Maharashtra Seamless: Margins to remain strong near term: HSBC

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Maharashtra Seamless (MHS IN)
N: Margins to remain strong near term


 2QFY11 operating profit below our forecasts by 6%; net profit
rises 12% y-o-y due to other income
 Order book at INR4.2bn, benefit from low cost inventory
would lead to strong EBITDA margins in near term
 Reiterate Neutral rating, removing volatility flag (V); raise target
to INR460 from INR425; high raw material prices the key risk





2QFY11 operating result below forecast, net profit increases on other income:
Maharashtra Seamless’s reported flat sales and EBITDA for 2QFY11 (lower than our estimate
by 10% and 6% respectively) primarily due to a decline in sales volumes (-7% y-o-y to
c73,500 tonnes). However, net profit increased 12% y-o-y to INR801m due to high other
income (INR136m) on sale of non-trade investments.

Order book flat at INR4.2bn MHS had a closing order book of INR4.2bn (flat y-o-y) at
the end of 2QFY11, of which c92% orders were from domestic market while remaining
from international market. The order book for seamless pipes was cINR2.9bn and for
ERW was INR1.3bn.

Near term EBITDA margin (EBITDA/tonne) likely to remain strong: The company
had a closing inventory of c90,000 billets and c20,000 coils (raw material for pipes) at the
end of 2QFY11 valued at a price lower than current market price. We believe MHS is
likely to benefit from low cost inventory in the rising steel price scenario leading to higher
EBITDA margins for next few quarters.

Maintain Neutral, removing volatility flag (V), raised target to INR460 (from
INR425): We like the stock based on its cash-rich balance sheet and near-term margins
strength. Further, the announcement of anti-dumping duty on Chinese pipes in India will
improve the company’s earnings outlook as MHS has capacities to gain market share from
Chinese imports. Applying our target PE of 12.5x (up from earlier 12x) to Mar-12e EPS,
we arrive at our 12-month target price of INR460 (from was INR425), implying a
potential return of 10.6%. We maintain our Neutral rating but remove V-flag.