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Maharashtra Seamless
Industrials
Domestic margins under threat. The Indian government has stopped anti-dumping
investigations against the Chinese seamless pipe manufacturers, citing lack of evidence.
We believe that with the Indian market opening to the Chinese, there is certainty of
pricing pressure on the Indian manufacturers. We reduce our earning estimates and
downgrade the stock to ADD with a target price of Rs418 (Rs518 previously), which
implies a P/E of 10.5X FY2012E EPS.
Anti-dumping investigations on Chinese players called off – we expect price erosion
The Indian government has called off anti-dumping investigations against the Chinese seamless
pipe manufacturers, citing lack of evidence. We find this surprising given that the 1HCY10
financials of Wuxi Holdings Ltd—one of the major players in the Chinese seamless industry with a
capacity of ~1.5 mn tons—make it amply clear that the company is selling goods below cost.
With anti-dumping duties out of the way, we expect Chinese companies to compete aggressively
in the Indian market given their large un-utilized capacities and the fact that they are barred from
the two biggest markets for seamless pipes—US and Europe. If one were to look at 1HCY10
financials of Wuxi (Exhibit 1), it seems certain that they will undercut MHS on pricing in a
significant manner. We note that in 1HCY10, Wuxi has sold its products at negative gross margin.
Higher exports is the only solution to counter the Chinese threat
We expect MHS to give renewed emphasis on scaling up export volumes with price erosion in the
domestic market on account of increased Chinese competition. The Romanian plant coming on
line in FY2012E would help the company in the following ways:
` It would enable MHS to tap export markets for new and higher value added products like ‘drill
pipes’, which earn higher margins per ton.
` It would enable MHS to compete for larger orders from the global oil majors. Earlier, the small
size of MHS’s operations (0.35 mn tons) was an impediment for qualifying for larger orders.
Reduce our estimates; downgrade to ADD
We have reduced our earning estimates to take into account the likely price erosion in the Indian
market due to Chinese competition. We expect the first sign of pricing pressure to emerge from
1QFY12E onwards as MHS has current order book of ~Rs4.5 bn which would more or less take
care of 4QFY11E. We have reduced our EBITDA estimates from Rs5.34 bn and Rs5.8 bn to Rs4.15
bn and Rs4.61 bn for FY2012E and FY2013E, respectively. Our EPS estimates are down to Rs39.6
and Rs44.3 from Rs50.9 and Rs56 for FY2012E and FY2013E, respectively.
Chinese players could represent a significant threat in the domestic market
We highlight the 1HCY10 financials of one of the major players in the Chinese seamless
industry, Wuxi Holdings Ltd, which has a capacity to manufacture ~1.5 mn tons of seamless
pipes. We note that in 1HCY10, the company has sold its products at negative gross margin.
The reasons are:
` There have been significant capacity additions (Seamless pipes) in China from CY2007
onwards. With crude oil prices having corrected significantly from mid-CY2008, the
global demand of seamless pipes has gone down.
` Anti-dumping duties have been imposed on Chinese seamless pipes by the US
government on account of which they can’t sell their products in the biggest market for
OCTG products. The North American geography accounted for ~28% of the total
consumption of OCTG products in CY2009.
With Chinese companies under a lot of financial stress as seen from the 1HCY10 financials
of Wuxi, we expect them to be aggressive on the pricing front in the Indian market.
Global rig count is rising; exports could be scaled up
With crude oil price rising consistently and trading at $88/bbl currently, worldwide rig count
has been rising mom since April ’09, which augurs well for demand of seamless pipes. We
expect MHS to put greater emphasis on growing export volumes in the coming years to
counter the threat which Chinese companies pose in the domestic market. Higher volumes
of exports would counter the pricing pressure in the domestic market on account of export
markets offering better margins than India.
Change in estimates
Our new estimates imply an EBITDA per ton of ~Rs13,500 and ~Rs5,000 (earlier ~Rs18,000
and ~Rs5,000) in the seamless and ERW segments, respectively, in FY2012E. We are
assuming that MHS would be able to hold on to its pricing on the export front (~30% of
seamless volumes). On the other hand, we are assuming that pricing in the domestic market
would decline ~10% (average realization Rs60,289 in 2QFY11).
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