Maharashtra Seamless: Buy

Higher realisations from seamless pipes, better capacity utilisation rates than peers and a cash-rich balance-sheet give the company an edge.



It has been a turbulent three years for Indian steel pipe makers with players struggling to garner enough orders to justify aggressive capacity additions. In this context, Maharashtra Seamless with its strong presence in the seamless category holds an edge over competitors.

The company produces pipes that yield higher realisations, has managed better capacity utilisation rates than peers and has a cash-rich balance-sheet. The stock is an attractive buy at the current price of Rs 336, at a valuation of 7.5 times trailing earnings. The PE is at a premium to Welspun Corp and at a discount to Jindal SAW, whose dominant product categories of welded pipes have seen more competition than those of Maharashtra Seamless.

What do they do?

Maharahtra Seamless purchases steel billets and coils to process into pipes of two varieties: Seamless (three-fourths of revenues) and welded. Seamless pipes find application in the oil and gas space and for high-pressure boiler-tube pipes in power plants. Welded pipes do not compete with seamless in more intensive ‘high-pressure' niches such as oil country tubular goods and boiler tubes. This works to the company's advantage in two ways: First, capacity additions in the seamless space have not been as aggressive as in the welded pipes category.

Second, realisations in the seamless space are higher than those for welded pipes. Maharashtra Seamless produces more than twice as many seamless tubes as welded tubes and enjoyed 42 per cent higher realisations on the former. In FY-11, the company managed to utilise 66 per cent of its seamless tube capacity, the number far in excess of general capacity utilisation in the pipes space and welded category in particular. The company's solid roster of clients includes ONGC and BHEL. BHEL's strong order-book bodes well for Maharashtra Seamless.

Dependable financials

During the quarter ended September 2011, the company saw sales grow by 45 per cent to Rs 583 crore, driven by a combination of volume and realisation gains.

However, net profits remained flat at around Rs 81 crore as higher raw material costs ate into the company's operating margins that shrank by nearly seven percentage points to 21 per cent.

However, steel prices have shown signs of cooling off over the last quarter which, coupled with significant steel capacity additions, augur well for Maharashtra Seamless raw material bill. The company's operating margins have hovered between 20 per cent and 29 per cent over the last five fiscals, with FY11 registering 29 per cent margins on the back of the product mix tilting in favour of oil exploration.

In the first half of FY12, Maharashtra Seamless fared much better than peers with sales rising by 30 per cent, while net profits dipped by 15 per cent.

Others saw much sharper declines in profits. Aiding the cause is the fact that the seamless category enjoys higher profits per unit, which are anywhere between three and four times those of welded tubes.

Most welded pipe-producing peers such as Welspun Corp, Jindal SAW, PSL and Man Industries had resorted to debt to increase capacity. While larger players do have leverage on a leash, rising interest costs have corroded margins for them.

Maharashtra Seamless has resorted to very little debt to fund its domestic seamless tube expansion plan which will more than double capacity over the next two years.

Bolstering the company's case as a solid investment candidate during turbulent economic conditions is the Rs 671 crore in liquid investments. The pipe-maker is looking to increase exports to growing South American and Canadian markets where oil exploration activity is on the rise due to buoyant crude oil prices.

RISKS

The company's order flow and profits depend on the level of exploration activity, which is linked to crude oil prices remaining above $80-85/barrel. If current global weakness dampens oil prices and depresses rig additions, this could hurt the company's prospects.

Concerns surrounding longer recovery cycles for power equipment players like BHEL could have an indirect impact on this company, if they snowball. Negligible debt and a solid roster of clients however do give the company an edge over peers.

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