Maharashtra Seamless: An overview - Views on News from Equitymaster

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Maharashtra Seamless: An overview

Sep 8, 2008

Brief background:
Maharashtra Seamless Limited (MSL) is the flagship company of the D.P Jindal Group. It was incorporated in 1989 and is the largest manufacturer of seamless pipes in India, primarily used in oil & gas exploration activities. It has a nearly 50 per cent market share in the seamless pipes space and is the major revenue generator, contributing on an average 70% to company’s total revenues.

The company also manufactures electric arc welded (ERW) pipes used in the refining industry. Its wide range of pipe products also finds application in the hydrocarbon & process industry, automotive, boilers, bearings, mechanical & general engineering industries. The company is increasingly focusing on manufacture of high diameter pipes, both in the seamless and ERW pipes category. Currently, the company is the sole manufacturer of 14-inch diameter seamless pipes in India, a niche segment that is largely import intensive.

Moreover, it also offers value-added services like anti-corrosion coating for pipes and connectors used in drilling. It also has presence in the renewable energy segment, having 20 windmills aggregating to 7 MW capacities for captive consumption. Its plant is located in Raigad district of Maharashtra, which has manufacturing capacity of seamless pipes of 350,000 tonnes and ERW pipes of 250,000 tonnes annually.

It recently acquired seamless pipes plant in Romania on an asset sale basis having a capacity of 200,000 tonnes, which it intends to relocate to India and undertake modernization at an estimated cost of Rs 30 bn that would take the company’s seamless plant capacity to 500,000 tonnes per annum.

Let us see the financial performance of the company in the five years between 2003 and 2007

(Rs m) FY03 FY04 FY05 FY06 FY07
Net sales 3,838 4,913 7,694 9,662 13,971
Operating profit 841 1,003 1,285 2,080 3,410
OPM (%) 21.9% 20.4% 16.7% 21.5% 24%
Net profit 637 718 849 1,396 2,338
NPM (%) 16.6% 14.6% 11.0% 14.4% 16.7%
Balance sheet          
Total Equity 2,032 2,441 3,128 4,139 9,241
Total Debt 584 1,271 1,084 4,930 1,082
D/E (x) 0.3 0.5 0.3 1.2 0.1
Working cap 1,104 1,487 1,641 3,253 4,105
% sales 28.8% 30.3% 21.3% 33.7% 29%
NFA 1,202 2,197 2,699 2,807 2,858
Sales/NFA (x) 3.2 2.2 2.9 3.4 4.9
RONW 31.4% 29.4% 27.1% 33.7% 25.3%
ROIC 21.4% 16.2% 17.7% 20.8% 29.6%
Interest coverage 67 54 34 44 102
P/E* (x) 10.1 11.6 15.3 15.1 20.1
* Price is average of high and low during the year

Profit and loss account:

  • The company managed to grow its topline at a CAGR of 38% backed by robust growth in the oil and gas sector.

  • The operating margins of the company expanded by around 210 bps from 21.9% in FY03 to 24% in FY07. The operating profits grew at a CAGR of 42% during the same period, higher than the topline growth. This was mainly on account of reduced operating expenditure as a percentage of sales.

  • The bottomline of the company grew at a CAGR of 38% in line with the topline growth during the period under consideration.

  • As far as FY08 performance is concerned, the company’s topline grew by a sedate 7% YoY while bottomline fell 17% YoY as higher costs took toll on its margins.

Balance Sheet:

  • The company managed to reduce its debt to equity from 0.3 in FY03 to 0.1 in FY07.

  • The working capital (cash excluded) of the company grew at a CAGR of 39%. However if we consider it as a percent of sales, it remained stable at 29%.

  • As far as growth in NFA is concerned, it stood at a CAGR of 24%.

Cash flows:

  • The company invested around Rs 2.1 bn in capex between the period FY04 and FY07, most of which was funded with internal accruals.

  • As far as investment in working capital is concerned, it has pumped in close to Rs 3 bn between FY04 and FY07 to meet its working capital needs.

  • Thus, between FY04 and FY07, while the company generated cash from operations to the tune of Rs 5.8 bn, it had to plow back more than 80% of the same to grow its business.

Future prospects:
The company has a dominant position in seamless pipes in domestic market and has also created a significant presence in overseas markets through its exports to USA, Middle Eastern countries, Japan etc. With an increasing focus on exploration & production (E&P) activities in India and globally and need for cross country infrastructure for oil and gas transport, the products of the company would definitely have a broad market to cater in future. Moreover, increasing demand for oil and gas would consequently increase demand for massive investment in E&P sector. Also, it should be kept in mind that the company has an impressive clientele domestically as well as internationally.

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