Pipe Dream: Should you invest in these infra stocks that have delivered 50% returns?

• Estimates peg the current market size of structural pipes at ₹32,000-₹40,000 crore.
• ERW pipes sector is expected to grow at 12-13% for FY24, followed by 8-9% for the next 4-5 years.
• The companies in the sector gave good returns in the last one year, but still have juice left, say analysts.
  

India’s infrastructure spending and construction are on a full swing. And, as a proxy play, the companies, which supply specialized pipes to builders, have been gaining in value. All the four listed companies that make structural pipes have given over 50% returns in the last one year.

Structural pipes are also mostly used in construction and also other sectors like oil & gas, water supply and agriculture. Within construction, steel tubes or Electrical Resistance Welding (ERW) pipes are gaining increased acceptance.

Their usage helps bring down construction time and save carpet area. Since they increase the returns of builders, they’re becoming a popular choice for a variety of infrastructure projects.

How big is the sector?

The sector is also gaining from increased construction activity from public and private sectors alike. But the key trigger is rise in spending by the Indian government, whose capex grew at 27% CAGR between FY19-24.

“Majority of the spending will be driven by road transport and highways, railways, and defence, which augurs well for ERW pipes demand, as almost all these segments need structural pipes,” says a report by PhillipCapital.

Estimates peg the current market size of these pipes anywhere between ₹32,000-₹40,000 crore. “We expect ERW pipes to grow faster pace than the steel industry – at 12-13% for FY24, followed by 8-9% for the next 4-5 years, considering it is still in the process of replacing some traditional long products that were previously used in construction,” says PhillipCapital.

And, there are more infrastructure building plans in the pipeline. Water-supply lines under Jal Jeevan Mission are also expected to aid demand for these pipes. The government’s plans to add more airports, upgrade railway stations and metro construction should also provide more demand levers ahead.

The sector also has fewer players who dominate the sector and each of them have a sizable market share. Analysts also believe that the stocks have juice ahead in spite of a good run-up, due to its growth levers. One the sector stocks – Surya Roshni has also given multibagger returns in the last one year.

Stock	1 year change
APL Apollo	56.8%
Hi-Tech Pipes	60%
Surya Roshni	142%
JTL Industries	82%

Source: BSE

Capex and growth ahead

The companies in the sector are preparing for good volume growth ahead with aggressive expansion strategies. They are adding capacities, and also expanding their distribution footprint by establishing more stock keeping units.

Added to that, their expansion plans are not leading to extensive debts by players – which is offering comfort to analysts. JTL raised funds through share warrants rather than debt to fund capacity expansion.

“The company issued fully convertible warrants worth ₹3,840 crore to non-promoters in March 2023 to fund its 400,000 tonnes capacity addition at Raipur and Mangaon. This has led to a considerable reduction in its debt levels, improving its net debt to equity ratio,” said a report by Nuvama.

APL Apollo’s bet debt stood at ₹500 crore at the end of FY23. While it needs ₹600 crore more for capacity expansion, it also reduced its net working capital days to merely 7-8 days, affecting its borrowings in a benign manner.

Hi-Tech Pipes is also expanding and adding more value-added products to its portfolio, along with expansion and that’s another trigger ahead. “It trades at an attractive valuation and is one of the cheapest stocks available in this space. We believe the stock price has the potential to double, aided by earnings growth and some re-rating after it achieves the 500Kt volume target,” said PhillipCapital.

With growth levers from private as well as government sector spending, the sector is poised for better days ahead. However, any change in the government’s capex plans in the run-up to elections may play spoilsport for the sector’s assumed growth rate.