Srikalahasthi Pipes Limited- SPL (formerly Lanco Industries Limited) is one of the leading manufacturers of ductile iron pipes (DI Pipes) in India. SPL also offers superior quality foundry grade pig iron, cement and low ash metallurgical coke. SPL is an associate company of Electrosteel Castings Limited (ECL), which is a pioneer in production of DI pipes in India and five decade old water infrastructure company, providing techno-economic solutions for water supply and sewerage system. ECL group is India’s largest and one of the few manufacturers in the world to make DI pipes, DI fittings and CI pipes, having its facilities in Khardah & Haldia in West Bengal, Elavur in Tamil Nadu and Srikalahasthi Pipes Limited In Andhra Pradesh. Lanco Industries (LIL) was incorporated on November 1, 1991 by Lanco Group of Companies to manufacture Pig iron using Korf (German) Technology and cement. The unit is located at Rachagunneri Village on Tirupati- Srikalahasthi road which is about 30 kms from Tirupati and 10 kms from srikalahasthi. The installed capacity of Pig Iron was 90,000 TPA and with similar capacity 90,000 TPA for cement. The operation of the cement unit was suspended for various reasons and the unit was reengineered for producing a different product mix having potential in South India. As a measure of forward integration project for adding value to the pig Iron manufactured by the company, LIL floated another company named Lanco Kalahasthi Castings Limited (LKCL) on March 4, 1997 to manufacture iron castings and spun pipes in the same campus of the company with annual capacity of 40,000 TPA and 35,700 TPA respectively. Accordingly, LIL had an arrangement with LKCL for supply of molten and pig iron to LKCL, being a value added product, as such iron pipes manufactured by LKCL offered better returns. At a time when the company was exploring financial and technical strategic alliance with Indian/Foreign partner, Electrosteel Castings Limited was looking for additional capacities for production spun pipes. Considering the synergies involved, Lanco Industries Limited entered into a Strategic alliance partnership during December 2002, with Electrosteel Castings Limited (ECL), Kolkata a leading manufacturer of CI pipes and DI pipes. This was win-win situation for both LIL and ECL. After takeover, a financial re-engineering and re-structuring of LIL was undertaken by ECL. The 3,00,000 TPA Ductile Pipe Plant of SPL is integrated with the 2,75,000 TPA Mini Blast Furnace, 2,25,000 TPA Coke Oven Plant, 12 MW captive power plant, 99,000 TPA Cement Plant, 5,00,000 TPA sinter plant and 5 MLD sewage Water Treatment Plant. The Blast furnace gas from the Mini Blast furnace casters to various energy requirements, thereby reducing HSD/LDO consumption significantly. Apart from this, SPL has a DI Flanged Pipe Unit, with a production capacity of 3,600 TPA. SPL has built three batteries with a production of 2,25,000 TPA Coke of Blast Furnace & Foundry grade. The Plant’s coal requirement are mainly met from Australian mines. SPL’s captive power plant is based on waste heat recovery from Coke Oven Plant and no other fuel is used in generation of 12 MW power. All the power generated from this plant is being used for captive consumption. SPL has Tata Korf Mini blast furnace (MBF) with a capacity of 2,75,000 TPA liquid metal equipped with Hot Blast Stoves, sinter plant and pulverized coal injection. In the manufacturing process of MBF, generation of slag which is around 30 to 35% is utilized for producing slag cement in the mini cement plant and the surplus slag is sold in the market. Cement is sold under brand name SPL GOLD. SPL has setup a 33 sq.m sinter plant which has rated capacity of 1400 MT/Day. The plant has been set up with the objective of reusing BF Gas & Limestone lines from MBF, coke fines from COP, using limestone from own mines and iron ore fines in place of costlier calibrated ore. Around 35% of the Mini Cement plant’s production is utilized internally for cement mortar lining of DI pipes in DI plant and own civil construction. SPL has its own electrified railway siding to accommodate two full rakes at a time. The siding is being utilized for bringing iron ore from Hospet, coal from Chennai/Krishnapatnam ports and for Dispatch of pig iron to Punjab and occasional dispatch of cement through railway wagons. SPL has taken a plot on lease basis at the Krishnapatnam Port to accommodate coal imported from Australia. SPL has long term agreement with Tirupathi Municipal Corporation for the supply of sewerage water for 25 years, supported by appropriate GO of AP government. SPL has own three limestone mines in Tippalur, T.V. Palle and Kazipet in Kadapa dist. The Limestone from these mines is consumed in the Mini Cement Plant as well as the mini blast furnace. The company’s DI pipes are supplied to various Water Boards, Municipal Corporations, Irrigation Departments, Railways and trunkey contractors across the country for their water Infrastructure Projects which are the thrust area of the government of India. The company operates predominantly in single reportable segment that is Ductile iron pipes. The company’s production of DI pipes increased to 2,98,514 MT in 2018-19 from 2,25,465 MT in 2015-16. The company’s sales of DI pipes increased to 2,90,873 MT in 2018-19 from 2,75,484 MT in 2017-18. The production of Pig iron increased to 2,88,215 MT in 2018-19 from 2,59,120 in 2015-16. The company’s sales of pig iron increased to 2,87,915 in 2018-19 from 2,76,891 in 2017-18. The production of Lam coke increased to 1,79,586 MT in 2018-19 from 1,55,504 MT in 2015-16. The company’s sales of Lam coke have decreased to 1,68,105 MT in 2018-19 from 1,77,355 in 2017-18. The production of cement has increased to 93,699 MT in 2017-18 from 87,359 MT in 2015-16. But in 2018-19 the production of cement decreased to 77,394 MT from 93,699 MT in 2017-18. The sales of company’s cement have decreased to 76,496 MT in 2018-19 from 96,634 MT in 2017-18. SPL has a manufacturing capacity of 2,25,000 TPA DI pipes. SPL manufactures and markets DI pipes under the brand name SRIPIPES . DI pipe contributes 85% of the company’s total revenue. SPL commands 15% market share in the DI pipe market in India and 75% market share in the south and western zone which it caters to. The worldwide market for DI pipes is expected to grow at a CAGR of roughly 2.6% over the next five years, will reach 7920 million US$ in 2024, from 6810 million US$ in 2019. The Indian market for DI pipes is expected to reach about 930.73 million USD by 2022 from 105.29 million USD in 2017. DI pipes are mainly use for water supply. Its other uses are gas/oil supply, mining, trenchless applications. Water is precious resource in India because the country accounts for 18% of the world population as again just 4% of global water resources. The water use efficiency is low in the country compared to international standards. As in the previous years, agriculture will continue to be the major demand segment for water. However, the demand from industries is expected to grow faster than the demand from agriculture and domestic sectors. It is understood that the use of water in Indian industries is high due to a combination of factors such as obsolete process technology, poor recycling and reuse practices, and poor wastewater treatment. Use of water in industries is closely linked to the economy of a country. The major water guzzling industries are pulp and paper units, thermal power plants, fertilizer units, iron and steel plants, sugar plants and textile units. The total water requirement by 2050 will be 1,422 billion cubic meter. Overall demand of water will be around 1,048 billion cubic meter in 2047. All this lead to increase in demand of DI pipes. It is estimated that population that will live in cities and towns constitute approximately 40% of the country’s population. This rapid pace of urbanization will increase the demand for piped water supply. Thus, the increase in population accompanied by the fast pace of urbanization will together contribute for the growth in demand for pipes. Thrust of government to provide drinking water & sanitation to 100% of the population. Government’s focus to improve the urban infrastructure has been increasing significantly year after year. The year wise fund allocation growth rate in this five year plan is 21% which is higher than the year wise growth rate of 15% during last five year plan. The AMRUT scheme is the main driver for the urban infrastructure development. The depletion of fresh water sources is driving the need of desalination projects & these projects are expected to drive the growth of urban infrastructure in the coming years. The desalination projects are being planned and implemented in certain coastal cities. All this will lead to increase in demand of DI pipes. The demand drives for DI pipes are demand for water, rapid urbanization, improvement in water supply and sanitation coverage, awareness on safety and hygiene, importance for lift and micro irrigation system through piped distribution network, investment by the central and state governments in water and sanitation schemes, assistance from external agencies, inter-linking of rivers, development of SMART cities and export potential. Inter linking of rivers project is Government of India’s proposal to link 37 rivers through 30 links, dozens of large dams and thousands of miles of canals, making it the largest water project in the world. Once this project is set in motion, there will be an unprecedented demand for DI pipes and fittings. Domestic DI pipes market is expanding owing to increase in water development infrastructure, increasing awareness on water conservation and aim to become 100% open defecation free nation. DI pipes market is likely to have strong linkages with investment in water infrastructure development and India is witnessing huge investment in water projects under various central and state sponsored projects. It is expected that demand of DI pipes will continue to dominate in India owing to huge investment in water infrastructure, improving sanitation facilities and increasing awareness on using good quality pipes. Growth of DI pipes is estimated to register a positive CAGR in the next 3 to 4 years on account of investments in Swachh Bharat Mission and housing for all by 2022. The choice of pipe material is governed by various factors such as pipe diameter, application, durability, reliability of joints, costs etc. DI pipes scores high on technical parameters like 70-90 years of life, leak proof joints & negligible maintenance and considered value for money. The users are now becoming increasingly aware of importance of considering life cycle cost rather than any initial capital cost. This development is further assisting choice of DI pipes over other pipe materials. DI pipes is preferred choice of water systems designers, for the peace of mind this “fit & forget” pipe provides the operation and maintenance team. The board of directors of Srikalahasthi Pipes Ltd has approved a plan to increase the capacity of its DI pipe plant from 3,00,000 tonnes to 5,00,000 tonnes per annum with a total outlay of Rs 400 crore. The decision to expand was taken considering the growing demand of DI pipes. The board in its previous meeting had already sanctioned capex of Rs 145 crore and the balance capex of Rs 225 crore has now been approved. To attain 5,00,000 TPA hot metal production, it is proposed to install additional sinter plant, increased furnace blowing system, additional hot blast stove, oxygen enrichment and all auxiliaries along with higher furnace volume. The new blast furnace is likely to be commissioned in the third quarter of 2020 and the increase in capacity of DI pipes plant by end of March 2021. The investment required will be made from available funds and internal accruals. Ferro alloys project is under final stages and the first furnace already started its operation and the second furnace will be under operation by December 2019. The government of India has launched Swajal Scheme to ensure there is a steady supply of clean drinking water in rural areas. These remote rural areas receive contaminated and harsh water which, on consumption, has led to many illness. The Ministry of Drinking Water and Sanitation has launched the Swajal scheme in around 115 rural districts in India to provide clean drinking water. It will involve an outlay of Rs 700 crore through flexi funds under existing National Rural Drinking Water Programme budget. 90% of this project is funded by the government and 10% is funded by the beneficiary communities. The management of this operation is managed by local villagers and hundreds of technicians will be trained under this scheme to maintain and operate the units. All the villages will get water supplied through fitted DI pipes. This will ensure that the water is not contaminated. Around 2 lakh people die in India every year because of the immense water shortage and 600 million people of this country don’t have access to clean drinking water. Narendra Modi led Government at the centre is mulling to offer 43-55 litres of water per person per day to every rural Indian household by 2024 under its Jal Jeevan Mission. As per the plan, an estimated over 15crore of the 18.5 crore rural household will be provided with tap water. The rest already have access to tap water. Prime Minister Narendra Modi on Independence day said more than Rs 3.5 lakh crore will be spent in the coming years under the Jal Jeevan Mission to bring piped water to households. Modi said for water conservation, efforts need to quadruple in the next five years as to what was done in the last seven years. The government has resolved to provide piped water to all households by 2024. All this will help Srikalahasthi Pipes Ltd to expand its business operations. The domestic cement demand is likely to grow by 8% this fiscal which may push the capacity utilization to 71% from 65% in FY18. The growth in demand will be driven by a likely 18-20 million tonnes per annum of additional capacity during the fiscal. The domestic cement production rose by around 13% in FY19 as compared to 6% year-on-year growth in FY18. All this will help SPL to increase its Cement Operations. On standalone basis the company’s income from operation grew to Rs 1,558.80 crores in March 2019 from Rs 286.08 crores in March 2005. Company’s net profit grew to Rs 117.54 crores in March 2019 from Rs 20.94 crores in March 2005. In between this period company made a highest profit of Rs 158.80 crores in March 2016. Company’s EBITDA grew to Rs 238 crores in March 2019 from Rs 91 crores in March 2009. Between this period company had made highest EBITDA of Rs 287 crores in March 2016. Currently EBITDA margin of company is 17.52% . Total debt of the company is around Rs 351.13 crores. The contingent liabilities of SPL is around 198.67 crore which is 15.74% of the net worth of the company. Company has around Rs 462.81 crores as cash in hand. By all this, company is looking strong in both fundamentals and financials. So I prefer buy call on SRIKALAHASTHI PIPES LTD at CMP of Rs 182.35.