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Mah Seamless: Bad performance continues - Views on News from Equitymaster

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Mah Seamless: Bad performance continues

Mar 11, 2014

Maharashtra Seamless Ltd (MSL) has announced its results for the quarter ended December 2013. The company has reported a decline of 31.9% YoY in sales and 26.1% YoY in net profits for the quarter ended December 2013. Here is our analysis of the results.

Performance summary
  • The company's topline declines by 31.9% YoY during the quarter ended December 2013.
  • Both operating profits and operating margins declined by 58% YoY and 3.3% YoY respectively.
  • At the bottomline level, net profits for the quarter saw a decrease of 26.1% YoY while net profit margins improved by 0.6% YoY.
  • For the nine months ended December 2013, net sales declined by 36.9% YoY and net profits declined by 49.9% YoY.

Standalone financial performance snapshot
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Net sales 3,916 2,668 -31.9% 13,933 8,785 -36.9%
Expenditure 3,579 2,526 -29.4% 12,236 8,055 -34.2%
Operating profit (EBDITA) 338 142 -58.0% 1,697 730 -57.0%
Operating profit margin (%) 8.6% 5.3%   12.2% 8.3%  
Other income 152 191 25.6% 425 410 -3.6%
Interest (net) 18 6 -66.3% 52 14 -73.6%
Depreciation 91 94 2.6% 272 283 4.0%
Profit before tax 381 233 -38.8% 1,798 843 -53.1%
Exceptional Item - -   - -  
Tax 97 23 -76.1% 427 156 -63.5%
Profit after tax/(loss) 284 210 -26.1% 1,371 687 -49.9%
Net profit margin (%) 7.3% 7.9%   9.8% 7.8%  
No. of shares (m)         71  
Diluted earnings per share (Rs)         12.1  
P/E ratio (x)*         14.1  
On a trailing 12 months basis

What has driven performance in 3QFY14?
  • Maharashtra Seamless has registered a topline decline of 31.9% YoY during the quarter ended December 2013. During the quarter, sales volumes of ERW pipes stood at 15,200 tonne, an increase of 10.2% QoQ but lower by 17.3% YoY. The sales volume of seamless pipes stood at 33,000 tonne, a drop of 6.1% QoQ and 29% YoY.

    Break-up of operating costs
    (Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
    Raw Materials 2,738 1,902 -30.5% 9,536 6,140 -35.6%
    % of sales 69.9% 71.3%   68.4% 69.9%  
    Employee cost 110 101 -8.9% 355 312 -12.2%
    % of sales 2.8% 3.8%   2.5% 3.5%  
    Other Expenditure 730 523 -28.3% 2,346 1,604 -31.6%
    % of sales 18.6% 19.6%   16.8% 18.3%  
    Total operating expenditure 3,579 2,526 -29.4% 12,236 8,055 -34.2%
    % of sales 91.4% 94.7%   87.8% 91.7%  

  • At the operating level, the company reported a decline in expenditure of 29.4% YoY. Despite decline in expenditure, low sales led to a decline of 3.3% in operating margins YoY. During the quarter, the EBITDA/tonne of the seamless pipe segment stood at Rs 1300/tonne as against EBITDA/tonne of Rs 3795/tonne in 2QFY14 while EBITDA/tonne of ERW stood at Rs 4600/tonne

  • The company's net profit decreased by 26.1% YoY. Net profit margins improved marginally by 0.6% YoY. Other income for the quarter increased by 25.6% YoY.

  • After obtaining the necessary permission from its board of directors and SEBI, the company is currently pursuing a buy-back of its shares. During the quarter, the company has bought and extinguished 969,030 equity shares. Consequently a sum of Rs 4.84 m has been reduced from share capital and Rs 170.7 m has been reduced from securities premium. Till January 30, 2014 the company has utilised Rs 356 m for buyback of Rs 1.89 m shares. The company has proposed a buy-back of its shares at a price not exceeding Rs 300 per equity share, payable in cash and not exceeding an aggregate amount of Rs 1000 m.
What to expect?
We believe the near term scenario for seamless pipe continue to be challenging in the domestic markets (Chinese competition and excess supply) and international market. A slowdown in the domestic and global capex cycle is weighing on the company's pipe sales volume. However, the on-going buy-back of shares by the company will continue to provide support to the company's stock price, going forward.

At the current price of Rs 170, the stock trades at around 14.1 times its trailing twelve month earnings. The stock is also trading around 2 times our estimated FY16 book value which makes it attractive. But looking at the challenging scenario in the short term, we recommend investors to be patient and Hold on to the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single midcap stock comprises more than 3% of your portfolio.

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