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Maharashtra Seamless: Operating costs hurt profits - Views on News from Equitymaster
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Maharashtra Seamless: Operating costs hurt profits
Nov 1, 2011

Maharashtra Seamless Ltd has announced its results for the quarter ended September 2011. The company has reported a rise of 37.8% in sales and 1.4% increase in net profits for the quarter ended September 2011. Here is our analysis of the results.

Performance summary
  • The company's topline grows by 37.8% YoY during the quarter ended September 2011.
  • Operating profits improved by 9.2% YoY but operating margins declined from 24.5% in 2QFY11 to 19.4% in 2QFY12.
  • At the bottomline level, net profits for the quarter saw a marginal increase of 1.4% YoY on account of lower other income and higher expenditure.

Financial performance snapshot
(Rs m) 2QFY11  2QFY12  Change 1HFY11 1HFY12 Change
Sales 4232 5833 37.8% 8263 10657 29.0%
Expenditure 3196 4702 47.1% 6250 8505 36.1%
Operating profit (EBDITA) 1036 1131 9.2% 2013 2152 6.9%
Operating profit margin (%) 24.5% 19.4%   24.4% 20.2%  
Other income 136 89 -34.8% 453 175 -61.4%
Depreciation 45 46 3.4% 96 92 -4.9%
Interest 5 9 102.2% 12 15 21.1%
Profit before tax 1123 1165 3.7% 2358 2220 -5.8%
Tax 322 353 9.6% 552 692 25.3%
Profit after tax/(loss) 801 812 1.4% 1805 1528 -15.4%
Net profit margin (%) 18.9% 13.9%   21.8% 14.3%  
No. of shares (m)         70.5  
Diluted earnings per share (Rs)         45.2  
P/E ratio (x)         7.5  
*On a trailing 12 month basis

What has driven performance in 1QFY12?
  • Maharashtra Seamless has registered a topline growth of 37.8% YoY during the quarter ended September 2011. The significant rise in the topline can be attributed to strong volume growth in the steel pipes and tubes segment as well as wind power segment. Revenue from steel pipes and tubes increased 37.7% YoY and revenues from wind power segment increased 53.2% YoY during the quarter ended September 2011.

    Break-up of operating costs
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Raw Materials 2627 3817 45.3% 5006 6831 36.5%
    % of sales 62.1% 65.4%   60.6% 64.1%  
    Employee costs 71 87 22.2% 135 162 19.6%
    % of sales 1.7% 1.5%   1.6% 1.5%  
    Manufacturing Expenses 431 679 57.8% 993 1321 33.0%
    % of sales 10.2% 11.6%   12.0% 12.4%  
    Selling & Distribution Expenses 48 84 75.4% 74 131 76.6%
    % of sales 1.1% 1.4%   0.9% 1.2%  
    Other Expenditure 20 34 75.4% 42 61 45.0%
    % of sales 0.5% 0.6%   0.5% 0.6%  
    Total operating expenditure 3196 4702 47.1% 6250 8505 36.1%
    % of sales 75.5% 80.6%   75.6% 79.8%  

  • At the operating level, the company reported an increase in expenditure of 47.1% YoY. As a result operating margin declined by 5.1% YoY and net profit margin declined by 5% YoY. 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 and higher selling and distribution expenses.

  • Other income saw a significant decline of 34.8% over the same quarter last year.

  • The company's net profit increased marginally by 1.4% YoY as compared to an increase in operating profits. This was due to lower other income and increase in interest charges which increased by 102.2% YoY during the quarter ended September 2011.

What to expect?
High crude oil prices have led to an increase in E&P (Exploration & Production) activities, an important driver for demand of seamless pipes and tubes. Anti dumping duty by USA and Europe on Chinese manufactured seamless pipes is having positive impact for demand of seamless pipes and tubes of the company. Canada and Brazil are also considering anti dumping duty on Chinese manufactured seamless pipes. This will further help Indian manufacturers. However dumping of steel pipes and tubes made by China is still continuing in India. This has hurt domestic sales. Government of India has issued six PCPIR (Petroleum Chemicals Petro Chemicals Investment Region) which are massive complexes that are expected to attract investment worth Rs 2-3 trillion. This would lead to massive demand for steel pipes and tubes. The company's current outstanding order book stands close to Rs 5.56 bn.

At the current price of Rs 340, the stock trades at around 7.5 times its trailing twelve month earning. We maintain our positive view on the stock.

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