Equity Research: Venus Pipes & Tubes Ltd.

Strong sectoral tailwind along with improved profitability, net debt to EBITDA and improving CAGR makes Venus pipes looks attractive.

Venus Pipes & Tubes Ltd (VENUSPIP IN), incorporated in 2015, is a manufacturer and exporter of stainless steel (SS) welded and seamless pipes. It is headquartered at Gandhidham, Gujarat, with ~12,000tpa SS pipe manufacturing plant at Daheti (Kutch), Gujarat. The plant is strategically located which is in close proximity of 50-70km to Mundra and Kandla Ports. The products offered cater to diverse industries like Engineering, Chemicals, Pharmaceuticals, etc. The company is on expansion spree to become 2nd largest player in India by FY24E. The significant increase of ~2.8x in capacity, backward integration into hollow pipes for SS seamless pipe manufacturing and expanding offerings to higher diameter pipes will lead to blended margin expansion of 400-450bps and enable to generate 46% EBITDA CAGR over FY22-25E. 

Venus Pipes is set to expand its capacity to 33.6ktpa, expected commission by Q1FY24E end. The capital outlay required for expansion project is ~Rs1.6bn funded largely through IPO proceeds. Future growth will be fueled from both volume expansion at 32% CAGR over FY22-25E as well as cost savings on account of backward integration as it is setting up 9.6ktpa piercing plant for seamless pipes which can help in saving Rs25-35k/t (at full capacity utilization can save ~Rs240-335mn). The addressable domestic SS pipe market is ~305kt – out of 1.1mt, which are primarily used in process industries. The niche market is distributed between few producers. Ratnamani Metals & Tubes Ltd with 48ktpa capacity is the market leader (~16% market share) followed by Jindal Saw with 30ktpa capacity (~10% market share). Notably, imports from major global players like Vallourec, Centravis, Sandvik, Tubacex, etc. and unorganised sector with 80ktpa capacity scattered between small players together hold lion’s share of 46% in overall market. As of 2023, the global SS pipe and tube industry was estimated at USD36.4bn. The market size is expected to increase at 4% CAGR over FY22-25E to >USD40bn. India is major producer and consumer of SS pipes; it imports ~60ktpa, largely from China (54% share as on CY2021). On May 01, 2021, China revoked VAT rebates (13%) to encourage producers to supply more in domestic market. Besides, given the ongoing Russia Ukraine conflict, the SS pipes supply disruption is aggravated in global market. This move will benefit domestic producers to target import substitution and gain share in export markets.

Industry Research:

Manufacturing is emerging as an integral pillar in the country’s economic growth, thanks to the performance of key sectors like automotive, engineering, chemicals, pharmaceuticals, and consumer durables. The Indian manufacturing industry generated 16-17% of India’s GDP pre-pandemic and is projected to be one of the fastest growing sectors. The machine tool industry was literally the nuts and bolts of the manufacturing industry in India. Today, technology has stimulated innovation with digital transformation a key aspect in gaining an edge in this highly competitive market. Technology has today encouraged creativity, with digital transformation being a critical element in gaining an advantage in this increasingly competitive industry. The Indian manufacturing sector is steadily moving toward more automated and process-driven manufacturing, which is projected to improve efficiency and enhance productivity. India has the capacity to export goods worth US$ 1 trillion by 2030 and is on the road to becoming a major global manufacturing hub. With 17% of the nation’s GDP and over 27.3 million workers, the manufacturing sector plays a significant role in the Indian economy. Through the implementation of different programmes and policies, the Indian government hopes to have 25% of the economy’s output come from manufacturing by 2025. India now has the physical and digital infrastructure to raise the share of the manufacturing sector in the economy and make a realistic bid to be an important player in global supply chains.

A globally competitive manufacturing sector is India's greatest potential to drive economic growth and job creation this decade. Due to factors like power growth, long-term employment prospects, and skill routes for millions of people, India has a significant potential to engage in international markets. Several factors contribute to their potential. First off, these value chains are well positioned to benefit from India's advantages in terms of raw materials, industrial expertise, and entrepreneurship. Second, they can take advantage of four market opportunities: expanding exports, localising imports, internal demand, and contract manufacturing. With digital transformation being a crucial component in achieving an advantage in this fiercely competitive industry, technology has today sparked creativity. Manufacturing sector in India is gradually shifting to a more automated and process driven manufacturing which is expected to increase the efficiency and boost production of the manufacturing industry. India is gradually progressing on the road to Industry 4.0 through the Government of India’s initiatives like the National Manufacturing Policy which aims to increase the share of manufacturing in GDP to 25 percent by 2025 and the PLI scheme for manufacturing which was launched in 2022 to develop the core manufacturing sector at par with global manufacturing standards.

India is planning to offer incentives of up to Rs. 18,000 crore (US$ 2.2 billion) to spur local manufacturing in six new sectors. Manufacturing exports have registered highest ever annual exports of US$ 447.46 billion with 6.03% growth during FY23 surpassing the previous year (FY22) record exports of US$ 422 billion. By 2030, Indian middle class is expected to have the second-largest share in global consumption at 17%. India’s gross value added (GVA) at current prices was estimated at US$ 626.5 billion as per the quarterly estimates of the first quarter of FY22. India has potential to become a global manufacturing hub and by 2030, it can add more than US$ 500 billion annually to the global economy. As per the economic survey reports, estimated employment in manufacturing sector in India was 5.7 crore in 2017-18, 6.12 crore in 2018-19 which was further increased to 6.24 crore in 2019-20. India's display panel market is estimated to grow from ~US$ 7 billion in 2021 to US$ 15 billion in 2025. As per the survey conducted by the Federation of Indian Chambers of Commerce and Industry (FICCI), capacity utilisation in India’s manufacturing sector stood at 72.0% in the second quarter of FY22, indicating significant recovery in the sector.

The manufacturing GVA at current prices was estimated at US$ 110.48 billion in the first quarter of FY24. India is an attractive hub for foreign investments in the manufacturing sector. Several mobile phone, luxury and automobile brands, among others, have set up or are looking to establish their manufacturing bases in the country. The manufacturing sector of India has the potential to reach US$ 1 trillion by 2025. The implementation of the Goods and Services Tax (GST) will make India a common market with a GDP of US$ 3.4 trillion along with a population of 1.48 billion people, which will be a big draw for investors. The Indian Cellular and Electronics Association (ICEA) predicts that India has the potential to scale up its cumulative laptop and tablet manufacturing capacity to US$ 100 billion by 2025 through policy interventions. One of the initiatives by the Government of India's Ministry for Heavy Industries & Public Enterprises is SAMARTH Udyog Bharat 4.0, or SAMARTH Advanced Manufacturing and Rapid Transformation Hubs. This is expected to increase competitiveness of the manufacturing sector in the capital goods market. With impetus on developing industrial corridors and smart cities, the Government aims to ensure holistic development of the nation. The corridors would further assist in integrating, monitoring and developing a conducive environment for the industrial development and will promote advance practices in manufacturing.

Shareholding Pattern:

Investment Rationale:

India is projected to be a refining hub in future. The government plans to expand oil refining capacity from 249mmtpa to ~304mmtpa by 2025 and thereafter to ~450mmtpa by 2030. The sector is expected to receive ~USD2856bn in investment over FY23-25E. Typically, 10% is attributed for SS pipes and tubes, which translates to ~Rs285bn opportunity from this sector. Venus Pipes derives significant revenue (~19% of FY21 sales) from chemical industry. The chemical industry is estimated to be valued at USD178bn in FY22, which is expected to grow at 9% CAGR to USD300bn by 2025. The sector is expected to receive ~USD215bn in investment from major companies over FY23-25E. Typically, 10% of capex is estimated in form of SS pipes and tubes. The pandemic had significant impact on domestic pharmaceutical industry. Understanding the importance of having strong manufacturing capabilities, investments in the sector increased sharply during FY22. The sector is expected to receive ~USD215bn in investment over FY22-25E. Typically, 10% of capex is estimated in form of SS pipes and tubes. Venus Pipes installed capacity is ~12ktpa of which ~8.4ktpa is SS welded pipes and ~3.6ktpa is SS seamless pipes. Currently, it manufactures welded pipes upto 8” inch diameter and seamless pipes upto 4’ inch diameter. The capacity is fully utilised at optimum levels (>90%) but the company has to rely on contractors for higher diameter orders. To manage flexibility between small to large diameter size vis-à-vis small to large quantity, Venus Pipes initiated capacity expansion project at capex cost of ~Rs1.6bn, which is expected to complete by Q1FY24E end. The capex also includes investment in setting piercing line to manufacture hollow pipes, which is the raw material for SS seamless pipes. 

Venus Pipes has been on expansion mode and has recorded 30% sales volume CAGR over FY19-22 to 11,746 tonnes. We expect FY23E volumes to increase marginally as the plant is operating at above 90%, which is optimum level. With new capacity commissioning by Q1FY24E, sales volume is estimated to register 32% CAGR over FY22-25E driven by market share gain from unorganised sector, tapping new geographies and increasing sales in demand sectors like Oil & Gas, Chemicals, Pharmaceuticals, Food Processing, Defence, Power, etc. Venus Pipes , through stringent quality control measures, is able to get critical clients’ approval, which is a pre-requisite for business relationship. In FY22, it has added many marquee clients like Asian Paints, Dalmia Bharat Sugar, Praj Industries, Toyo Engineering, Tata Projects (ISRO Project), MRPL (Subsidiary of ONGC), etc. Venus Pipes, with comprehensive array of products, presents itself as one stop solution to meet every requirement. With higher capacities and product offerings, it can target vast import (~20% market share) substitution opportunity in petrochemicals, aerospace and nuclear plants as well as gain market share from unorganised sector (26% market share). Possible anti- dumping duty on stainless steel pipes can create further opportunity for the company. In order to enhance 100% backward integration of SS seamless pipes, Venus Pipes is setting up 9.6ktpa hollow pipe manufacturing capacity. It will install piercing machinery, which will help in manufacturing of hollow pipes from SS billets, which is raw material for SS seamless pipes. Currently, it buys hollow pipes largely from China. It also plans to set up slitting machine for backend process of cutting steel strips/coils for welded pipes. As part of technological enhancement, it will set up acid regeneration plant to reduce acid usage, which will help to lower down time and enhance productivity.

The SS coils are procured domestically as well as imported from Malaysia and Indonesia, while SS hollow pipes are largely imported from China. There is heightened reduction in availability of hollow pipe from China given necessary BIS certification. Besides, Department of Commerce has initiated anti-dumping investigation concerning imports of SS pipes from China and further clarification is awaited. This could affect the companies that depended on imported hollow pipes. The capacity expansion and backward integration of SS seamless pipes will add new product offerings of varied diameters and better quality due to in-house manufacturing of hollow pipes. Besides, backward integration will enable cost saving of net Rs25,000-35,000/t by switching to SS billets as raw material and significantly increase margins from ~13% to ~23%. The capacity expansion will enhance product offerings up to higher diameter size and backward integration in seamless pipes will aid higher margins and profitability for the company. Venus Pipes is estimated to record 32% CAGR in net sales and 31% CAGR EBITDA over FY22-25E. Post IPO, equity is diluted by 25% leading to lower return ratios from ~38% RoE and ~27% RoCE in FY22 to 23% RoE and 20% RoCE, respectively in FY25E. Company books 80-85% back-to-back inventory of order backlog, hence we expect WC cycle to remain stretched at 130-150 days.

Venus Pipes capacity expansion from 12ktpa to 33.6ktpa will help the company post 32% sales volume CAGR over FY12-25E to 26.8kt. Further, the change in product mix will improve margins. As a result, we estimate revenue CAGR of 32% over FY22-25E to Rs89bn. Venus Pipes focussed on increasing direct and export sales leading from 44% of sales in FY20 to 56% in FY23, while dependence on stockists reduced from 56% in FY20 to ~44% in FY22. It is expected that the direct sales and exports to turn majority of sales mix with 80% and sales to stockists expected to reduce to 20%. Further, in-house manufacturing of high diameter pipes will no longer be required to get done by third party and backward integration into manufacturing of hollow pipes in turn to manufacture seamless pipes will lead to margins expanding by >400bps over FY22-25E. Higher margins of ~17% along with 32% sales volume CAGR will help Venus Pipes to post 46% CAGR over FY22-25E to Rs15.2bn, in our estimate.

Venus Pipes recorded 104% PAT CAGR over FY19-23, driven by higher operating profits. As the company will increase debt to support capex, interest cost is expected to increase in future. Notably, the tax incentives in form of reimbursement of net SGST to boost other income significantly in FY24E and FY25E. Overall, we expect higher capex related expenses while commissioning is expected in Q1FY24, which will lead to ~11% YoY lower profits to Rs283mn in FY23E. Post ramping up, higher operating profit would propel earnings growth at 48% CAGR over FY22-25E to Rs10.3bn. Stainless Steel (SS) is an alloy steel which contains minimum 10.5% chromium. SS pipes are mostly notable for their corrosion resistance, strength and formability. Hence, in highly corrosive and chemical environments, SS pipes form a critical part of the process which carries high failure cost. Therefore, approval from customers is a pre-requisite for this sector and acts as entry barrier in the industry. Venus Pipes, with its capabilities and global accreditations for quality products has emerged to be the leading producer in the industry. It caters to various marquee clientele like EIL, BPCL, BHEL, L&T, ISRO, Tata Projects, etc.

Product Portfolio:

SS Pipes are mainly used in critical applications mandating low failure rate and long life. It is corrosion resistant, high durable and low on maintenance, hence finds no substitute and fits ideal for critical process areas like high pressure, high temperature and prone to corrosion. The key raw material used in SS welded and seamless pipes are SS Coils and SS hollow pipes/billets. Any increase or decrease in raw material prices is passed on to customers.

SS welded pipes: SS welded pipes are produced from SS Coils. The coils are processed into plate which is rolled and welded to form welded pipes. Venus Pipes has installed capacity of ~8.4ktpa (1.2ktpa commissioned in June 2022) and manufactures up to 8” inch diameter.

SS Seamless pipes: SS Seamless pipes are produced from a SS round bar (billet) which is pierced into a hollow pipe. Venus Pipes has ~3,600tpa capacity and manufactures up to 4” inch diameter.

Management Profile:

Financials:

Balancesheet

Profit & Loss

Cash Flow

Valuation & Opinion:

The strong sectoral tailwinds brought improvement in profitability and improved net debt to EBITDA from 3.33x in FY22 to 0.57x in FY25. The company is set to expand capacity by 21.6ktpa and backward integration of 9.6ktpa (capex of Rs1.6bn to be incurred in FY23 and 24E). The company expects to fund this capex largely through IPO proceeds (Rs1.6bn). The working capital days to remain stretched at 130-150 days due to high inventory days of 90- 100 days, which remains a concern for the company. The capacity expansion will enhance product offerings up to higher diameter size and backward integration in seamless pipes will aid higher margins and profitability for the company. Venus Pipes is estimated to record 32% CAGR in net sales and 31% CAGR EBITDA over FY22-25E. Post IPO, equity is diluted by 25% leading to lower return ratios from ~38% RoE and ~27% RoCE in FY22 to 23% RoE and 20% RoCE, respectively in FY25E. Company books 80-85% back-to-back inventory of order backlog, hence we expect WC cycle to remain stretched at 130-150 days, all this makes Company looks attractive at current market price.

Key Risks:

1. Financial Market Risks

Market risk is the risk of loss related to adverse changes in market prices, including interest rate risk. We are exposed to interest rate risk, inflation and credit risk in the normal course of our business.

2. Interest Rate Risk

 Financial results are subject to changes in interest rates, which may affect their debt service obligations and access to funds.

3. Liquidity risk

Liquidity risk is the risk that company will encounter difficulties in meeting the obligations associated with financial liabilities that are settled by delivering cash or another financial asset. Their approach to managing liquidity is to ensure, to the extent possible, that they will have sufficient liquidity to meet liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to reputation.

4. Credit Risk

Company is exposed to credit risk on monies owed to them by their customers. If customers do not pay promptly, or at all, company may have to make provisions for or write-off such amounts.

5. Raw Material Risk

Any shortage in in raw material or increase in the price of raw material will directly affect the profit margin of the company.

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