We have conducted a very important analysis of our segment i.e. Profit Pool analysis of Steel Pipes and Tubes. And we also know that Economic Profit is true real profit of the business i.e. profit left after deducting for cost of capital (Interest). But, did we ever think why business continue to earn such higher Economic Profit? And why can’t other businessmen enter into these kinds of lucrative business for higher profits? Common Sense says that one should enter into businesses that generates higher Economic Profit. Have a look at the E.P. (Economic Profit) table for steel pipes & tubes segment again, produced below from profit pool:

Simply put, three companies i.e. Ratnamani Metals, APL Apollo Tubes and Gandhi Special Tube are the best earners in whole segment. Their long 10 year average E.P. have been at least 4.5%. And one icing on cake is that “They are operating in cyclical industries.” So, despite being a play of cyclicality, they are able to generate a healthy 10 year average E.P ranging from 4.58% to 17.35%.

Note: Surya Roshni and Jindal SAW are not taken in the above profit pool analysis. Jindal SAW operates in many verticals like Pallets, DI Pipe and SAW Pipe. Here in steel pipes, we are only concerned with SAW Pipes for which separate data is not available. In Surya Roshni, from 2017 onwards Surya Roshni (Majorly Electricals business) merged with Surya Global Pipes. So with merged balance sheet, combined data of steel pipes and electrical business does not make the comparison and ratios relevant here. Hence, they are not taken into consideration in profit pool analysis.

Companies in steel pipes (as seen above) were able to earn economic profit for so long. Also, recent years E.P. are at high-ends. What reasons enable these companies to continue its stint of higher profits? An analysis of Michael Porter will help us find the answer. These five forces, which I am going to use to analyse Steel Pipes & Tubes segment, will help us understand 1) why it is difficult for others to get into this business, 2) why customer will have to use steel pipes, 3) why companies are able to buy materials at cheap cost, 4) why companies are selling at higher prices and 5) why, despite competition the profitability (E.P.) is maintained for long periods. And, obviously, Why not so?

Hence, these five forces are very important and will help us determine why our segment is able to generate a very long term 10 year average of E.P. despite being in cyclical business. How much E.P. this segment makes depends on how strong the forces are. These five forces (Shown in image above) will be analysed in detail considering most of the relevant & important aspect/angles in our segment. Then, in the end, overall conclusion will be drawn considering all five forces. Sounds very interesting to me, as I have conducted all the research/analysis and put in efforts to understand these aspects/angles force by force. I hope you will love it, request you to keep following me through to my next post on Force 1.

Note: Michael Porter’s Five Force analysis will only help us to understand why our segment/business was profitable and why it is expected to remain profitable in future. By no means, there is an indication of good investment opportunities into companies forming part of this segment.

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.