August 1, 2011

Analysis : Maharashtra seamless

Maharashtra seamless is in the business of seamless and ERW steel pipes. These steel pipes are made from steel billets and HR coils respectively.

Seamless pipes are used mainly in the oil and gas and other such industries where there is a need to carry fluid under high pressure application. ERW pipes which have a higher diameter are also used in the same industry, in water distribution and other applications in airports, malls and other civic locations.

The company now has a capacity of around 550000 MT in seamless pipes and produced around 220000 MT. In addition the company has a capacity of around 200000 MT of ERW pipes and produced around 115000 MT.

The company is a certified supplier to several prominent O&G companies such as ONGC, Oil india and GAIL and other companies such as SAIL, NTPC etc. In addition the company is also an approved supplier to several global O&G companies such as Chevron, Saudi aramco and occidental oman etc. The company has benefited from the imposition of anti-dumping duties on seamless pipes from china, due to which its products have become competitive in various foreign markets.

The company has increased its revenue from around 383 Crs in 2003 to 1760 Crs in 2011 with an annual growth of around 18% per annum. The topline growth has however slowed from 2007 onwards. The net profit has grown at a CAGR of around 20% from around 62 Crs in 2003 to around 346 Crs in 2011 (excluding other income).

The net profits have grown at a higher rate than the topline due to improvement in margins. The net margins have mainly improved due to reduction in overhead expenses as % of sales.

The company has paid off its debt completely and now has a surplus of around 700 Crs on the balance sheet. The company raised around 300 Crs of capital via FCCB in 2005 for expansion which was converted to equity in 2006. This capital has however not been utilized as the company has been able to generate sufficient capital from operations to fund its capex, pay off debt and maintain its dividend.

The company has been able to maintain an ROE in excess of 25% for the last 8-9%. To get the true picture of the core business ROE, one needs to adjust for the excess cash and revaluation of fixed assets. The ROE numbers have dropped in 2011 mainly due to revaluation of fixed assets which caused the networth numbers to go up by almost 67% in one year.

The company has been able to maintain a reasonable growth in topline which has however slowed down in the recent past. In addition the company has been able to improve its margins from 12-13% levels to around 16% levels. It remains to be seen if this level of margin will be maintained.

The company has been able to pay off its entire debt and has close to 700 Crs excess capital on the balance sheet. The company has imported a plant from Romania for seamless pipes which it is installing near its current facility. This new plant will take the capacity up from 350000 to 550000 MT. In addition the company is also going in for backward expansion in steel billets which is a key RM for the seamless pipe (remains to be seen if the expansion is a good move). The company can easily meet all its expansion plans with the excess capital on the books.

The company sells a product which is a commodity product. The company has been able to maintain its gross margins inspite of fluctuation in steel prices which account for more than 60% of the total cost. It remains to be seen if the company will be able to maintain these margins in a slower growth/ higher competition environment (where other companies are expanding capacity too).

The company has managed the liability side of the balance sheet quite poorly. The company raised around 300+ crs in FCCB in 2005-06 which been idle since then. This is expensive capital which has been lying on the books and earning low rates of return. This excess capital has depressed the return numbers for the company.

Next post: Competitive analysis of the company, management review, valuation and final conclusion.


Ankit said...

Hi ther,

what took me aback is the decision to allocate the capital in such a poorly fashion; i am sure the company will command a lower multiple given its entry as a steel converter...this was one of the managements which stood apart in the pipes industry...however years of reputation now goes down the drain -

Vikas said...

Hi Rohit,
Came across your site just 2 days back when searching more on very less known Chandrakant Sampat.
And WOW! Such a great blog. Means I may have missed on making lacs of rupees by not following your blog 3-4 yrs before.
Feel extremely sad but also feel great that now I am part of your excellent - VALUE INVESTING BLOG.
As always I have few queries

1 - Whats your view on Holding Companies? Specifically about Bajaj Holdings. Its intrinsic value comes around 1800 to 2000 per share but its quoting around 750. Means more than 50% discount.
Means are these holding companies worth holding for long term to get above market returns?
2 - Same thing with DVR shares.Again specifically about Tata Motors DVR shares which are trading about 40 to 50 % to Tata Motors shares. Are they again investment worthy for better returns?
3 - Whats your take on Blue-chips like Titan / ITC @ CMP.
Means should we wait for more downfall / just enter @ CMP.
4 - And of course - Which are other excellent businesses are worth investment (Long Term)in current down-market?

With Regards,
Vikas Bargale

Rohit Chauhan said...

hi vikas
welcome to the blog
- on holding companies : i dont invest much as the discount will not get realised unless there is a catalyst. sum of parts looks good ..but the value does not come through a lot of times
- tata motors dvr could be a good opportunity - have not looked at it, though there are other value investors who have
- titan or ITC are not cheap enough for me ..but blame that on my mindblock in paying more for such companies
- on long term idea, i have discussed a few here on the blog


Vikas said...

Thanks a lot Rohit.

Anonymous said...

Hi Rohit,
Could you please tell us which are good stocks in mid cap right now in which we can start investing?