PSL

Stock Trading At P/E Multiple Of 11 With A Lot Of Steam Left For Further Upside

 

THE stock price of PSL, a leading manufacturer of steel pipes in the country, has been surging upwards for quite a while. It has posted a return of 25% in the past two months compared to the rise of 7.6% in the Sensex. 

   Other than a general improvement in overall economic sentiment, a key driver has been the company's burgeoning order book. This week, the company bagged an order worth Rs 425 crore to supply water pipes to large private infrastructure companies such as Larsen & Toubro (L&T), Lanco and Nagarjuna, among others. Though this order may not look very big compared to the company's total order book size of Rs 3,100 crore, it accounts for more than two-thirds of its order book from water pipeline segment. And strategically, this is important for the company because such a big-size order will help it get more such orders from this segment, which holds a lot of potential for future growth. 

   The company has a competitive advantage of diversified plant locations and this has helped it outbid its rivals while bagging this project, which will be implemented in states such as Tamil Nadu, Karnataka, Andhra Pradesh and Gujarat, among others. What is positive from the investors' perspective is that the impact of this order on the company's earnings could be seen in the next 2-3 quarters since it has already started working on it. PSL generates roughly Rs 600 crore of revenue every quarter and the current order will account for around one-fourth of quarterly revenue for the next 2-3 quarters. The management expects to get 4-5% of net profit margin, in line with the overall margin of the company. And this will translate into an annualised earning per share (EPS) of Rs 5.6, one-third of its current TTM (trailing twelve-month) EPS. 

   Its strong order book is likely to result in a better financial numbers next year. The stock is now trading at a price-earning multiple of around 11. The stock has historically traded at a P/E multiple of 15-20 in good times. Considering the short-term outlook on order book execution, it appears that the stock still has some more steam left behind.