An integrated approach to laying pipelines

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Indian pipe manufacturer Welspun has moved along the value chain by buying up an EPC contractor. Rama Rastogi looks at how vertical integration could prove pivotal in India’s burgeoning infrastructure sector.

Indian pipe manufacturer Welspun Infratech has agreed a INR4 billion ($89.8 million) deal which will see it take a stake of around 75% in engineering, procurement and construction specialist MSK Projects India. The deal will give the $3 billion Welspun Group an entry point into India’s infrastructure market, including a position in the pipeline laying market for water projects.

MSK’s shares jumped 19% on the news of the acquisition, closing at INR152.45 on 18 March. The share price has risen from a low of INR77.00 in November last year, gaining the most ground in January when the possibility of a deal was first mooted.

Speaking to GWI, Nayana Borthakur, senior manager at Welspun, said: “It is a company decision to be present at all points in the value chain for the pipes business. We are looking at manufacturing and laying pipelines for infrastructure sectors such as oil and gas, as well as water. The deal was a strategic move as it brings along EPC capability to our organisation.” Welspun manufactures textiles as well as pipes and plates, but does not intend to enter the water treatment business, according to Borthakur.

Vineet Rathi, a financial consultant working on behalf of MSK Projects, told GWI that “MSK has an inherent value for Welspun. The alliance between the companies provides for forward integration for Welspun and its entry in the infrastructure sector, which is growing rapidly in India.”

The deal involves Welspun buying 4.75 million shares held by four private individual shareholders at INR130.50 each, for a total of INR620.2 million, and 527,000 shares held by three corporate investors (Aaheli Construction, Classic Insurance and D.A. Finvest), for a total of INR68.8 million. Additionally, an open offer has been made to public shareholders to purchase up to 8,000,000 shares, also at INR130.50 each.

MSK will also simultaneously issue 17.2 million preference shares to Welspun at INR123.00 each, thereby injecting INR2.1 billion ($47.2 million) of fresh capital directly into the company (equivalent to 43% of the post-preferential share capital). The total investment by Welspun is approximately INR 4 billion ($89.8 million), and will be financed from existing cash reserves.

MSK – which had a turnover of approximately INR4.5 billion ($100 million) in the financial year to 31 March 2010 – derives 90% of its turnover from EPC contracts, chiefly in the roads and buildings sectors. The remaining 10% comes from BOT projects, of which it has one in the water sector, an INR1.1 billion ($160 million) 30-year contract to treat and supply over 1,500,000 m3/d of water to Dewas Industrial Estate, a major industrial development in Madhya Pradesh.

The kind of vertical integration represented by this deal will see Welspun establish itself in a market traditionally dominated by major EPC contractors such as Larsen & Toubro, IVRCL, Nagarjuna Construction and a number of lower-tier firms which install and rehabilitate pipeline networks.