Maharashtra Seamless: High-margin export orders -- Alchemy

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High-margin export orders and inventory gains boost margin

Volume decline neutralised by realisation improvement
The volumes declined 6.7% YoY to 74,140 tonnes, mainly led by 17.2% decline in ERW
volumes to 22,434 tonnes. The seamless volumes marginally declined 1.2% YoY to 51,706
tonnes. The realisation grew 6.6% YoY, led by a sharp 10% YoY growth in seamless
realisations at `60,289/tonne. ERW realisations declined 7.7% YoY to `38,086/tonne.


Highest ever EBIDTA in seamless segment
The blended EBIDTA grew 9% YoY to `13,914/tonne, mainly led by margin expansion in the
seamless segment. EBIDTA in seamless grew 5% YoY and 21% QoQ to `18,872/tonne (the
highest ever EBIDTA to date) on the back of execution of high-margin export orders and
inventory gains in the quarter. However, EBIDTA in ERW declined 14% YoY `2,487 (the
lowest for last five quarters) due to a higher proportion of sales to the dealers’ market. The
EBIDTA margin stood at 24.6% YoY (down 160bps YoY).

Net profit up 13% YoY, led by higher other income
Net profit grew 13.4% YoY to `807mn, led by doubling of other income at `136mn. Other
income includes `90mn profit on the sale of non-trade investments.

Order book at `4.15bn
The order book remained flat on YoY and declined 7% QoQ to `4.5bn (seamless at `2.88bn
and ERW at `1.27bn). Exports account for 8% of the order book. During the quarter, the
company witnessed order inflow of `4.2bn (down 5.6% YoY and 8.9% QoQ).

Outlook
MSL maintains its annual guidance of 225,000 tonnes of seamless pipes, but downgrades its
guidance for ERW pipes at 110,000 tonnes (against 120,000 tonnes earlier). It implies volume
growth of 16% YoY in seamless and 37% YoY in ERW in 2HFY11. The company expects
inventory gains to continue in the coming quarter as it holds inventory of 90,000 tonnes of
billets and 20,000 tonnes of coils at relatively lower cost.

Valuations
We maintain a positive view on MSL, considering a) the favourable industry outlook (with
crude oil consistently hovering above US$70/barrel), b) strong demand from the domestic
boiler market, c) favourable developments in the form of antidumping duties for seamless
pipes by the US and Europe against China and initiation of an antidumping probe by the
Government of India (to help in scaling up exports and benefit from lower competition in the
domestic market) and d) attractive valuations.