>MAHARASHTRA SEAMLESS: Will commence production at its 2,00,000 tonne mill in Q4FY12

Results inline with estimates, higher volumes compensate for lower margins
■ Maharashtra Seamless (MSL) Q3 FY12 profits ` 810mn (DCe: ` 805mn) primarily due to higher than expected volumes however EBITDA per tonne at `12272 per tonne for seamless pipes was lowest in 16 quarters
■ Net sales increased 6.9% QoQ/52.2% YoY) to ` 6.17bn (DCe ` 5.7bn) primarily due to higher volumes and better realisations. Sales volumes in seamless pipes at 70936 tonne (+0.3%QoQ/46%YoY) and ERW pipes at 33755 tonnes (+6.7%QoQ,40.7%YoY) witnessed strong traction. However EBITDA per tonne continue to decline for seamless pipes and were at lowest in 16 quarters at ` 12,272 (DCe ` 14000 per tonne) due to issues regarding the billet availability leading to higher cost. EBITDA per tonne in the ERW segment increased by 54%QoQ/3.4%YoY to 4467 per tonne (Dolat Est `N 3000 per tonne). EBITDA fell by 4.7% QoQ to ` 1.02bn on back of lower margins at 16.6%.
■ MSL will commence its new pipe mill capacity of 200000 tonnes in Q4FY12 which will drive volume growth over FY12-14E.
■ MSL’s order book remained flat sequentially at ` 5.51bn despite strong demand environment. Export order book remains strong and currently constitute 50% of its order book.
■ MSL is facing margin pressure in domestic markets due to increase in competition from the Chinese players and Indian players.
■ We expect MSL earnings to grow at 13%CAGR over FY12-14E primarily led by volumes. Demands for seamless pipes continue to remain strong given the high oil prices. We believe MSL, with a strong balance sheet is well-placed to capitalize on the strong demand for seamless pipes. MSL is currently trading at 4.6xFY12EV/EBITDA and 4xFY13EV/EBITDA. We maintain our Buy rating on the stock with a price target of ` 421 (5x FY13 EV/EBITDA).




Highlights
■ MSL’s net sales increased by 6.9% QOQ to ` 6.17bn. Sales volumes increased 0.3% QoQ and 6.7% QoQ to 70936 tonnes and 33755 tonnes in seamless and ERW pipes respectively. Seamless pipes realizations were increased by 5.8% QoQ at ` 62857 per tonne whereas for ERW pipes it rose by 4.2% to ` 45099 per tonne.
■ EBITDA per tonne on seamless pipes decreased 14.6% QoQ/36.2%YoY to ` 12,232 due to higher cost raw material and increase in Chinese competition post the withdrawal of the anti dumping duty application on China.
■ EBITDA per tonne in ERW pipes increased sequentially by 56.2% to ` 4467 as it had an inventory loss due to a decline in steel prices. We now expect MSL margins to be in the range of ` 2500-3000 per tonne as against the earlier `3000-3500 due to increase in competitive intensity.
■ EBITDA declined 4.7% QoQ despite 25% volume growth as the margins dipped in seamless pipes segment.
■ Other income declined 5.8% QoQ to ` 138mn (Dolat est: ` 150mn) as MSL has invested in FMPs whose gains will be booked in March 2012.
■ PAT was flat sequentially at ` 810mn as margin fall was compensated by higher volumes.


Demand strong but margins under pressure.
MSL expects demand to remain strong for seamless pipes with the prevailing high crude oil prices (USD 115 a barrel) and increase in rig counts. MSL also expects strong demand from the boiler segment due to large capacities being added in the power sector. MSL’s order book remained flat sequentially to ` 5.51bn despite strong demand environment. Seamless pipes contribute 76% of the order book whereas rest is contributed by ERW pipes. Export order book remains strong and currently constitute 50% of its order book.


Valuation
We expect MSL earnings to grow at 13%CAGR over FY12-14E primarily led by volumes. Demands for seamless pipes continue to remain strong given the high oil prices. We believe MSL, with a strong balance sheet is well-placed to capitalize on the strong demand for seamless pipes. MSL is currently trading at 4.6xFY12EV/ EBITDA and 4xFY13EV/EBITDA. We maintain our Buy rating on the stock with a
price target of ` 421 (5x FY13 EV/EBITDA).


RISH TRADER