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Maharashtra Seamless (MHS IN)
Going international
4QFY11 profits surprised us on the upside owing to higher
sales and inventory gains
We like the company’s new strategy of focusing on Latin
American and Canadian markets; we believe free cash will
be a boon in a rising interest rate scenario
We raise our price target to INR450 (from INR430) and
upgrade our rating to Overweight (from Neutral)
MHS reported 4QFY11 net profit of INR906m, c20% higher than our estimate and
consensus. The surprise was primarily because of higher-than-expected sales and inventory
gains from the liquidation of some inventory. The sales volume was the highest recorded over
the past 10 quarters, which management attributed to two large orders in the quarter. It
liquidated some of its inventory holdings and benefited from the rise in steel and billet prices.
We expect MHS to benefit from its increasing focus on international markets. In its
presentation and during the conference call, management pointed to increasing its focus on
international territories like Canada, Latin America and the United States. Our discussions with
large global players in a similar space also seem to suggest rising buoyancy in Latin American
markets like Brazil, Argentina and Columbia where E&P activity is picking up. While
management during the conference call did not elaborate on the strategy for improving its
penetration in international markets, we believe this is nevertheless a step in the right direction.
Free cash is a boon in a rising interest rate scenario. MHS has reported free cash of
INR6.85bn, and we expect this cash reserves to grow in future. Its reported other income
accounts for c18% of profit before tax, making it a substantial contributor to profitability.
In an increasing interest rate scenario, we expect this to improve the firm’s profitability.
Valuation and risks. We expect MHS to achieve a modest CAGR of 8% over FY11-14e.
We increase our FY12e and FY13e EPS estimates by 3 and 4%, respectively, and are ahead
of consensus by the same. Given the cyclical nature of order inflows, we value the pipes
business on PE. The stock has underperformed the Sensex by 15% over the past 12 months
and trades (ex cash) at 5.3x FY13e core EPS of INR47. We now value the pipes business at
7.5x (earlier 8x, now reflecting increasing cost of capital) and add the value of investments
with a 25% discount to value the company at INR450. The delay in adding capacity, fall in
steel prices and slowdown in E&P spend are key risks to the business. We raise our price
target to INR450 (from INR430) and upgrade our rating to Overweight (from Neutral).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Maharashtra Seamless (MHS IN)
Going international
4QFY11 profits surprised us on the upside owing to higher
sales and inventory gains
We like the company’s new strategy of focusing on Latin
American and Canadian markets; we believe free cash will
be a boon in a rising interest rate scenario
We raise our price target to INR450 (from INR430) and
upgrade our rating to Overweight (from Neutral)
MHS reported 4QFY11 net profit of INR906m, c20% higher than our estimate and
consensus. The surprise was primarily because of higher-than-expected sales and inventory
gains from the liquidation of some inventory. The sales volume was the highest recorded over
the past 10 quarters, which management attributed to two large orders in the quarter. It
liquidated some of its inventory holdings and benefited from the rise in steel and billet prices.
We expect MHS to benefit from its increasing focus on international markets. In its
presentation and during the conference call, management pointed to increasing its focus on
international territories like Canada, Latin America and the United States. Our discussions with
large global players in a similar space also seem to suggest rising buoyancy in Latin American
markets like Brazil, Argentina and Columbia where E&P activity is picking up. While
management during the conference call did not elaborate on the strategy for improving its
penetration in international markets, we believe this is nevertheless a step in the right direction.
Free cash is a boon in a rising interest rate scenario. MHS has reported free cash of
INR6.85bn, and we expect this cash reserves to grow in future. Its reported other income
accounts for c18% of profit before tax, making it a substantial contributor to profitability.
In an increasing interest rate scenario, we expect this to improve the firm’s profitability.
Valuation and risks. We expect MHS to achieve a modest CAGR of 8% over FY11-14e.
We increase our FY12e and FY13e EPS estimates by 3 and 4%, respectively, and are ahead
of consensus by the same. Given the cyclical nature of order inflows, we value the pipes
business on PE. The stock has underperformed the Sensex by 15% over the past 12 months
and trades (ex cash) at 5.3x FY13e core EPS of INR47. We now value the pipes business at
7.5x (earlier 8x, now reflecting increasing cost of capital) and add the value of investments
with a 25% discount to value the company at INR450. The delay in adding capacity, fall in
steel prices and slowdown in E&P spend are key risks to the business. We raise our price
target to INR450 (from INR430) and upgrade our rating to Overweight (from Neutral).
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