Maharashtra Seamless: In line Q2FY11; maintain BUY: Nomura

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 Action
We maintain our BUY rating and price target of Rs505, offering potential upside of
18%. We think MHS is in a strong competitive position in both seamless and ERW
pipes and has been able to maintain profitability despite being exposed to business
cycle risks (user industries and raw materials).


 Catalysts
A pick-up in the capex of both the power-generation and oil & gas sectors could
spur an increase in order book and revenue growth for the company.

Anchor themes
We think MHS is a play on the capex of the industrial (oil & gas) and powergeneration
sectors in India, and we expect capex in these segments to increase
further. It is in the process of expanding capacity for its product lines.


Growth drivers intact
 In line Q2FY11; maintain BUY
MSL Q2 FY10 results were in line at the net profit level as lower than
expected volume growth in seamless pipes was compensated for by
higher EBITDA margin (Rs18,872 per metric tonne). We maintain a
BUY on the stock, as we believe the company will benefit
significantly from a pick-up in the domestic capex cycle due to the
nature of its businesses and its strong competitive position.

 Demand environment likely to pick up
As per management, domestic demand is likely to pick up as the
government has started the process for NELP phase 9 auction. Also,
ONGC is expected to give a large order which is likely to start delivery
by October 2011. Demand from power and refinery will also continue
to be strong in the near future, in our view.

 Competition scenario is the same
Competitive intensity in the industry remains high both from the Indian
players (which have also expanded capacities) and Chinese players.
As per management, anti-dumping on seamless pipe has been
effected in the US and Europe against China which is having a
positive impact on realisations in export markets. Also, the Indian
government’s probe against anti-dumping of seamless pipes by
Chinese players is likely to be over by January 2011.

 Maintaining price target
The stock has performed in line with the Sensex over the past few
months. Our estimates have changed only slightly in view of the Q2
results, and we maintain our PT of Rs505.