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Maharashtra Seamless (MHS)
Industrials
In-line results; order book highest in the past two years. MHS reported 1QFY12
EBITDA at Rs1.02 bn, in line with our estimate at Rs1.07 bn. EBITDA margin per ton
(seamless) at Rs15,786 (our estimate Rs16,000) was lower than ~Rs18,500 reported in
the last three quarters which had positive contribution from inventory gains. Order
book at Rs7.08 bn is the highest in the last two years which would give the company a
head start in achieving volume guidance of 0.26 mn tons of dispatches (seamless) in
FY2012E. BUY (ADD earlier) with a TP of Rs460 (5X FY2013E EBITDA; Rs418 earlier) as
we roll over to FY2013E.
In-line results – order book at Rs7.08 bn; highest in the past two years
MHS reported 1QFY12 revenue at Rs4.82 bn (-12.4% qoq; +20% yoy) which was in line with our
estimates at Rs4.83 bn. EBITDA at Rs1.02 bn was a tad lower than our estimate (Rs1.07 bn) due to
marginally lower volumes and margins in the seamless pipe segment. Miss at the PAT level (Rs717
mn versus our estimate at Rs797 mn) was due to lower-than-estimated other income. Key
highlights:
EBITDA margins per ton in the seamless segment at Rs15,786 were lower than the range of
Rs18-19,000 per ton reported in the past three quarters. The management has been indicating
a component of inventory gains in the high margins reported in the past. The EBITDA margins
per ton in 1QFY12 are in line with the management guidance of normalized margins of Rs15-
16,000 per ton.
Order book at Rs7.08 bn is the highest in the past two years and would give a head start to the
company in achieving volume guidance of 0.26 mn tons (versus 0.22 mn tons in FY2011).
World rig count has come off from recent highs; large correction in crude oil prices remains a risk
World rig count has come off from the highs achieved 3-4 months back in line with the correction
in crude oil prices. Any large correction in crude oil prices would mean lower rig counts and hence,
would make it difficult for the company to scale up volumes from the new capacity (imported
Romanian plant) coming online in September 2011.
We upgrade the stock to BUY (ADD earlier) with a revised target of Rs460 (Rs 418 previously)
We retain our earning estimates and revise our TP to Rs460 (5X FY2013E EBITDA) as we roll over
to FY2013E. 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.
Upgrade to BUY from ADD with a target price of Rs460 (Rs418 earlier)
We are retaining our earning estimates and upgrading the stock to BUY from ADD with a
revised target price of Rs460 (roll over to FY2013E). The stock is quoting at 9X FY2012E and
8X FY2013E EPS estimate of Rs41.6 and Rs46.7, respectively. On an EV/EBITDA basis, the
stock is trading at 4.7X FY2012E and 4.3X 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 the
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.
We value MHS at Rs460 per share
Valuation table for MHS, March fiscal year-ends (Rs mn)
FY 2013E EBITDA 4,612
EV/EBITDA (X) 5.0
EV 23,061
Net debt (9,826)
Equity value 32,887
No. of shares (mn) 71
Value per share (Rs) 4 66
Target price (Rs/share) 4 60
Source: Company, Kotak Institutional Equities
