Maharashtra Seamless – Seamless growth

Maharashtra Seamless (CMP Rs 364.90) is India’s largest manufacturer of seamless steel pipes and tubes. The company’s product finds application in industries like Oil and gas, , boilers & heat exchangers, automotive, bearing and general engineering. . Maharashtra seamless has a very wide and diversified client base, which includes IOC, ONGC, BPCL, GAIL (India), OIL, BHEL and L&T The company belongs to the O.P Jindal group which is satisfactory when viewed in terms of corporate governance and shareholder friendliness..

65% of the company’s revenues are derived from seamless pipes while the balance the balance comes from the sale of ERW (electric resistance wielded) pipes. These pipes are used in fencing, line pipes, oil country tubular, water and gas conveyance, structural, engineering purpose. Globally there has been a tremendous increase in the production of ERW steel pipes due to growing demand in oil & gas industry, infrastructure and automobile usages.

The next few years is expected to see robust demand for the company’s products; the growth in the oil and gas exploration and distribution sector coupled with the proposed spending outlay on social infrastructure would be the major growth catalysts.

Some time back a joint venture agreement was executed with Hydril of US for the manufacture of high-end pipes. This JV shall source its requirements exclusively from Maharashtra Seamless. The customers that this JV would cater to would be both the domestic and the international oil companies.

 Over the past few years the company has consistently grown its earnings  and the trend is expected to continue in future also. The RoE has been hovering at close to 30% for the past five years. A five year consistent RoE of 30% for a manufacturing company is very difficult to achieve. Companies achieve this ratio for a couple of years and then revert back to their 12 %– 16% range but Maharashtra seamless has been a real exception on this count.

Over the years the company has been able to push its operating margins at close to 28%. This has been achieved Inspite of the rising input costs indicateing the company’s ability to pass on costs to the customer.

On August 11, 2006, the company allotted 687,376 number of equity shares of Rs 5 each at a premium of Rs 248.34 per share against conversion of Zero Coupon Foreign Currency Convertible Bonds (FCCBs). Post conversion the paid-up equity share capital of the company has increased to 6,03,00,110 equity shares of Rs 5 each, as of date.

Recommendation : India’s largest pipe manufacturer available at a market cap of Rs 2200 crore a PE of less then 10 with an RoE at close to 30%  is a buy at present levels. In case of any decline (fundamentals remaining same) investors should aggressively keep adding. In times to come the laying down of gas pipelines across the country could significantly benefit the company as could the demand from the other areas of the oil and gas sector.

Maharashtra Seamless is looking at a robust demand for its products during this year. The company also informed that it is sitting at an order book of over Rs 550 crores and  is planning to increase the installed capacity of 7" OD seamless pipes to  150,000 tons from 125,000 tons)  and 14" OD pipes to 175,000 tons from 100,000 tons).

A 50,000 ton coating plant is also being set up. All these capacity expansion programs have been funded and no further equity dilution is forthcoming except for the FCCB conversion.

The company stated that the benefits of this expansion shall be available from Fy 08 onwards

At Rs 374 the stock trades at a PE of less then 9 times for FY08E (EPS of Rs44) and remains a compelling buy for medium to long term investors.

Basantji could you plz what PE should be given to Maharastra Seamless?

Basantji, you are right, it had forex scare. However, as the events turned out, what had happened, as understood by me was this : The company was holding forex holdings ( proceeds out of fccb issue unutilised for a full period of more than a year ) in possibly US $.

With the depreciation of US $, the company incurred mark to market losses of Rs.24.03 crores on its actual balances held in US $ as was clarified by the company in its notice to BSE on 27.02.08. This is the loss due to appreciation of the Indian Rupee and not because of forex derivative.

Very commendable on the management's part to come out with the press release and clarify the Forex derivatives rumours.

FY08 EPS was slightly lower than FY07 due to rising raw material prices. Cheaper chinese imports have also been a concern especially in ERW pipes segment but the company is focussing more on the specialised seamless pipe segment where price cutting from chinese imports are much less.