Hello everyone back again,

So, as you all know this COVID situation is now a new normal for our mental minds. But, my focus is how will our segment i.e. Pipes & Tubes will fare and expected to perform in future. Hence, I have come up with this article to explain you the impact of COVID-19 on business.

Firstly, I am just conducting research in this segment of Pipes & Tubes. I do not run this type of business at all. Hence, I am no one to comment on how will business impact because of Corona Virus and situation all around. So to clarify everyone here, I have taken up many sources and compiled them to come up with this blog as a whole. The following sources were referred by me:

1. Note on “How COVID-19 will impact the business”, submitted at BSE by respective companies in our segment.
2. Investor Presentation of respective companies of Q1FY2021 i.e. covering period of April 2020 to June 2020.
3. Conference Calls by respective companies for Q4FY2020 i.e. Jan 2020 to March 2020 period.

So, I read all the above copies (copies which were relevant here and available) and bifurcated the observation, comments from management, etc. The materials referred by me for each of the six companies in the segment are:

Hence, my observation below is just the combined view of great managements of these great companies. As we all know, that they are running the business for many decades and they are right person to let us know how business will be affected. Hence, to listen to them is the only primary source of information we can get as of now. Obviously, there are many things which can be backed by data as well. So, let me run you through the important pointers and wherever possible provide you the data which is in sync with the observation.

• Impact of COVID on overall business.

So with government bringing in compulsory lockdown all the companies had to stop their production completely. Hence, from around 23^rd March, 2020, the factories got closed. Also, as management comments that factories resumed after 3-5 weeks and they were operational with limited staffs and working hours initially. After which the production slowly picked up and now all the plants are working at their best capacity. However there is one important thing to note in specially this segment i.e. Oil prices were not stable due to which the demand of Pipes from Oil companies were already low. On top of that, due to COVID, there was double blow to companies as orders from Oil Refineries just came down a lot. Managements are expecting demand revival from these companies only after the oil price settles a bit. You can have a look at the chart:

So, you can see in around March, the prices started to fall and came down quite a bit at low levels. But also it retraced back to $42 levels. Hence, the orders might have dried up but what is observe is that the oil is slowly coming back to normal levels. Hence, we might see some demand coming back again from Oil companies.

As collectively said by management: “There is only short term impact in business due to COVID and we expect the demand to fall back to normal levels in 6-12 months.”

• Impact of COVID on Revenue, Demand, Orders, Collections.

So basically, April was the toughest month for all the companies where virtually no production happened. Also, due to business being closed all around, the orders were also not coming. But as noted from Con. calls that, from May onwards the demand is slowly picking up. A lot of inquiries have come from companies all around the world and also a lot of tenders have been filled by the companies. Only the thing is that, the process is slow due to limited staff and lockdown everywhere. Also, companies have a good pending orders with them which will get them going at good production capacity for 3-9 months. Hence, overall there was one observation from Demand side (Also linked to revenue) that the orders are slowly coming and things are getting back to normal.

Another very important to focus on is the future order inflow. So, Central Government is going for robust expansion plan for cross-country wide natural gas pipeline basically for objective of CGD (City Gas Distribution), the Jal Jeevan Mission (JJM) for adequate and clean drinking water across country, etc. which will bring very good order inflows in future. PSU companies like GAIL, IOCL, BPCL, etc. have already started issuing tenders and giving orders. Also, big companies are operating on full force which means we can expect demand from them for their raw materials. Apart from these, we expect low demand for near term from state government as many states are currently focused on to pull out of COVID and for temporary basis have stopped their expansion plans. Also, Oil price instability is another factor where there might be slow demand from particularly these sectors. These all were the compiled remarks from the management stating that next coming years can be very good for the companies, and the impact of COVID on its order inflow is only short term.

Have a look at this news column: Click Here (Fin Minister Launches Rs 102 Trillion National Infra Pipeline Plan).

Also, management says that Ministry of Steel had a meeting recently discussing the future of steel and its demand revival. This is seen as very positives by them.

Another important point to note for remarks by management of APL Apollo Tubes stating “The biggest win for this COVID is that whole market has converted to cash. This has led to go for negative debtor to the company i.e. receive cash first and sell goods.” This is very attractive statement, where historically steel companies have good outstanding amount of debtors taking time for realization, the management says that “Selling on Cash Basis is slowly converting as a new norm for industry overall.”

So, basically, there is lot of positives from management that demand will revive in future and this is only short term impact. We really need to wait for the next quarter’s number to come out i.e. Q2FY2021. Initially, I have compared q-o-q basis the number and you can see the image below:

So, as of now, it is clearly visible that April to June quarter was very bad for all the companies (except Ratnamani with only 8% fall). Hence, where 3 months business is down but as per the management’s comment we can expect demand to normal levels from Q2/Q3 onwards and we would definitely wait for that to see whether that is reflecting in numbers.

• Impact on COVID-19 on Costing, Suppliers, Raw Materials, Liquidity, etc.

So, with approx. 45 days of no work, management seems to have found ways to reduce cost. Where plants were coming back to normal operational levels, the staffs were not fully available due to many reasons like Social Distancing Norms, Staffs leaving and not coming back, higher management pay cuts, etc. So major cut in expenses were of salary payments to employees. Along with that, reduced advertisement cost, effective supply chain have bought down the fixed cost for many companies. (Again as per the management).

Also, the inventories level is running high but companies have enough raw materials to continue its production barring a few items of consumables. Companies now, are focusing on reducing debt to lighten its balance sheet and hence repaying debt. This has also lead to reduced interest cost.

Hence, COVID has been helpful for companies to plan its cost and reduce them. Especially the debt part which is temporary decline in interest cost. Also, selling on cash as mentioned above have improved the liquidity of business and reduction in cash conversion cycles.

Again, we do not have much data available to verify this part. We are waiting for the next quarters result to be declared were we can see the impact on paper i.e. financials.

• Impact of COVID-19 on production and capacity utilization.

So, production are coming back to normal levels slowly. Most companies are operating at capacity utilization of 50% – 70% and some are even operating at 90% capacities. This might be mainly due to the good order book pending with the companies. Hence, pre-COVID and post-COVID, the production seems to be running good. An indication on reading the Concall was that production was down during April and May month and they got picked up due to relaxation in working of companies by the government. So, as of June the general management comments states that production are slightly down with compared with pre-COVID levels but they are only temporary.

But it is seen that companies are still cautious regarding the expansion. Although production are running but they are still unsure about future demands. Hence, companies like APL Apollo have postponed their CAPEX plans on capacity expansion for 2-3 years and would like to observe how the GDP of the country behaves. Ratnamani has its new plant stuck due to handover reasons from its suppliers. So, mixed feelings emerging here, but as said earlier the true picture will be reflected in sales of coming quarters.

• Impact of COVID-19 on Profitability.

As per my reading and managements comments and questionnaire on Con. calls, the emphasis on demand and sales have been more than the emphasis on profitability of companies. The main reason what I see is the advantage of economies of scale which companies enjoy when producing at high capacities. Hence, more focus was put on demand and sales. But, one very good question being asked by were “Due to very few order inflows, there will be many companies chasing them leading to competition. How will this affect your business and profitability?” So companies like Ratnamani and APL Apollo have clearly stated that we are firstly lowest cost producers and there will be very minimal impact on our EBITDA Margins, and secondly we will be keen to focus on our profitability and will keep our margins intact at historical levels (may be more this time to take advantage of the situation). But, management comments also state that whatever is the issue currently going on due to COVID is only temporary and things will come back even stronger than the pre-COVID levels due to new arrangement by government for expansion.

Have a look at the EBIDA Margins back again which indicates that they have actually remained even if sales have gone down. Seems companies have not compromised their realizations even due to COVID uncertainties.

So friends, the main conclusion which I have to give you for the segment of steel pipes & tubes is that the effect of COVID on business is only seen as temporary by the management. They expect the demand revival from Q2 and Q3 of FY 2021 where things will not only come back to normal levels, but with more force.

Cautious Statement: The view presented by me are based on management’s comments from different sources. These views are indirectly what management wants to state for their businesses, revenues, costing, expansion, production, profitability, etc. Everything as usual is uploaded on my Google Drive Link. Click here to access the files.

Disclaimer: Views are personal and presented through independent research. By no means there is any stock advice. Also, presented content is for learning purpose only. I might be wrong in presenting data and inaccurate data, let me know if you find any discrepancies.