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Mah Seamless: On the cusp of revival - Views on News from Equitymaster

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Mah Seamless: On the cusp of revival
Sep 5, 2014

Maharashtra Seamless Ltd (MSL) has announced its results for the quarter ended June 2014. The company has reported a decline of 17.8% YoY and 18.5% YoY in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • The company's topline declines by 17.8% YoY during the quarter ended June 2014.
  • Operating profits decline 54.7% YoY while operating margins almost halve to 5.5% during the quarter.
  • At the bottomline level, net profits for the quarter declined 18.5% YoY.
  • The company extinguished 1.2 m equity shares during the quarter. It may be noted that the buy- back culminated on 07th April 2014 and about 3.5 m shares were bought back in total.

Financial performance: A snapshot
(Rs m) 1QFY14 1QFY15 Change
Net sales 3,274 2,690 -17.8%
Expenditure 2,945 2,541 -13.7%
Operating profit (EBDITA) 329 149 -54.7%
Operating profit margin (%) 10.0% 5.5%  
Other income 120 212 77.3%
Interest (net) 6 6 16.4%
Depreciation 95 98 3.6%
Profit before tax 348 256 -26.4%
Tax 72 32 -56.4%
Profit after tax/(loss) 276 225 -18.5%
Net profit margin (%) 8.4% 8.4%  
No. of shares (m)   67  
Diluted earnings per share (Rs)   3.4  
P/E ratio (x)*   25.6  
* (Standalone book value as on 30th June 2014)

What has driven performance in 1QFY15?
  • Maharashtra Seamless has registered a topline decline of 17.8% YoY during the quarter ended June 2014 due to weak demand and increasing competition.

  • At the operating level, the company reported a decline in profits of 54.7% YoY. Huge cost pressures and dwindling sales growth led to margin erosion.

  • The company's net profit declined by 18.5% YoY. Rise in depreciation (+3.6% YoY) and interest expenses (+16.4%) hurt profitability growth. However, a 77.3% rise in other income cushioned the overall fall in profits.
What to expect?
We believe the near term scenario for seamless pipes is expected to be buoyant. Finally, the government decided to impose safeguard duty on seamless pipes. This is going to create a level playing field with Chinese companies who dumped into India till now. Imposition of duty will augur volume growth as well as increase capacity utilization levels as domestic demand will revive. Further, in the recent Union Budget the FM indicated setting up of an additional 15,000 km of gas pipeline. This is also expected to generate substantial demand for pipes.

At the current price of Rs 341, the stock trades at around 25.6 times its trailing twelve month earnings. This is one stock which has tested our patience for long. However, considering the fact that the macro environment has been improving, we believe the time is ripe to reap the rewards as the company is at a cusp of revival. 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 midcap stock comprises more than 3% of your portfolio.

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