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Excess leverage may play spoilsport…
PSL reported its Q2FY11 numbers that were in line with our estimates.
Revenues grew ~ 25% YoY despite sluggish growth QoQ (down ~14%)
against our estimates of | 780 crore due to lower shipments from the
0.3 MTPA plant in the US. EBITDA margins also improved (up ~100 bps
YoY and 130 bps QoQ) led by lower raw material cost (down ~11%
QoQ) and reduced employee expenses (down ~ 43% QoQ). PAT
remained under pressure due to excess leverage on the books (debt at
~ | 2295 crore), which led to a sharp spike in interest cost by ~100%
YoY. So far, the Q2FY11 results reported by pipe manufacturers have
not been encouraging. Also, based on order book visibility concerns, we
have revised down our target price to | 110/share with an ADD rating.
Lower shipment from 0.3 MTPA US plant dampens sales growth
PSL’s net sales at | 742 crore were down 14% QoQ primarily due to
lower sales from its 0.3 MTPA plant in the US. The plant in the US
was lying idle for most of the quarter due to lack of orders from the
US. Going forward, It is expected to bag some orders from the US
due to renewed shale gas activity.
Excess leverage leads to decline in PAT
PAT declined by ~ 35% YoY and ~32% QoQ due to a substantial
jump in interest cost (up ~100% YoY and ~7% QoQ). Excess
leverage in its books (debt levels at | 2295 crore as on September
30, 2010 as compared to | 1130 crore in 2009) led to the poor show
on the bottomline front.
Valuation
At the CMP of | 102, the stock is trading at 12.7x FY12E EPS of | 8 and
also discounting its FY12E EV/EBITDA by 4.9x. We have valued the stock
at 5x FY12E EV/EBITDA to arrive at a target price of | 110. We have
assigned an ADD rating to the stock.
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