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Maharashtra Seamless (MHS)
Industrials
Above estimates; concerns on declining margins and order book. MHS’ reported
2QFY12 EBITDA of Rs1.13 bn was ~10% higher than our estimates at Rs1.02 bn. While
reported numbers are good, there are a few concerns: (1) Order book at Rs5.56 bn has
declined ~20% qoq (Rs7 bn in 1QFY12) despite worldwide rig count at all-time high
levels, and (2) margin (EBITDA per ton) in seamless segment has declined to Rs14,322,
which is the lowest in the last two years and below the management guided range of
Rs15-16,000 per ton. We would seek clarifications from the management on the same.
Maintain BUY.
Above estimates – sequential decline in order book and margins disappointing
MHS’ reported revenue for 2QFY12 at Rs5.83 bn (+38% yoy; +20% qoq) was higher than our
estimates at Rs4.8 bn, primarily led by higher volumes (70,749 tons versus estimates at 60,000
tons). Reported PAT at Rs812 mn (+1.4% yoy; +13% qoq) was 12% higher than our estimates.
While the reported numbers are good, we have the following concerns:
�� Low margins. EBITDA per ton in the seamless segment dropped to Rs14,322 (Rs15,786 in
1QFY12), which is lowest in the last two years and lower than the management-guided range
of Rs15-16,000 per ton. EBITDA per ton in the ERW segment at Rs2,860 (Rs3,016 in 1QFY12)
was also lower than normalized margins (management guidance) at upwards of Rs4,000 per
ton. In the past (2QFY11), the management attributed low ERW margins to higher proportion
of sales from the retail channel which is less remunerative than the institutional segment
(mostly oil and gas) where margins are higher.
�� Declining order book in a strong business environment. Order book of MHS declined to
Rs5.5 bn in 2QFY12 from Rs7 bn in 1QFY12. We are concerned as the business environment for
seamless pipes is strong with oil at US$110 per bbl and the worldwide rig count at an all-time
high level. Also, we had hoped for higher order book as the management had guided for
commissioning of incremental capacity of 0.2 mn tons in September 2011.
We would seek clarifications on the same from the management in the post-results concall.
Maintain BUY with a target price of Rs460
We retain our earning estimates and target price of Rs460 (5X FY2013E EBITDA). Our earning
estimates in FY2012E and FY2013E assume EBITDA per ton (seamless) at Rs13,500, which is lower
than Rs17,971 per ton reported in FY2011. We are cautious due to dropping of anti-dumping
investigations against Chinese companies by the government in December 2010.
Valuations cheap even after assuming declining margins
We are retaining our earning estimates and our target price of Rs460.The stock is quoting at
7.8X FY2012E and 7X FY2013E EPS estimate of Rs42 and Rs47, respectively. On EV/EBITDA
basis, the stock is trading at 4X FY2012E and 3.5X FY2013E EBITDA estimates of Rs4.15 bn
and Rs4.6 bn, respectively. Our earning estimates assume a decline in EBITDA per ton for
seamless pipes from Rs17,971 in FY2011 to Rs13,500 per ton in FY2012E and FY2013E. In
our view, there is limited downside from the current levels.
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 margins
per ton in the domestic business to reduce to Rs10,500 (from ~Rs16,500/ton) on account of
Chinese competition given that anti-dumping proceedings have been dropped by the Indian
government. Fresh representation has been submitted by the Indian pipe companies to the
Indian government on which verdict is awaited.
Key risks are: (1) Decline in worldwide rig count on the back of lower crude prices which
would lead to lower-than-expected volumes for the company, and (2) any measure to
deploy cash by the company perceived as inefficient by the Street.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Maharashtra Seamless (MHS)
Industrials
Above estimates; concerns on declining margins and order book. MHS’ reported
2QFY12 EBITDA of Rs1.13 bn was ~10% higher than our estimates at Rs1.02 bn. While
reported numbers are good, there are a few concerns: (1) Order book at Rs5.56 bn has
declined ~20% qoq (Rs7 bn in 1QFY12) despite worldwide rig count at all-time high
levels, and (2) margin (EBITDA per ton) in seamless segment has declined to Rs14,322,
which is the lowest in the last two years and below the management guided range of
Rs15-16,000 per ton. We would seek clarifications from the management on the same.
Maintain BUY.
Above estimates – sequential decline in order book and margins disappointing
MHS’ reported revenue for 2QFY12 at Rs5.83 bn (+38% yoy; +20% qoq) was higher than our
estimates at Rs4.8 bn, primarily led by higher volumes (70,749 tons versus estimates at 60,000
tons). Reported PAT at Rs812 mn (+1.4% yoy; +13% qoq) was 12% higher than our estimates.
While the reported numbers are good, we have the following concerns:
�� Low margins. EBITDA per ton in the seamless segment dropped to Rs14,322 (Rs15,786 in
1QFY12), which is lowest in the last two years and lower than the management-guided range
of Rs15-16,000 per ton. EBITDA per ton in the ERW segment at Rs2,860 (Rs3,016 in 1QFY12)
was also lower than normalized margins (management guidance) at upwards of Rs4,000 per
ton. In the past (2QFY11), the management attributed low ERW margins to higher proportion
of sales from the retail channel which is less remunerative than the institutional segment
(mostly oil and gas) where margins are higher.
�� Declining order book in a strong business environment. Order book of MHS declined to
Rs5.5 bn in 2QFY12 from Rs7 bn in 1QFY12. We are concerned as the business environment for
seamless pipes is strong with oil at US$110 per bbl and the worldwide rig count at an all-time
high level. Also, we had hoped for higher order book as the management had guided for
commissioning of incremental capacity of 0.2 mn tons in September 2011.
We would seek clarifications on the same from the management in the post-results concall.
Maintain BUY with a target price of Rs460
We retain our earning estimates and target price of Rs460 (5X FY2013E EBITDA). Our earning
estimates in FY2012E and FY2013E assume EBITDA per ton (seamless) at Rs13,500, which is lower
than Rs17,971 per ton reported in FY2011. We are cautious due to dropping of anti-dumping
investigations against Chinese companies by the government in December 2010.
Valuations cheap even after assuming declining margins
We are retaining our earning estimates and our target price of Rs460.The stock is quoting at
7.8X FY2012E and 7X FY2013E EPS estimate of Rs42 and Rs47, respectively. On EV/EBITDA
basis, the stock is trading at 4X FY2012E and 3.5X FY2013E EBITDA estimates of Rs4.15 bn
and Rs4.6 bn, respectively. Our earning estimates assume a decline in EBITDA per ton for
seamless pipes from Rs17,971 in FY2011 to Rs13,500 per ton in FY2012E and FY2013E. In
our view, there is limited downside from the current levels.
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 margins
per ton in the domestic business to reduce to Rs10,500 (from ~Rs16,500/ton) on account of
Chinese competition given that anti-dumping proceedings have been dropped by the Indian
government. Fresh representation has been submitted by the Indian pipe companies to the
Indian government on which verdict is awaited.
Key risks are: (1) Decline in worldwide rig count on the back of lower crude prices which
would lead to lower-than-expected volumes for the company, and (2) any measure to
deploy cash by the company perceived as inefficient by the Street.
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