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Mah Seamless: A terrible year - Views on News from Equitymaster

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Mah Seamless: A terrible year
Jun 6, 2013

Maharashtra Seamless Ltd (MSL) has announced its results for the quarter ended March 2013. The company has reported a decline of 46.8% YoY in sales and 80.6% YoY in net profits for the quarter ended March 2013. Here is our analysis of the results.

Performance Summary
  • The company's topline declines by 46.8% YoY during the quarter ended March 2013.
  • Both operating profits and operating margins declined by 98.6% YoY and 13.7% YoY respectively.
  • At the bottomline level, net profits for the quarter saw a decrease of 80.6% YoY while net profit margins declined by 8.6% YoY.
  • For the full year ended March 2013, net sales declined by 25.2% YoY and net profits declined by 50.7% YoY.
  • The company has recommended a dividend of Rs 6 per share for the financial year ended March 2013.


Standalone financial performance snapshot
(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Net sales 6,182 3,287 -46.8% 23,015  17,220 -25.2%
Expenditure 5,313 3,275 -38.4% 19,004  15,511 -18.4%
Operating profit (EBDITA) 869  12 -98.6% 4,011  1,709 -57.4%
Operating profit margin (%) 14.1% 0.4%   17.4% 9.9%  
Other income 352  270 -23.3% 668  695 4.1%
Interest (net) 15.5 9 -41.3% 52  61 18.3%
Depreciation 62.9  93 48.5% 201  365 81.9%
Profit before tax 1142.2  180 -84.3% 4,426  1,978 -55.3%
Exceptional Item 0   -      -     -    
Tax 306.5  17 -94.3% 1,318  444 -66.3%
Profit after tax/(loss) 835.7  162 -80.6% 3,108  1,533 -50.7%
Net profit margin (%) 13.5% 4.9%   13.5% 8.9%  
No. of shares (m)         70.5  
Diluted earnings per share (Rs)         21.8  
P/E ratio (x)*         10.5  
On a trailing 12 months basis

What has driven performance in 4QFY13?
  • Maharashtra Seamless has registered a topline decline of 46.8% YoY during the quarter ended March 2013. The significant decline in topline can be attributed to lower volumes. Sales volumes in seamless pipes at 36,241 tonne (-22% QoQ and -47.8% YoY) and ERW pipes at 21,049 tonnes (14.5% QoQ and -37% YoY) were weak in both the segments.

    Break-up of operating costs
    (Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
    Raw Materials 4,074  2,521 -38.1% 15,103  12,057 -20.2%
    % of sales 65.9% 76.7%   65.6% 70.0%  
    Employee cost 125 82 -34.3% 404 437 8.2%
    % of sales 2.0% 2.5%   1.8% 2.5%  
    Other Expenditure 1,114 672 -39.7% 3,497  3,018 -13.7%
    % of sales 18.0% 20.4%   15.2% 17.5%  
    Total operating expenditure 5,313  3,275 -38.4% 19,004  15,511 -18.4%
    % of sales 85.9% 99.6%   82.6% 90.1%  

  • At the operating level, the company reported a decline in expenditure of 38.4% YoY. Despite decline in expenditure, low sales led to a decline of 13.7% in operating margins YoY. Lower volumes, coupled with lower realizations led Maharashtra Seamless to report lowest ever margin in seamless pipes. Lower volumes and higher fixed cost was on account of shutdown of unit 2 (newly commenced in April 2013) in the wake of weak demand. This led Maharashtra Seamless to report a loss in seamless pipes segment of Rs 25 m at the EBITDA level. EBITDA per tonne in the ERW segments was at Rs 1800 per tonnes.

  • The company's net profit decreased by 80.6% YoY. Net profit margins continue to disappoint and saw a decline of 8.6% YoY. This is on back of low capacity utilization of seamless pipe mill post the commencement of the new mill and higher competition from the Chinese mills.

  • The company's order book increased by 34.6% QoQ to Rs 3.5 bn and the company has recently added an export order worth US $22 m.

What we expect?

At the current price of Rs 228, the stock trades at around 10.5 times its trailing twelve month earning. We believe the near term scenario for seamless pipe continue to be challenging in domestic markets (Chinese completion and excess supply) and international market (Reduction in rig counts, destocking in US and commissioning of local supply in US). The company also sounded cautious on the outlook for FY14 although expects demand to pick up from 2HFY14. Maharashtra Seamless has reduced the volume guidance for FY14 to 220,000 tonne (earlier 270,000 tonnes) and refrained from giving the EBITDA per tonne guidance given the lower volumes.

The stock price of the company may underperform in the near term due to demand issues coupled with lower utilization in the seamless pipe segment. Domestic Indian seamless pipe players have requested for applying the safeguard duty to Director General of safeguards on imports from China which they allege is dumping the pipes in India given the slow demand globally. DGS has accepted the plea (earlier rejected) and has started the investigation against the imports of seamless pipes. We believe the process will at least take 6-9 months to complete and will provide respite to domestic players if the ruling is in their favour. Until then the Indian seamless player would continue to bleed during this period. We expect some revival in demand for pipes on the back of an improved global environment and renewed focus of the government on infrastructure development. Hence 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 stock comprises more than 5% of your portfolio.

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