Maharashtra Seamless (MAHSEA) 231

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1 e Result Update Rating matrix Rating : Hold Target : 240 Target Period : 12 months Potential Upside : 4% What s Changed? Target Changed from 215 to 240 EPS FY17E Changed from 9.0 to 14.6 EPS FY18E Changed from 13.0 to 19.0 Rating Unchanged Quarterly Performance (Standalone) Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%) Revenue EBITDA NM EBITDA (%) bps bps PAT Key Financials (Standalone) Crore FY15 FY16 FY17E FY18E Total Op. Income EBITDA Net Profit EPS ( ) Valuation summary FY15 FY16 FY17E FY18E P/E Target P/E EV / EBITDA P/BV RoNW (%) RoCE (%) Stock data Particular Market Capitalization crore Total Debt (FY16 - Consolidated) crore Cash & cash eq.(fy16 - Consolidated) crore EV ( Crore) crore 52 week H/L 275/130 Equity capital 33.5 crore Face value 5 Price performance (%) Return % 1M 3M 6M 12M Maharashtra Seamless Research Analyst Dewang Sanghavi dewang.sanghavi@icicisecurities.com Akshay Kadam akshay.kadam@icicisecurities.com December 21, 2016 Maharashtra Seamless (MAHSEA) 231 Lower operating cost aids margin expansion... Maharashtra Seamless reported a good set of Q2FY17 numbers. The topline broadly came in line with our estimate while EBITDA and PAT came in higher than our estimate. The seamless pipes sales volume for the quarter came in at tonne (up 12.4% YoY, down 1.7% QoQ) marginally lower than our estimate of tonne. The ERW sales volume registered a healthy increase of 30.3% QoQ to ~17591 tonne, higher than our estimate of tonne. Total pipes sales volume came in at ~60855 tonne (our estimate: ~61750 tonne) Gross income from operations were at crore. After adjusting for excise, net operating income was at crore (up 16.3% YoY, 5.7% QoQ), broadly in line with our estimate of crore EBITDA was at 59.4 crore (up 103.4% QoQ), higher than our estimate of 34.6 crore. Lower operating cost per tonne of 40342/tonne (down 14.5% YoY, 10.5% QoQ) aided margin expansion during the quarter. Other income came in at 19.3 crore, higher than our estimate of 16.2 crore. Hence, PAT came in at 38.8 crore (up 921.1% YoY, 62.3% QoQ), higher than our estimate: 22.0 crore Recommendation to make anti-dumping duty definitive The Directorate General of Anti-Dumping and Allied Duties (DGAD) has recommended imposition of definitive anti-dumping duty (ADD) on imports of seamless tubes and pipes from China. Provisional duty, which was levied in May 2016, has now been recommended to be made definitive. In its finding, DGAD indicated the product under consideration has been exported to India from China is below its normal value, resulting in dumping causing material injury to the domestic industry. The imposition of anti-dumping duty, if accepted, is likely to aid improvement in capacity utilisation levels. We expect seamless pipes sales volume to firm up and grow at a CAGR of 15.6% in FY16-18E. We expect ERW pipes sales volume to grow at a CAGR of 2.4% in FY16-18E. EBITDA margin to decline moderately, going forward For Q2FY17, EBITDA margins came in at 19.5%, significantly higher than our estimate of 11.1% (EBITDA margin for Q1FY17: 10.1% and H1FY17: 14.9%). However, on account of a rise in price of key raw material (steel), we expect EBITDA margins to decline moderately. Going forward, we expect the company to clock an EBITDA margin of 12.0% in both FY17E and FY18E. Healthy order book position The current order book position is at 308 crore, up 35% QoQ. The seamless pipes order books is at 282 crore while ERW pipe accounts for the balance 26 crore. Lower operating costs aid margin expansion, maintain HOLD MSL reported a good set of Q2FY17 numbers wherein the EBITDA margin expansion to the tune of 936 bps QoQ was driven by significant cost savings. Going forward, we believe the anti-dumping duty, if accepted, will aid in improvement of capacity utilisation of the seamless pipes segment. We value the company on an SOTP basis and, subsequently, arrive at a target price of 240. We have a HOLD recommendation on the stock. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q2FY17 Q2FY17E Q2FY16 YoY (%) Q1FY17 QoQ (%) Comments Total Operating Income Topline came broadly in line with our estimate Other Income Other income came in higher than our estimate Employee Expenses Raw Material Expenses Raw material cost came in higher than our estimate Other Expenses EBITDA NM EBITDA came in higher than our estimate owing to lower operating costs EBITDA Margin (%) bps bps EBITDA margin came in higher than our estimate Depreciation Interest Exceptional Item PBT Total Tax PAT PAT came in higher than our estimate Key Metrics Sales of Seamless (in tonne) 43,264 46,750 38, , Sales volume of seamless pipes came in lower than our estimate Sales of ERW (in tonne) 17,591 15,000 16, , Blended EBITDA/tonne (in /T) 9,761 5, NM 5, Source: Company, ICICIdirect.com. Research Change in estimates FY17E FY18E ( Crore) New Old % Change New Old % Change Revenue 1, , , , Estimates revised upwards for all parameters EBITDA EBITDA Margin (%) bps bps PAT EPS ( ) Assumptions Current Earlier Comments FY17E FY18E FY17E FY18E Pipes sales volume (Seamless +ERW) 225, , , ,000 Maintained estimates ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Maharashtra Seamless (MSL) is a leading manufacturer of seamless and ERW carbon & alloy steel pipes and tubes in India. Both seamless & ERW plants are a first of their kind in India and have a technical tie-up with SMS MEER (earlier known as Mannesmann Demag) of Germany. The plant is strategically located in Nagothane, about 100 km from Mumbai Port. MSL has also set up a new state-of-the-art facility for manufacturing both drill pipes as well as casing, tubing and line pipes at Mangaon. Recommendation to make anti-dumping duty definitive Directorate General of Anti-Dumping and Allied Duties (DGAD) has recommended imposition of definitive anti-dumping duty (ADD) on imports of seamless tubes and pipes from China. The provisional duty, which was levied in May 2016, has now been recommended to be made definitive. In its finding, DGAD indicated the product under consideration has been exported to India from China are below its normal value, resulting in dumping causing material injury to the domestic industry. Seamless, ERW pipes volume likely to firm up If accepted, anti-dumping duty will aid in firming up of seamless pipes sales volume from current levels. We expect seamless pipes sales volume to grow at a CAGR of 15.6% in FY16-18E. Anti-dumping duties levied by the government have resulted in opportunities for domestic players in upstream (ONGC, Oil India and other private explorers) and downstream (refineries need to go in for expansion of sulphur recovery plants to meet the Euro-VI norms) segment, which were earlier catered by Chinese mills. We expect ERW pipes sales volume to grow at 2.4% CAGR in FY16-18E. Healthy order book position The current order book position is at 308 crore, up 35% QoQ. In terms of break-up, the geographical mix to domestic order book is at 282 crore while export accounts for the balance order book of 26 crore. In terms of break-up, according to product profile: seamless pipes order books is at 282 crore (domestic seamless pipe order book: 221 crore, export order book: 61 crore) while ERW pipe accounts for the balance 26 crore (domestic ERW pipe order book: 24 crore). EBITDA margin to decline moderately going forward For Q2FY17, EBITDA margins came in at 19.5%, significantly higher than our estimate of 11.1% (EBITDA margin for Q1FY17: 10.1% and H1FY17: 14.9%). However, on account of a rise in prices of key raw material (steel), we expect EBITDA margins to decline moderately. Going forward, we expect the company to clock an EBITDA margin of 12.0% in both FY17E and FY18E. ICICI Securities Ltd Retail Equity Research Page 3

4 Key takeaways from annual report During FY16, the increased unfair inflow of pipes from China at predatory prices posed a challenge to domestic players. The price revision impacted the margins of the players adversely The government imposed a safeguard duty on imports acceding to the industry s petition. However, due to a steep fall in global steel prices, the safeguard duty was unable to support the domestic industry During the year, MSL reported a loss on inventory on account of a steep fall in steel prices (raw material). Further, the operations of the company were also impacted by fire at its electric substation The Government of India notified the imposition of anti-dumping duty on seamless pipes from China in May The management expects the anti-dumping duty to improve the pricing scenario and, in turn, aid margins and overall performance Despite a subdued economic scenario in FY16, the company added nine new countries to its export market. The company further aims to add countries like Canada, Latin America and Europe for exports besides the existing market of US and Mexico The management believes fast consumption of inventories coupled with continuous and consistent support on oil prices would enable oil companies to resume operations at inactive rigs and also enable drilling investments both long term and short-term, thereby providing an impetus to the pipe industry In an effort to improve process flow and restructure operations, the company has hired consultants for cost cutting initiatives The company has a stake in an iron ore mine in Brazil. MSL plans to remain invested for the longer term to benefit from an upturn in the steel cycle as and when it happens The company generated power of lakh units, which works out to 29% of its power consumption. Further, MSL has won 20 MW solar power project under the National Solar Mission (NSM) in Rajasthan, which is likely to be set up by FY17 ICICI Securities Ltd Retail Equity Research Page 4

5 Valuation MSL reported a good set of Q2FY17 numbers wherein the EBITDA margin expansion to the tune of 936 bps QoQ was driven by significant cost savings. Going forward, we believe the anti-dumping duty, if accepted, will aid an improvement in capacity utilisation of seamless pipes segment. We value the company on an SOTP basis and subsequently arrive at a target price of 240. We have a HOLD recommendation on the stock. Exhibit 1: Valuation matrix (Standalone) Year Sales Growth EPS EPS Growth PE EV/EBITDA RoNW RoCE ( Crore) (%) ( ) (%) (x) (x) (%) (%) FY NA FY FY17E FY18E ICICI Securities Ltd Retail Equity Research Page 5

6 Recommendation History vs. Consensus ( ) (%) Dec-14 Feb-15 May-15 Jul-15 Sep-15 Dec-15 Feb-16 May-16 Jul-16 Oct Dec-16 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Jan-10 Sep-10 Jan-11 May-11 Mar-12 Nov-12 Apr-13 May-13 May-13 Apr-16 May-16 Price Idirect target Consensus Target Mean % Consensus with HOLD Event Secures export orders for tonne for supply of seamless casting pipes. GoI initiates grounds for anti-dumping duty on cheap Chinese imports into the country (seamless pipes & tubes) Reliance Mutual Fund acquires 1.05% stake in the company via a bulk deal on stock exchanges Enters into a power purchase agreement (PPA) with NTPC Vidyut Vyapar Nigam (NVVN), for a period of 25 years to sell electricity to be generated by the 5 MW capacity 'Solar Photovoltaic Power Project' to be set up by the company in Rajasthan. The company has been selected by NVVN to set up the above said Photovoltaic Power Project under the Jawaharlal Nehru National Solar Mission of the Government of India Secures an order worth 247 crore from ONGC for supply of tonne of seamless casting pipe Commissions its new state-of-the-art manufacturing facility of six seamless plant at Vile-Bhagad Industrial Area, Near Mangaon (Maharashtra) Accepting the recommendations of the IMG, the GoI de-allocates coal block awarded to Maharashtra Seamless (Gondkhari coal block; awarded in consortium to three firms along with MSL) The board of directors of Maharashtra Seamless approve proposed buyback of equity shares of the company at a price not exceeding 300 per equity share, payable in cash and not exceeding an aggregate amount of 100 crore. The buyback shall be from the open market through stock exchange Receives export order amounting to US$22 million (~ 120 crore) for supply of seamless and ERW pipes for drilling programmes in the US Net profit plunges 50% to 153 crore in FY13 vis-à-vis 311 crore in FY12. Turnover also plunges 25% to 1722 crore ( 2292 crore in FY12) Icra downgrades the rating from AA to AA- assigned to company's bank limits The GoI imposed provisional anti dumping duty on on seamless tubes, steel pipes up to 14 inch outer diameter (OD) imported from China, the anti dumping duty will be in the range of US$ to US$ per tonne. Top 10 Shareholders Rank Name Latest Filing Date % O/S Position Change 1 Odd & Even Trades & Finance Pvt. Ltd. 30-Sep M 0 2 Stable Trading Co., Ltd. 30-Sep M 0 3 Brahmadev Holding & Trading, Ltd. 30-Sep M 0 4 Global Jindal Fin-Invest, Ltd. 30-Sep M 0 5 Templeton Asset Management Ltd. 30-Jun M 0 6 Haryana Capfin Ltd 30-Sep M 0 7 Jindal (Saket) 30-Sep M 0 8 Reliance Nippon Life Asset Management Limited 30-Sep M -0.3M 9 Jhanjhari Holdings Pvt. Ltd. 30-Sep M 0 10 GVN Fuels, Ltd. 30-Sep M 0.1M Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Old Mutual Global Investors (UK) Limited 0.4M 0.1M Reliance Nippon Life Asset Management Limited -0.8M -0.3M GVN Fuels, Ltd. 0.3M 0.1M Dimensional Fund Advisors, L.P. -0.1M -0.0M Swot Trading & Services, L.L.P 0.2M 0.0M BlackRock Asset Management North Asia Limited -0.1M -0.0M Jindal (Saket) HUF 0.2M 0.0M Religare Enterprises Ltd -0.0M -0.0M Jindal (Raghav) HUF 0.1M 0.0M Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 6

7 Financial summary (Standalone) Profit and loss statement ( crore) (Year-end March) FY15 FY16 FY17E FY18E Net Sales Other Operating Income Total Operating Income Growth (%) Raw Material & Mfg Expenses Employee Expenses Other expenses Total Operating Expenditure EBITDA Growth (%) Depreciation Interest Other Income PBT Total tax PAT before MI Minorities, Assoiciates, etc PAT after MI, Associates, etc Growth (%) EPS ( ) Balance sheet ( crore) (Year-end March) FY15 FY16 FY17E FY18E Liabilities Share Capital Reserve and Surplus 2, , , ,972.5 Total Shareholders funds 2, , , ,006.0 Total Debt Deferred Tax Liability Others Total Liabilities 2, , , ,117.0 Assets Gross Block 1, , , ,079.6 Less: Acc Depreciation Net Block 1, , , ,079.6 Capital WIP Total Fixed Assets 1, , , ,079.6 Investments Inventory Debtors Other Current Assets Cash Total Current Assets 1, , , ,629.5 Current Liabilities Provisions Current Liabilities & Prov Net Current Assets 1, , , ,367.9 Application of Funds 2, , , ,117.0 Cash flow statement ( crore) (Year-end March) FY15 FY16 FY17E FY18E Profit after Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions Others CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity Inc/(dec) in loan funds Dividend paid & dividend tax Inc/(dec) in Share Cap Others CF from financing activities Net Cash flow Opening Cash Closing Cash Key ratios (Year-end March) FY15 FY16 FY17E FY18E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt / EBITDA Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 7

8 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 8

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