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Maharashtra Seamless: Conference call extracts - Views on News from Equitymaster

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Maharashtra Seamless: Conference call extracts
May 26, 2009

We recently had a conference call with the management of Maharashtra Seamless to discuss about the performance of FY09 and the future plans of the company. Here are the key takeaways from the same. Key takeaways:

On FY09 performance: The topline grew by around 38% to Rs 20.9 bn on the back of higher realizations. The revenues from steel pipes and tubes segment grew by around 39% YoY in FY09. It sold around 225,000 tonnes and 100,000 tonnes of seamless and ERW pipes respectively during the fiscal. The operating margins contracted by 2.2% to 17.2% mainly on account of higher raw material costs and other expenditure. Freight expenses that form a part of other expenses have jumped more than threefold as exports accounted for around 25% of the total sales during the fiscal. The interest costs increased more than threefold mainly on account of short term buyer’s credit taken by the company. The net profits grew by around 30% to 2.5 bn during the fiscal.

Balance sheet position: Maharashtra Seamless continued to maintain its debt free status with no debt outstanding on its books. The liquidity position of the company remained strong as it sits on a cash balance of Rs 6.2 bn. It is important to note that all the working capital requirement of company will also funded through internal accruals.

Order book position: The current order book stands at around Rs 5 bn wherein seamless pipes segment has Rs 3.8 bn worth of orders and ERW pipes segment has around Rs 1.2 bn worth of orders. This order book comprises completely of domestic clients with ONGC accounting for around 40% of the total order book.

Expansion plans: The company plans to expand its seamless pipe capacity from 350,000 tonnes to 500,000 by December 2010. For this purpose, it had acquired a seamless plant in Romania last year having a capacity of 200,000 tonnes, which is being relocated to India. Around 90% of the shipment has been already done to India. It is also setting up a captive power plant of 20 mw at Maangoan in Maharashtra. The expansion and modernization of the seamless plant is going as per the schedule. The total estimated capex for the expansion is around Rs 3 bn, out of which the company has already spent Rs 1.2 bn.

Tenaris JV: The company has a joint venture with Tenaris UK, which provides the company with premium threading technology used especially for oil well refineries. The JV has enabled the company to cater to the domestic markets requirements in this segment. The revenue of the JV stood at around Rs 400 m in FY09, while the margins were around 10% to 15%. The management expects the revenues to grow by 25% in FY10.

Outlook for FY10 and FY11: Globally the demand for seamless pipes from oil and gas sector is expected to remain subdued in the first half of the current fiscal due to the credit crisis, while recovery is likely to start from third quarter of the fiscal. However, the demand in the domestic markets is not adversely affected. Domestic oil companies are continuing with their ongoing projects and exploration and production activities. The management foresees nominal growth in FY10, while the same is expected to grow at around 10% to 15% in FY11.

The company’s major focus during the current fiscal is on maintaining its profitability. It has also adopted several cost cutting measures so as to ensure that its margins remain safeguarded. The management is targeting sales of around 225,000 tonnes of seamless pipes and 125,000 tonnes of ERW pipes in FY10. It has put up an intensive and aggressive marketing approach by expanding the customer base in domestic as well as international market to reduce the impact of recession.

What to expect?
At the current price of Rs 244, the stock trades at a P/E of 4.7x times our expected FY12 earnings per share. We had given a target price of Rs 300 from a FY11 perspective. Having added one more year to our projections, we now revise the target price upwards to Rs 400 per share and expect the company to achieve the same by FY12.

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