Scoda Tubes Ltd - Integrated, Accredited and tailwind driven | Initiating Coverage Report

We initiate coverage on Scoda Tubes with a BUY rating and TP of Rs240. This under-researched idea has undergone a transformational scale-up, expanding its land parcel and capacity manyfold, through strategic accreditations and commissioning of a captive hot-piercing plant. This backward integration eliminated dependence on imported hollows, unlocked opportunities to bid for government tenders, and materially expanded margins. Scoda is now doubling its seamless finishing capacity and adding new capacity for welded pipes. These expansions position the company to potentially achieve ~Rs10bn in revenue by FY29e, delivering a powerful 22% & 40% CAGR in revenue & PAT resp. over FY25–28E. Robust demand from the power sector, expanding global approvals, low threat from new entrants and sustained supply tightness reinforce our conviction for re-rating, alongside structural margin gains and improved cash conversion.

Evolution through integration and accreditation:

After the current management took control in 2016, the company rapidly evolved its operations, expanding the land parcel by 8x in the last 5years. Total production capacity also increased from 1,700 tonnes/annum to 21,000 tonnes/annum. This significant growth in sales and manufacturing footprint was made possible by consistently securing successful qualifications and accreditations in leading Oil & gas, power, process industries, EPC and engg. companies, both in domestic and global markets. The crucial backward integration step involved commissioning a captive hot piercing plant in FY23, which eliminated reliance on imported mother hollow tubes. This hot piercing capability opened doors for large government tenders that now mandate the use of Indian-origin material and triggered massive margin expansion.

Capacity expansion to unlock growth potential:

Despite having substantial backward integration capacity, Scoda’s immediate growth was constrained by a shortage in seamless pipe finishing capacity and the lack of a welded pipe product line. To unlock this potential, Scoda is pursuing a capex program aimed at doubling the seamless cold finishing capacity and adding new welded pipe capacity. This capex was completely financed through the equity raise (pre-IPO and IPO) worth Rs2.75bn. A separate land parcel has been acquired for the welded capacity, with equipment ordered and commissioning anticipated by April 2026, leaving additional space for future expansion. We expect Scoda to achieve a maximum revenue of ~Rs10bn from these capacities by FY29, translating into a robust financial performance, i.e. 22% revenue and a 40% PAT CAGR over the FY25–28E.

What drives our conviction in the thesis?

The fundamental conviction in Scoda is driven by strong underlying market demand and a deficit on supply. The Power sector is forecasted to be the primary demand driver for the 3-5years, supported by major thermal power capacity additions announced by NTPC and Adani Power. Scoda is well-positioned to scale up utilization by securing new approvals from entities like ADNOC, SABIC, Reliance, BARC, large BHEL tenders that require Indian-made products, expanding its presence in the US and Europe and replacing imports. We expect a low threat from new capacities due to the gestation period to receive approvals. Margin expansion is anticipated due to an improved product mix, specifically the elimination of low-margin hollow tube, the full utilization of the hot piercing plant and efficiencies of scale. Finally, the introduction of welded pipes, which have a significantly shorter cash conversion cycle (around 90 days), is expected to improve working capital turnover and lead to better cash flow conversion in the coming years.

Valuation, view & key risks:

We value Scoda tubes at a 19x Sept’27 PE (which is 20% discount to the PE attributed to value its peers Ratnamani metals) due to the best in industry earnings growth and very competent return ratios. We arrive at a TP of Rs240/sh and initiate coverage with a BUY rating. Key Risks: Weakness in export demand, commodity price risk, delay in setting up of new welded plant.

Company website: https://www.scodatubes.com/

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Analyst: 

• Sahil Sanghvi - Research Analyst, Institutional Equities (NISM-201900004744)
• Uvais Khatri - Research Associate, Institutional Equities (NISM-202300049054)