Maharashtra Seamless Ltd

Investors could consider picking up shares in pipe-maker Maharashtra Seamless whose valuation relative to peers looks attractive thanks to relatively higher margins, superior product mix and low debt. The stock trades at Rs 424, which discounts the trailing 12-month earnings by about nine times. It trades at a discount to peers such Jindal SAW and Welspun Corp.



Maharashtra Seamless produces seamless and welded pipes which are used in the oil, gas, power and water transportation segments. The seamless category which accounts for 70 per cent of its Rs 450 crore order book should serve it well to cater to demand from the oil rig segment. Margins in the seamless category are more than double of those in the welded category (company has 550,000 tpa of seamless capacity against 200,000 tpa of welded capacity). Major drivers for demand include increasing rig counts and domestic exploration by oil companies, expanded gas transmission and upcoming power generation capacity. While escalating raw material costs are a concern, margins may hold up due to the company's product mix.

The company's sales shrank by 22.5 per cent between FY09 and FY10, while profits grew by 9.5 per cent due to a combination of lower volumes and higher margins. The first six months of FY11 have proven to be a challenging one due to a maintenance shutdown and the utilisation of expensive inventory. However, the picture could improve over a two-year time frame as orders from the power and oil sector accelerate.

The company has a relatively smaller order book (in terms of revenue visibility) compared to peers mainly due to an effort to manage input costs better. The company has historically been successful in keeping up a strong flow of orders. Capacity additions over the next two-three years include additions in coated segment and seamless products (relocation of a 200,000-tpa Romanian facility by the first quarter of FY12). These will place it in an advantageous position to capitalise on future demand.

The company roughly holds around Rs 90 a share in value as cash and liquid investments. It has also planned a foray into billet manufacturing which has hit a roadblock in the form of land acquisition in Karnataka. Risks in this investment include a slowdown in the oil exploration segment, competition from Chinese imports and Indian welded pipe producers.

via BL