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Maharashtra Seamless: High input costs tanks profits - Views on News from Equitymaster
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  • May 17, 2012 - Maharashtra Seamless: High input costs tanks profits

Maharashtra Seamless: High input costs tanks profits
May 17, 2012

Maharashtra Seamless Limited (MSL) has announced its results for the quarter ended March 2012. During the quarter, the company has reported a rise of 12.3% YoY in net sales and a 7.9% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • The company's topline grows by 12.3% YoY during the quarter ended March 2012 on account of realisation growth of 7% YoY in the Seamless pipes segment and 2.6% in ERW pipes.
  • Both operating profits and operating margins declined by 38.7% YoY and 11.7% YoY respectively.
  • At the bottomline level, net profits for the quarter saw a decline of 7.9% YoY on account of high raw material cost. Net profit margins saw a decline of 3% YoY.
  • Other income for the quarter grew by a staggering 172.9% YoY.
  • For the year ended March 2012, net sales grew by 29% YoY and net profits declined by 7.4% YoY.

Financial performance snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Sales 5505 6182 12.3% 17836 23017 29.0%
Expenditure 4087 5313 30.0% 13380 18969 41.8%
Operating profit (EBITDA) 1418 869 -38.7% 4456 4048 -9.2%
Operating profit margin (%) 25.8% 14.1%   25.0% 17.6%  
Other income 129 352 172.9% 697 661 -5.1%
Depreciation 55 63 13.7% 185 201 8.9%
Interest 8 17 96.4% 32 52 64.4%
Profit before tax 1483 1141 -23.1% 4937 4456 -9.7%
Tax 577 307 -46.9% 1509 1282 -15.1%
Profit after tax/(loss) 906 835 -7.9% 3428 3174 -7.4%
Net profit margin (%) 16.5% 13.5%   19.2% 13.8%  
No. of shares (m)         70.5  
Diluted earnings per share (Rs)         45.0  
P/E ratio (x)         8.2  
* On a trailing 12 months basis

What has driven performance in 4QFY12?
  • Maharashtra Seamless has registered a topline growth of 12.3% YoY during the quarter ended March 2012. The significant rise in the topline can be attributed to strong volume growth in the steel pipes and tubes segment. Revenue from steel pipes and tubes increased 11.8% YoY. Revenues from the wind power segment also registered a robust growth of 542% YoY. For the full year ended March 2012, the company registered a robust 29% YoY growth in revenues due to 28.9% YoY increase in sales of steel pipes and tubes.

    Break-up of operating costs
    (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    Raw Materials 3221 4074 26.5% 10540 15113 43.4%
    % of sales 58.5% 65.9%   59.1% 65.7%  
    Employee costs 82 125 52.2% 302 384 27.2%
    % of sales 1.5% 2.0%   1.7% 1.7%  
    Other Expenditure 784 1114 42.1% 2539 3473 36.8%
    % of sales 14.2% 18.0%   14.2% 15.1%  
    Total operating expenditure 4087 5313 30.0% 13380 18969 41.8%
    % of sales 74.2% 85.9%   75.0% 82.4%  

  • At the operating level, the company reported an increase in expenditure of 30% YoY. As a result operating margin contracted by 11.7% YoY. Operating profits also tumbled by 38.7% YoY. This was due to high raw material and employee cost. The decline in EBITDA was largely on account of a 33.8% decrease for the seamless pipes EBITDA, and for ERW pipes, it decreased by 35.1%.

  • The company’s net profit declined by 7.9% YoY. This was due to higher interest expense, despite lower taxes. Net profits for the full year declined by 7.4% YoY on account of high input costs. This is the first time in three years that the company has recorded a decline in net profits on a full year basis.

  • The current order backlog stands at Rs 4.5 bn. The domestic order backlog currently stands at close to Rs 1.5 bn (34% of the total order backlog) worth of orders and the export orders account for around Rs 3 bn of orders (66% of the total order backlog). The share of seamless pipes in the total order book is 71% (Rs 3.7 bn) and that of ERW is 29% (Rs 0.9 bn).

What to expect?
The Company has commissioned 6 Seamless Plants at Vile-Bhagad Industrial Area, near Mangaon (Maharashtra) in the month of March 2012. The added advantage of this mill is that besides manufacturing drill pipes, it would be able to manufacture high thickness as well as long length pipes. This will help the company to broaden its product base in oil & gas, boiler and automobile segment. The plant is entitled for mega project benefits under Government of Maharashtra Package scheme of incentives 2007. The capacity of this plant is 0.2 million tonne per annum (mtpa) and with this total capacity to manufacture seamless pipes would increase to 0.55 mtpa. We believe that with the commissioning of this facility the company would be able to substantially improve its sales volume in coming years. The Company has also commissioned 5 MW Solar Power project at Pokaran, District Jaisalmer, Rajasthan during the quarter.

According to the management, the demand of seamless pipes and tubes from E&P activities continues to be strong. However, the dumping of steel pipes and tubes by Chinese companies in the Indian market continues and has an adverse effect on the market. Representatives of the industry are making a case for the imposition of anti-dumping duties. USA, Europe, Mexico and Brazil have imposed anti-dumping duties on Chinese pipes, which have created a favourable situation for Indian manufacturers in these countries.

However, the uncertainty relating to European debt crisis and subdued recovery in the US economy has led to a decline in oil prices. If this trend continues, it could further hamper the company’s profitability. At the current price of Rs 367, the stock trades at around 8 times its trailing twelve month earning. We maintain our positive view on the stock.

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