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Mah Seamless: Profits tank on weak demand - Views on News from Equitymaster
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Mah Seamless: Profits tank on weak demand
Aug 22, 2013

Maharashtra Seamless Ltd (MSL) has announced its results for the quarter ended June 2013. The company has reported a decline of 37.2% YoY in sales and 57.8% YoY in net profits for the quarter ended June 2013. Here is our analysis of the results.

Performance summary
  • The company's topline declines by 37.2% YoY during the quarter ended June 2013.
  • Both operating profits and operating margins declined by 59.4% YoY and 5.5% YoY respectively.
  • At the bottomline level, net profits for the quarter saw a decrease of 57.8% YoY while net profit margins declined by 4.1% YoY.

Standalone financial performance snapshot
(Rs m) 1QFY13 1QFY14 Change
Net sales 5,210 3,274 -37.2%
Expenditure 4,401 2,945 -33.1%
Operating profit (EBDITA) 808 328 -59.4%
Operating profit margin (%) 15.5% 10.0%  
Other income 184 120 -34.9%
Interest (net) 12 6 -55.6%
Depreciation 87 95 9.4%
Profit before tax 893 348 -61.0%
Exceptional Item - -  
Tax 239 72 -69.8%
Profit after tax/(loss) 654 276 -57.8%
Net profit margin (%) 12.5% 8.4%  
No. of shares (m) - 71  
Diluted earnings per share (Rs)   19.6  
P/E ratio (x)*   9.7  
On a trailing 12 months basis

What has driven performance in 1QFY14?
  • Maharashtra Seamless has registered a topline decline of 37.2% YoY during the quarter ended June 2013. The significant decline in topline can be attributed to lower volumes. Sales volumes of seamless pipes stood at 35,209 tonnes (0.6% QoQ and -38.7%YoY) and have stabilized post 4QFY13. However, volumes of ERW pipes fell to 11,471 tonnes (-38.9% QoQ and -47.3%YoY).

    Break-up of operating costs
    (Rs m) 1QFY13 1QFY14 Change
    Raw Materials 3,437 2,236 -34.9%
      % of sales 66.0% 68.3%  
    Employee cost 121 112 -7.5%
      % of sales 2.3% 3.4%  
    Other Expenditure 843 597 -29.2%
      % of sales 16.2% 18.2%  
    Total operating expenditure 4401 2945 -33.1%
      % of sales 84.5% 90.0%  

  • At the operating level, the company reported a decline in expenditure of 33.1% YoY. Despite decline in expenditure, low sales led to a decline of 5.5% in operating margins on a YoY basis. Margins improved sequentially in both seamless pipes and ERW pipes as it were impacted by inventory write-down in 4QFY13. EBITDA per tonne in the ERW segment was at Rs 4,255 per tonne whereas in seamless pipes it was at Rs 6,278 per tonne. EBITDA fell by 59.4% YoY but increased sequentially. EBITDA margin improved sequentially by 960 bps to 10.0%.

  • The company's net profit decreased by 57.8% YoY. Net profit margins continue to disappoint and saw a decline of 4.1% YoY.

  • The company's order book fell further by 34.6% QoQ to Rs 2.3 bn reducing the visibility and is lowest ever in recent times.

What to expect?
Maharashtra Seamless has maintained its cautious outlook for the demand of seamless pipes but expects demand to pick up from 2HFY14. We believe the near term scenario for seamless pipes continues to be challenging in the domestic markets (Chinese competition and excess supply) and international markets.

At the current price of Rs 189, the stock trades at around 9.7 times its trailing twelve month earnings. The stock is also trading at around 0.4 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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