PSL

HSBC downgrades PSL’s ratings to `Neutral’. PSL announced new orders for 112,000 tonnes of spiral pipes, awarded by infrastructure companies such as Larsen & Toubro and Nagarjuna Constructions. With this, HSBC estimates PSL’s order book at 614,000 tonnes, equivalent to four quarters of sales volume.

The y-t-d (year-to-date) order inflow of 212,000 tonnes is lower than the expected 9MFY10 volume sales of 280,000 tonnes, leading to the risk of an order book decline at the end of FY10. The FY11 EPS is to fall 24% y-o-y on lower margins, as forex gains recorded in FY10 are not expected to repeat. HSBC’s FY11 EPS estimate is 40% below Bloomberg consensus and PSL will need further orders of 200,000 tonnes to achieve 500,000 tonnes of annual volumes in FY11. HSBC switches to a PE multiple approach, as investors will increasingly focus on earnings-based rather than asset-based multiples.

On a one-year forward PE multiple of 10x (up from 7x) and September 2011E EPS, they arrive at a target price of Rs 180.