Maharashtra Seamless

Investors can consider buying the shares of steel pipe maker Maharashtra Seamless.

At the current price of Rs 356, the stock trades at 9.5 times its one-year trailing earnings. In addition to boasting operating margins that have been consistently better than bigger peers such as Jindal SAW and Welspun-Gujarat Stahl Rohren, the company has also consistently provided better returns on capital employed.

It has also weathered the pressure on realisations over the last 16-18 months much better than peers. Jindal SAW and Welspun-Gujarat Stahl trade at 9.7 times and 10.9 times their per share earnings, respectively.

Maharashtra Seamless has a product line that includes seamless and welded tubes with a total capacity of 550,000 tonnes a year. The company is one of the dominant players in the seamless pipe category.

Though currently dependent on external sources for steel billets, the company is also mulling a move towards an integrated model by producing billets. This may offer scope for margin expansion and insulate the company to some extent against volatile steel prices.

Upcoming projects include a facility to produce 200,000 tonnes a year of seamless tubes at Maharashtra, which will be operational by FY11.

Among the pipe makers, Maharashtra Seamless has a balanced 60:40 revenue mix between exports and domestic sales in FY09. The company claims to have a market share of 50 per cent in the OCTG (Oil Country Tubular Goods) segment, line pipes and boilers.

Its order book, which stands at around Rs 430 crore, includes a multi-year deal from ONGC for OCTG products.

Prospects for future order flows appear strong with potential demand from GAIL, Reliance Gas Transportation and other oil and gas distribution companies.

The 60,000 MW of capacity addition planned over the next three years may fuel demand for boilers, and in turn pipes. Globally, too, rising oil and gas prices have also rendered new projects more viable, improving medium-term demand prospects for pipes, casings, etc.

Recently imposed duties on Chinese pipe imports by the US augur well for pipe makers across the globe including Maharashtra Seamless which has already witnessed a spike in export orders.

The last three years have seen the company's sales and net profits grow annually at 27 per cent and 28 per cent respectively.

Operating margins hovered around 20 per cent during this period. The company has low leverage with a debt-equity ratio of 0.07:1, providing good scope for growth using leverage.

The risks include the import threat from China and the still-tentative prospects for global demand including the US. Raw material costs have favoured secondary steel makers through 2009, this is unlikely to remain the case through 2010.

via BL