Thursday, October 8, 2009


On a seamless growth path

Key points
Improving demand environment: ISMT Ltd (ISMT), an integrated seamless tube manufacturer in India, is set to benefit from the overall improvement in demand from its traditional user segments of automobile and mining companies. In addition, the company would gain from the efforts taken to expand its product offerings and increase the size of the addressable market by penetrating into energy (boiler tubes) and oil exploration (oil casing and tubing goods) sectors. Moreover, the anti-dumping duty imposed by the USA and European Union on the Chinese seamless tubes will also boost the demand for Indian seamless tubes in
the export market.

New technology, capacity expansion to drive volume growth: ISMT is expanding its tube production capacity at Baramati to 475,000 tonne per annum (TPA) as well as installing a new premium quality finishing (PQF) mill. The technology advantage coupled with the cost saving through the installation of a 40MW captive power plant would provide the right competitive edge to ISMT in the export markets. Consequently, we expect ISMT’s seamless tube sales volume to grow at a CAGR of 27.4% over FY2009-FY2011.

Margins to inch up: Despite a highly competitive environment and the investments made to expand its operations in the overseas markets, ISMT is expected to show an improvement of 50-60 basis points in its operating profit margin (OPM) over the next two years. The margin improvement would be driven by: (1) a favourable sales mix (sales of high-margin power and oil country tubular goods [OCTG] seamless tubes to increase to 45% in FY2011 from 38% in FY2009); (2) saving on the power cost; (3) cost reduction from new technology (PQF mills);
and (4) economies of scale.

Compelling valuations: We expect the company’s profit to grow at a CAGR of 60% over FY2009-FY2011 on the back of a strong demand growth and margin improvement. Considering the strong growth expected in its earnings, we believe that its stock is trading at very attractive valuations of 4.4x its FY2011 expected earnings and EV/EBIDTA of 4.5x. We initiate coverage on ISMT with a Buy recommendation and a price target of Rs62 (valued at 6x its FY2011 expected earnings per share [EPS]).

To see full report: ISMT