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Maharashtra Seamless: Margins choke profit growth - Views on News from Equitymaster
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Maharashtra Seamless: Margins choke profit growth
Aug 8, 2011

Maharashtra Seamless has announced its June quarter results. The company has reported a 20% growth in topline and a 29% YoY fall in profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 20% YoY during the quarter.
  • Operating margins contract by 3% as higher raw materials expenses take toll.
  • Bottomline suffers a fall of 29% YoY on the back of fall in operating margins as well as other income.

(Rs m) 1QFY11 1QFY12 Change
Net sales 4,031 4,824 19.7%
Expenditure 3,054 3,804 24.5%
Operating profit (EBDITA) 977 1,021 4.4%
EBDITA margin (%) 24.2% 21.2%  
Other income 317 86 -72.8%
Interest (net) 8 6 -27.3%
Depreciation 52 46 -11.9%
Profit before tax 1,235 1,055 -14.5%
Extraordinaryincome/(expense) - -  
Tax 230 339 47.2%
Profit after tax/(loss) 1,005 717 -28.7%
Net profit margin (%) 24.9% 14.9%  
No. of shares (m) 70.5 70.5  
Diluted earnings per share (Rs)*   44.5  
Price to earnings ratio (x)*   8.0  
(* annualised)

What has driven performance in 1QFY12?
  • Company's topline grew by a decent 20% YoY during the quarter. As per the company, demand for seamless pipes and tubes from E&P activities continues to remain strong. Besides, anti dumping duty on seamless pipes from China in USA and Europe is having positive impact for demand of seamless pipes and tubes of the company. Furthermore, with the Government issuing 6 Petroleum, Chemicals and Petrochemicals investment regions (PCPIR) with investments in the region of Rs 2-3 trillion, this would lead to massive demand of steel pipes and tubes.
  • Cost break-up...
    (Rs m) 1QFY11 1QFY12 Change
    Raw materials 2,379 3,014 26.7%
    % sales 59.0% 62.5%  
    Manufacturing expenses 563 641 14.0%
    % sales 14.0% 13.3%  
    Staff costs 64 75 16.7%
    % sales 1.6% 1.6%  
    Selling & distribution expenses 26.40 47 78.8%
    % sales 0.7% 1.0%  
    Admin/other expenses 22.30 26 18.4%
    % sales 0.6% 0.5%  

  • On the costs front, margins have taken a hit to the tune of 3%. While manufacturing expenses came down (on a percentage of sales basis), they have been more than compensated by the huge jump witnessed in raw materials expenses and also selling and distribution expenses. It should be noted that the company did not seem to be in a position to pass on fully, the cost increases it has incurred due to higher raw material prices. Also, the fact that dumping of steel pipes and tubes by China in Indian market continued did not help matters.

  • Net profit for the quarter fell by 29% YoY. This is greater than the fall in PBT due to a 47% increase in tax outgo. Besides, the PBT itself has come in lower by 15% YoY despite a small 4% increase in operating profits. This has been mainly on account of 73% fall in other income. Excluding the same, net profits have fallen at a lot less rate of 8% YoY.

What to expect?

At the current price of Rs 357, the stock trades at a multiple of around 7 times its expected FY13 earnings per share. The company's current outstanding order book stands close to Rs 7.1 bn. In light of the attractive valuations and healthy order book we maintain our positive view on the stock.

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