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Maharashtra Seamless (MHS)
Industrials
In-line results. MHS reported 3QFY11 EBITDA at Rs1,044 mn (flat qoq and yoy),
which was almost in line with our estimates at Rs978 mn. The 3QFY11 result is
largely a non-event as we expect the domestic market to change structurally
post dropping of anti-dumping investigations against Chinese companies by the
Indian government. Medium-term fundamentals would depend on company’s
strategy in dealing with the changing business scenario. Maintain ADD.
In-line 3QFY11 results – not relevant; competition to increase on higher imports from China
MHS reported 3QFY11 revenues at Rs4.06 bn (-4% qoq, +9.1% yoy) vs our estimates at Rs4.38
bn. Marginal outperformance at the EBITDA level (Rs1.03 bn vs our estimates at Rs978 mn) was
balanced by higher tax rate at 32.2% vs our estimates at 28.7% leading to an in-line performance
at the PAT level (3QFY11 PAT at Rs750 mn vs our estimates at Rs759 mn). 3QFY11 numbers carry
very little significance as we expect the domestic market (~60% of sales) to change structurally,
going forward, on account of heightened competition from Chinese companies which should start
becoming visible from 4QFY11E onwards.
There could be an upside risk to our estimates if:
Other safeguard duties are imposed by the government on Chinese imports which would
improve domestic margins.
The company is able to scale up exports which earn higher margins to mitigate the impact of
lower domestic realizations.
Chinese companies pose a significant threat – we expect margin erosion in the domestic market
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, one of the largest Chinese players in the seamless segment (Exhibit 2), it seems
certain that Chinese will undercut MHS on pricing in a significant manner. We note that in
1HCY10, Wuxi has sold its products at negative gross margin.
Our estimates for FY2012E imply an EBITDA per ton of ~Rs13,500 (vs ~Rs18,000 per ton in
FY2011E) and ~Rs5,000, respectively in the seamless and ERW segments. We are assuming that
MHS would be able to hold on to its pricing on the export front (~30% of seamless volumes:
EBITDA margins at Rs18,000 per ton) while we expect the margins per ton in the domestic
business to reduce to Rs10,500 (from ~Rs16,500/ton).
We maintain our ADD rating with a target price of Rs418
We would take a re-look at our numbers post the conference call with the management.
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 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 for 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.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Maharashtra Seamless (MHS)
Industrials
In-line results. MHS reported 3QFY11 EBITDA at Rs1,044 mn (flat qoq and yoy),
which was almost in line with our estimates at Rs978 mn. The 3QFY11 result is
largely a non-event as we expect the domestic market to change structurally
post dropping of anti-dumping investigations against Chinese companies by the
Indian government. Medium-term fundamentals would depend on company’s
strategy in dealing with the changing business scenario. Maintain ADD.
In-line 3QFY11 results – not relevant; competition to increase on higher imports from China
MHS reported 3QFY11 revenues at Rs4.06 bn (-4% qoq, +9.1% yoy) vs our estimates at Rs4.38
bn. Marginal outperformance at the EBITDA level (Rs1.03 bn vs our estimates at Rs978 mn) was
balanced by higher tax rate at 32.2% vs our estimates at 28.7% leading to an in-line performance
at the PAT level (3QFY11 PAT at Rs750 mn vs our estimates at Rs759 mn). 3QFY11 numbers carry
very little significance as we expect the domestic market (~60% of sales) to change structurally,
going forward, on account of heightened competition from Chinese companies which should start
becoming visible from 4QFY11E onwards.
There could be an upside risk to our estimates if:
Other safeguard duties are imposed by the government on Chinese imports which would
improve domestic margins.
The company is able to scale up exports which earn higher margins to mitigate the impact of
lower domestic realizations.
Chinese companies pose a significant threat – we expect margin erosion in the domestic market
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, one of the largest Chinese players in the seamless segment (Exhibit 2), it seems
certain that Chinese will undercut MHS on pricing in a significant manner. We note that in
1HCY10, Wuxi has sold its products at negative gross margin.
Our estimates for FY2012E imply an EBITDA per ton of ~Rs13,500 (vs ~Rs18,000 per ton in
FY2011E) and ~Rs5,000, respectively in the seamless and ERW segments. We are assuming that
MHS would be able to hold on to its pricing on the export front (~30% of seamless volumes:
EBITDA margins at Rs18,000 per ton) while we expect the margins per ton in the domestic
business to reduce to Rs10,500 (from ~Rs16,500/ton).
We maintain our ADD rating with a target price of Rs418
We would take a re-look at our numbers post the conference call with the management.
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 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 for 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.
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