We have done Michael Porter’s analysis earlier. We saw how the combination of forces are beneficial for our segment and giving us Economic Profit. Low threat of substitute, high entry barrier, low competition for few product category, etc. are working in favour of our segment which led to protected E.P. and is expected to be protected in coming future as well. We already did porter’s analysis in detail in our earlier post. Here, we will do it again but this time with increased focus on how things are positioned to change in future which can give benefit to our segment, and with possible higher Economic Profit.
Changes happen, sometimes it happens very fast and sometimes it takes time. When the forces are strong, we observe change happen almost instantly i.e. the one we saw for Steel Pipes v/s PVC Pipes in threat of substitute. However, some things take time to change. Sometimes, consumer do not foresee real benefits or realize the betterment of product over other, and it takes long time for them to understand this. Hence, sometimes changes happening in consumers’ behaviour are slow. There are few such things, which are taking time to change in steel pipes & tubes segment and are presently in favour of Porter’s Force for our segment and the benefits is expected to realise in future.
One such thing observable in Steel Pipes & Tubes segment is the shift of using steel v/s wood. Steel is environment friendly product and the wood is not. Also, using wood is expensive, has lesser life then steel, offers low resale value, it is not suitable for all environments like humid places and are of lesser strength then steel. Hence, many of the benefits tilt towards steel. Steel is said to be 1/3rd cost of wood with 3x more life. Apart from this, there is higher resale value, designs could be made in steel, and strength of steel is higher and so on. But, our culture is not used to steel and rather used to wood. Wood is used in Doors, Furniture, Entrance Gates, Beds, and so on. The use of wood is very old and for people to change/switch to steel products, it will take time. Hollow sections are said to be near replacement of wood as they are also used in fencing, balconies, doors, etc. On top, this furniture’s requirement directly caters to retail segment i.e. final consumer. And the use of wood is at every household a.k.a. its use covers whole country. Hence, this gives greater opportunity for use of steel pipes in replacement to wood in future. The opportunity size is bigger here as it serves to retail segment which will bring more profitability. Hence, this is one very favourable advantage which we might enjoy leading to better E.P. in future especially for ERW Segment.
Another change which I observe and can benefit Steel Pipes a big time in future is its application in structural steel. Historically, products like Beam, Channels & Angles were used in making structures made of steel. But, in the past few years, use of hollow section to build warehouse, airports, bridges, mobile towers, etc. is increasing. Hollow sections are lighter than others thereby leads to less cost per Kg. Apart from that, hollow section comes in variety of thickness and shapes (square, rectangular, etc.) which could also be used for beautification purpose. Hence, hollow sections are better suited when compared with Angle, channels and beams. Our government’s focus is also towards infrastructural development. Building of Smart cities, Metro Projects, Affordable housing and housing for all, etc. types of plans by government are all positives for steel pipes segment. And this shift of using hollow section for structural steel will give huge opportunity in coming future.
Also, recently many companies are focusing to develop products for niche category and also going for branding. Few reputed & reliable companies product are preferred over others, even if the prices are higher by minimal amount (Source: Scuttlebutt). This shift of consumer to buy products from reputed companies has also encouraged branding exercise and this might prove to be new benefit for this segment. However, this branding factor is not yet reflecting in profits, as we see in companies like APL Apollo EBITDA per Ton is lower:
But, it will be interesting to see how companies are able to improve EBITDA per ton through branding advantage in future.
Another focus is the development of value added products (VAP). Companies like Welspun and Ratnamani are already making VAP. Same, is reflecting in their EBITDA margins. Also companies like Man Industries, APL Apollo are developing unique products and hence this is new trend which we are seeing in the segment. This will be very advantageous going forward in future with respect to better utility, better profitability amongst other factors.
Hence all above states that, in future the prospects are very good. And change in porter’s force is favourable to our industry in a very strong way. Overall, I can only comment about all positives for steel pipes & tubes segment
Thank You!
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.