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Maharashtra Seamless: Tepid performance - Views on News from Equitymaster

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Maharashtra Seamless: Tepid performance

Feb 2, 2011

Mahrashtra Seamless has announced its December quarter results. The company has reported a 9% growth in topline and a 5% growth in bottomline on a YoY basis. Here is our analysis of the results.

Performance summary
  • Topline grows by 9% YoY during the quarter, led by increase in realisations.
  • Contraction in operating margins reduces growth in operating profits to 1%.
  • Aided by lower depreciation and tax rates, bottomline registers a growth of 5% YoY.
  • Half yearly bottomline grows 23% YoY on the back of a 2% growth in topline.

(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net sales 3,726 4,065 9.1% 12,059 12,328 2.2%
Expenditure 2,692 3,021 12.2% 8,959 9,271 3.5%
Operating profit (EBDITA) 1,034 1,044 1.0% 3,101 3,058 -1.4%
EBDITA margin (%) 27.7% 25.7%   25.7% 24.8%  
Other income  103  112 8.8%  212  565 166.5%
Interest (net)   7 10 34.7%  26  22 -15.4%
Depreciation 48 34 -30.2%  141  130 -7.4%
Profit before tax 1,082 1,113 2.9% 3,146 3,471 10.3%
Tax  360  356 -0.9% 1,061  908 -14.4%
Profit after tax/(loss)  722  757 4.9% 2,086 2,562 22.9%
Net profit margin (%) 19.4% 18.6%   17.3% 20.8%  
No. of shares (m) 70.5 70.5   70.5 70.5  
Diluted earnings per share (Rs)*         47.1  
Price to earnings ratio (x)*         7.3  
(* on trailing twelve months earnings)

What has driven performance in 3QFY11?
  • Volumes for both of the company’s products viz. seamless pipes and ERW pipes were lower by 7% and 16% respectively on a YoY basis. On an aggregate basis, volumes were down 10% YoY. This indicates that there has been a strong 21% growth in blended realisations during the quarter. In order to prop up volumes, the company is intensifying its marketing activities in its major export market of the USA and also planning to enter the Canadian and Latin American markets. Furthermore, continued capex by domestic companies in the oil and gas space as well as the power sector should see volumes pick up in the coming quarters.

    Cost break-up...
    (Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
    Raw materials 2,299 2,326 1.2% 7,256 7,332 1.0%
    % sales 61.7% 57.2%   60.2% 59.5%  
    Staff cost 57 86 51.1% 183 221 20.7%
    % sales 1.5% 2.1%   1.5% 1.8%  
    Manufacturing expenses 267 518 93.9% 1,232 1,511 22.6%
    % sales 7.2% 12.7%   10.2% 12.3%  
    Other expenditure 69 92 32.0% 288 208 -27.9%
    % sales 1.9% 2.3%   2.4% 1.7%  

  • As far as margins are concerned, the same came in lower by around 200 basis points during the quarter. Except for the raw materials, all the other cost heads grew at a much faster pace than the growth in topline and thus, negatively impacted the margins. While no specific reason for the strong hike in manufacturing expenses is given, we believe that staff costs would have gone up on account of increased marketing efforts by the company.

  • Growth in PBT has come in at 3% YoY, driven mainly by the 30% drop in depreciation charges. While interest costs have gone up by 35% YoY, they have not been able to make a significant impact on account of it forming a very small portion of the company’s operating profits. Thanks to lower effective tax rate, there has been a further improvement in profitability with PAT growth coming in at nearly 5% YoY.

What to expect?
At the current price of Rs 342, the stock trades at around 6.5 times its expected FY13 earnings per share. Although the company has suffered on account of poor volumes, its strong focus towards marketing activities gives us the confidence that it will be able to improve the same going forward. We remain positive on the stock from a medium term perspective.

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