Pipedreams of the small and big

A rash of small companies, fuelled by the expanding oil and gas sector, are coming into their own. They herald the era of globalising Indian SMEs
In Sakhalin, a long, elongated island in the North Pacific, off the Siberian mainland, temperatures can drop to -40 degrees Celsius. Thick clouds block out the sun through much of the year.
Despite the bleak, harsh conditions, consortia of oil and gas multinationals jostle for a share of the immense oil and gas reserves. Armies of oil workers and tonnes of exploration equipment are disgorged here frequently.
Amidst the throng of belching and pounding exploration monstrosities, a leviathan ‘oily water separation package’ tackles oil spills, big and small. It sucks in contaminated sea water and draws out oil from it. The Rs 5-crore separator was designed, built and shipped from a nondescript workshop in dusty Faridabad, outside Delhi.
"It was a difficult project. When treated water is finally discharged, it contains a mere one part per million (ppm) of oil traces," says Viney Kumar, head of marketing at Grand Prix Fab, a small, Rs 24-crore company, specialising in fabricating filters and separators for oil and gas pipelines.
Borders are being breached. The worldwide boom in the oil & gas sector that also embraces pipeline manufacturing and laying has, along with giants like ONGC, taken a host of small companies to distant shores—countries in Eastern Europe, Russia, Africa, Middle East and the Far East.
These small companies, like Grand Prix, ride on the back of Indian and multinational groups and engineering, procurement and construction (EPC) contractors of the likes of Schlumberger, ABB, Emerson, Hyundai Heavy Industries, Burgess Manning, Bechtel, J Ray McDermott, Spie Capag, L&T and Punj Lloyd.
The EPC players have, over the years, worked in tandem with a number of small Indian companies. As the oil boom gathered steam, some Indian companies submitted to being bought off or opted for the joint venture (JV) route to dig into the oil and gas pipeline business. For instance, a $20-billion US company wanted to buy out Delhi-based Rs 25-crore Rockwin Flowmeter India, a pioneer in flowmeters that measure the flows of fluids and gas in pipes. But technocrat Vishnu Prakash is holding ground.
The trend heralds the emergence of global Indian SMEs, some with turnovers as low of Rs 11 crore, as in the case of the Mumbai-based Narmada Offshore, a pigging and hydro-testing company. Pigging is an activity that involves the insertion and running of specialised equipment—called pigs—through crude or gas pipelines for cleaning and testing.
"We had anticipated the boom and had been investing in shoring up our heavy equipment base," says Deo Bhandari, CEO of Narmada Offshore Constructions, which recently set up shop in the Middle East. In August, the company bagged a $1.8-million pigging contract for South Pars 9/10, Iran’s largest energy project.
A bevy of small companies in the pipelines space, right from flow-meters and filter manufacturers, pigging, diving and offshore pipeline support companies, to makers of specialised coatings for corrosion protection of pipes, have seen a spurt in business in recent years, in the domestic as well as foreign markets.
Niche companies providing specialised products and services have thrived. While Chennai-based Pipe Supports India is focused on clamps, braces and hangers that hold pipes in position, Bangalore-based Secon undertakes geographic information system (GIS)-driven route planning, corridor mapping and ‘right-of-way’ work with local bodies, even before a cross country pipeline is laid. Secon recently secured a foothold in Libya.
Mumbai-based Fugro (Survey) India is a key player for sub-sea geophysical surveys. It is heavily plugged into the Krishna-Godavari basin foray of Reliance Industries (RIL).
The KG basin work, in fact, has triggered efforts to scale up technologies among EPC contractors and small sub-contractors. This has been necessitated due to the need to work in greater water depths, which Indian companies were not geared for. "We have two saturation diving systems. We also provide remotely operated vehicle (ROV) services to ONGC. If you don’t own assets you are vulnerable," says Satpal Singh, Joint MD of Dolphin Offshore Enterprises (India), a Mumbai-based diving and underwater pipe support services company. Each sat system costs over $7 million. Dolphin acquired two junked sat systems and refurbished them for $3 million.
These sprightly band of entrepreneurs are catering to the domestic demand and eyeing pieces of the global pipelines market.
At The Golden Threshold
Worldwide, 70,421 miles of pipelines are planned or are under construction, according to Pipeline and Gas Journal’s 2006 report. The Asia-Pacific region accounts for the bulk, 26,849 miles. As India slowly transits towards gas, the demand for pipelines will be staggering. Government projects the share of natural gas in India’s energy basket to grow to 20% by 2024-25 from the present 9%.
The public sector Gail is already building a national gas grid of over 5,000 km, investing Rs 20,000 crore. City gas distribution (CGD), present in a few cities across Gujarat, Delhi and Mumbai, is expected to expand to 230 cities in the near future.
While much of the momentum will come from an expansion of the gas pipeline infrastructure, product pipelines are also growing. Indian Oil Corporation (IOC), with a pipeline length of 9,273 km, plans to invest over Rs 3,000 crore in capacity expansion. RIL, after commissioning its 1,400-km east-west pipeline by December 2007, is expected to make major investments in pipelines in eastern India.
The replacement market is also huge. All of the 30-year-old undersea pipelines in Mumbai High are currently being replaced. "The replacement project is to the order of $120 million every year for the next six years," points out Satpal Singh.

The Indian pipeline market is estimated at around Rs 32,000 crore. Over 20,000 km of pipelines are to be held in the next five years. "The period between 2008 and 2012 will be the golden period for Indian pipe manufacturers," says Indresh Batra, Managing Director of Jindal Saw, which has an order book of over $1.2 billion.
The clutch of pipe makers, in fact, is among the fastest growing companies in India today. Welspun Gujarat Stahl Rohren draws 75% of its revenue from exports. Man Industries, a mid-size company, is increasing capacity at Anjar in Gujarat and targeting a topline growth of 90% this year.
Expectedly, small companies in the pipeline ecosystem, which are riding the wave, are also growing fast. Dolphin Offshore, a Rs 45-crore company just three years ago, touched a turnover of Rs 205 crore in 2006-07. Narmada Offshore languished at a turnover of around Rs 1 crore for years, till it hit double digit last year. Rustech Products, a pipe coatings company, raced from a turnover of Rs 4 crore in 2002 to Rs 35 crore in 2006-07. "A Rs 100-crore target within the next five years is conservative," says Bimal Jhaveri, Vice Chairman of Rustech. The company’s product portfolio was recently spruced up to contain contemporary cold applied tapes and heat-shrinkable sleeves, an expensive polymer used to cover welded joints on pipelines.
Ingenious Stratagems
Growth, however, didn’t come easy to these entrepreneurs. The oil and gas sector is punishing, with an array of entry barriers. It is driven by specifications and every product and process is scrutinised against stringent standards, usually set by American and Western coalitions. "It is conservative, clannish and functions like an old boys club," explains Batra.
The degree to which ‘specs’ drive the sector can be gauged from the growing business of the Navi Mumbai-based Offshore Testing and Inspection Services. It receives over 100 samples of pipeline-related products each day, all scrutinised against an array of specs, including the ones laid by the American Petroleum Institute.
Before the start of any pipeline project, pipe metals used are subjected to radiographic and corrosion tests. "Even during the laying process, samples are tested for welding procedure," says TRK Chari, General Manager of Offshore Testing, with a turnover of Rs 2.6 crore.
While big companies have the resources to conform to the rules of the game, small companies have had an agonising run over the years. Dolphin Offshore’s long association with ONGC did not help when it wanted to graduate to design engineering. It couldn’t bid because prior experience was demanded. So a joint venture—IMPaC Dolphin—with a German company was set up. "We are now in the game," says Navpreet Singh, Joint MD, now competing with big players like Engineers India (EIL) and L&T. In 2005, the company issued $15 million of foreign currency convertible bonds (FCCBs) to fund its growth plans. It has graduated from a sub-contractor to main contractor and can now bid for Rs 4,000-crore of contracts coming up in the next two years.
The conservative Narmada Offshore has also been thrown into the arms of a foreign player. It struck a deal with the Singapore subsidiary of a Norwegian company, IKM Testing, to move up the value chain. "We are not comfortable with conducting nitrogen-helium leak tests. This expertise will help us work on pipelines in the KG basin," says Bhandari.
Technocrat Bighna Nayak, however, has no qualms about conceding 50% stake to Fugro in the JV, Fugro Surveys (India). Nayak now presides over cutting-edge technologies in a company that has presence in scores of countries and is pushing a turnover of $20 million.
"It’s a fair arrangement. I have also absorbed the exacting work ethic of European companies. I now focus on clients like Reliance. It seeks high-tech solutions. We are now perfectly matched," says Nayak.
However, technological advancements needn’t always flow from market leaders in the West. They can be difficult to deal with. A small company with limited resources or negotiating skills may hit a wall. That’s when they try out alternate routes. For instance, Rustech entered into a JV with a cost-efficient Chinese company that had a short while ago severed a tie-up with Polykem, a global market leader. Recently, he bagged 20% of a project for cold applied tapes in Rajasthan. Interestingly, the rest 80% was bagged by Polykem. Rustech, thus, suddently found itself among the global biggies. "I am now priming the cold applied tapes business," says Jhaveri.
Grand Prix, however, had recognised the worth of a foreign hand early on. This resulted in a JV with an industry major—Burgess Manning India. This trading outfit was in place almost 10 years ago channelising overseas orders for Grand Prix. "We are fabricating 17 pressure vessel separators for a client in the US. It’s worth Rs 10 crore," says Viney Kumar. Over 50% of his Rs 24-crore turnover (2006-07) comes from exports. In two years, he plans to double the turnover.

In another smart move, Chander Bhalla, the promoter of Grand Prix, thought it fit to plant himself in London as the MD of the European arm of Burgess Manning, with a strong presence in Europe and Africa. The Faridabad shopfloor has had a stream of orders from the two continents. It is readying a filter/separator, which is headed for Algeria.
For companies engaged in offshore work, it had become imperative to seek out other markets, for work comes to a standstill during the monsoons in India. Both Dolphin and Narmada have benefited immensely from their presence in the Middle East.
Challenges To Managing Growth
The ability to scale up operations has been a major problem with some of the small companies. Rockwin’s Prakash, for instance, rebuffed feelers for a takeover but is now finding it difficult to expand into various markets. "We just do not have the marketing bandwidth," concedes Prakash. "Despite our standing in the Indian market, we weren’t even invited to bid for a Rs 200-crore flowmetering order by RIL recently."
The biggest impediment to sustained growth of small companies is the ability to attract and retain manpower. In the early days, Dolphin coaxed the sons of Indian Navy’s divers to join the company. It paid dividends. Over 20 divers in the team belong to this clan. In Narmada Offshore, the only experienced engineer who resisted the call of foreign shores is the one with a medical condition.
At Dolphin, brothers Satpal and Navpreet are trying hard to delegate work down the line. Managers are sent to business schools for honing project management skills. "Going ahead without losing our business ethos and values is our biggest challenge," says Navpreet Singh.
Bonds nurtured by the Jhaveris, Rustech’s promoter family, with employees have helped it retain talent. Supervisory staff is encouraged to form their own companies and project work is unloaded to them. "Employees are our partners and should benefit from the company’s growth," says Jhaveri. The attitude shows in many ways. The office boy who served tea years ago now heads Rustech’s coatings plant in Kolkata.

Source : Outlook Business