacturers to become suppliers to international/local oil majors, they must obtain accreditation from these companies. For the Indian pipe manufacturers, the process of getting accreditation requires approvals not only for the quality of the final pipes, but also for the plant facilities. This generally takes three or four years, thereby creating a major entry barrier for new pipe manufacturers. Obtainingaccreditationisatimeconsumingprocessbutthingsarechanging now
Approval of raw material vendor Approval of pipe l Approval of product Approval of coating for pipes

3-4 years , but now reducing to less than 2 years CAPACITYUTILISATIONRANGESBETWEEN4060% In a pipe mill, pipe production per hour increases gradually as production increases, and it generally takes a couple of years for a pipe mill to achieve optimumlevelsofproduction.Also,sincealargeportionofcurrentcapacitieshas beenaddedinthepast23years,Indianpipemanufacturersareslowlyreaching theiroptimisationlevels.

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9th December, 2009 INDUSTRYRISKS o Fallincrudeprices o Shortageofsteelplates/coils o Sharpincreaseinfreightcosts o Sharpunexpectedincreaseinthecostofsteelplates/coils o Increasedcompetition CONCLUSION TheIndianPipeIndustryisamongthetopthreemanufacturinghubsafter Japan and Europe. However, the penetration level of pipelines in oil & gas transportation is low at 32% in India as compared to 59% in USA and 79% globally.Thelowpenetrationlevelsrepresentthehugescopeforgrowthforthe pipeindustry. The positivetrendin theIndian pipeindustryto continuein the next35 yearsonthebackofhighoilandgasdiscoveriesworldwide,increasedeffortsby theGovernmentofIndia(GoI)oninfrastructuredevelopmentforlayingpipelines for oil & gas transport, replacement demand from US and European countries, water&sewagetransportandirrigationfacilities. The pipe producers offer strong revenues and earnings visibility despite uncertaintyincommodityprices.Thestrongorderbookpositionsofthewelded pipeproducerscanprovidecomfortatthetopline. COMPANYPROSPECTS 1. WelspunGujaratStahlRohrenLimited: WelspunGujaratStahlRohrenLimited(WGSRL)ispartofthe$1.5billion Welspun Group and a manufacturing hub for stateoftheart pipe and related nicheproducts.Thecompanymanufactureslongitudinalsubmergedarcwelded pipes(LSAW),helicalsubmergedarcweldedpipes(HSAW)andelectricresistant weldedpipes(ERW).Italsoofferscompletecoating,aswellasbendingsolutions. WGSisoneofthelargestSAWpipecompaniesintheworld. Ithasacombinedannualcapacityof1.5milliontonne,outofwhich60%is accounted for by HSAW pipes. Its manufacturing facilities are located on the western coast (mainly in Gujarat) and this helps it to reduce freight cost while exporting pipes to the West Asia market. It also has a HSAW manufacturing facility, with a capacity of 0.35 million tonne in the US, catering mainly to the American market. It has a 1.5 million tonne manufacturing facility for plates & coils,bothofwhichareusedasrawmaterialsinpipemaking. www.ghallabhansali.com 8

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9th December, 2009 2.JindalSAW: JindalSAWLimited(JSL)(erstwhileSAWPipesLtd)isapartoftheJindal Group and one of the countrys largest producers of Submerged Arc Welded (SAW)pipes,whichiswidelyusedintheenergysectorforthetransportationof oilandgas.TheorderbookpositionofJindalSawstoodataboutUS$700million. The orders are slated to be executed by end March 2010. The company has participatedinvariousbidsandexpectstofetchsomeordersinnearfuture.The currentorderbookincludesexportordersofabout40%. 3.PSLLtd. PSL is the largest helical submerged arc welding (HSAW) pipemaker in the country and commands an over 50% share of the market with a capacity of about1.5milliontonnes.Thecompanyalsooffersarangeofcoatingservicesthat areusedtoincreasecorrosionresistancecapacityofpipes.Ithas13pipemills,a majorityofwhicharespreadstrategicallyacrosseasternandwesterncoasts.The welldistributedmanufacturingfacilitiesgiveitanedgeoveritscompetitorswith lowerfreightcostandabilitytoserviceoverseasmarkets. 4.Manindustries Man Industries, a part of the UKbased MAN group, should now start seeing meaningful contribution from the 400,000tpa HSAW capacity added over the pasttwoyears.Thecompanyhasputonholditsplanned300,000tpaHSAWmill intheUS.Currently,around55%oftotalsalescomefromexports.Thecompany is also focussing on the growing domestic market given the huge demand potentialonthebackofatreblingofgassupplies.ItsAnjarfacilityislocatedclose to the Mundra and Kandla ports enhancing export competitiveness. MAN currently has orders worth Rs 2,500 crore to be executed in the next 1215 months,mostlyforexport. 5.MaharashtraSeamlessLimited MaharashtraSeamlessLimitedmanufacturesseamlesspipesandtubesprimarily in India. Its products include hot finished pipes and tubes, cold pilgered/cold drawntubes,APIoilcountrytubulargoodsrange,andlinepipes.Thecompanys pipes and tubes are used in the oil and gas, hydrocarbon, boilers and heat exchangers, automotive, and bearing and general engineering industries. It also produces electric resistance welded (ERW) pipes comprising gas and sewage lines; steam, water, gas, and air line ERW pipes; and ERW casing pipes. The companysERWpipesareusedforapplicationsinthefieldsofnaturalgasoroil, diesel,drinkingwater,andsewage/watertreatments.Inaddition,itgeneratesand sellselectricitythroughawindpowerproject.MaharashtraSeamlessLimitedwas incorporatedin1988. www.ghallabhansali.com 9

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9th December, 2009 MaheshBabaria maheshb@ghallabhansali.com MittalChheda mittald@ghallabhansali.com Disclaimer:
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