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Initiating Coverage Maharashtra Seamless (MAHSEA) Report by ICICI Direct

Saturday, 15 September 2007

Maharashtra Seamless (MSL) manufactures seamless pipes and has cornered 50-52% market share in the domestic market.
Seamless pipes are used in oil & gas exploration as well as in the automobile and other industries such as heat exchanger and boilers. It is the only player in India to manufacture 14-inch diameter seamless pipes.

It recent JV with Hydril (one of the leading seamless pipe manufacturers in the world) for premium threading connectors, which is a high-margin business, is likely to make it globally competitive in this arena. The company also manufactures ERW pipes, which are mostly used in refineries.

Almost doubling capacity

Maharashtra Seamless is almost doubling the capacity of seamless pipes capacity by 54% to 5 lakh tonne per annum (tpa) from the existing 3.25 lakh tpa over two years. Seamless pipes contribute around 77% to the top line. On account of this capacity expansion, MSL’s revenue is likely to grow at a CAGR of around 31% to Rs 2388.99 crore over FY07-09E.

Getting into new alliances to boost product offerings

Increasing complexity such as deep water, off shore drilling, directional drilling (such as horizontal drilling) is not only increasing the demand for the seamless pipes but the demand for premium connectors are also increasing. It has entered into a JV with Hydril, US, in FY07 for premium fittings (connectors) with capacity of 50,000 tpa.

Company Background

Maharashtra Seamless (MSL), the flagship company of DP Jindal group, was incorporated in 1988. The company manufactures carbon and alloy steel seamless pipes at its plant in Roha, Maharashtra in technical collaboration with Mannesmann Demag,
Germany.

The major applications for seamless pipes are in oil exploration, boilers, ball bearings, roller bearings, automobiles, fertilizer, petrochemicals, etc. The company also manufactures ERW Pipes, sizes from 8 inches to 20 inches, wall thickness from 3.2 mm to 12.70 mm and the major applications for ERW pipes are in natural gas or oil, diesel, drinking water and sewage/water treatment.

Further the company also has its presence in Power Division with 20 Wind Mills aggregating to 7 MW capacity for captive consumption. Recently, the company entered into a 50:50 joint venture with Hydril to form Hydril Jindal International Private Ltd to manufacture premium connections for the Indian and international markets.

The company is the market leader of seamless and large diameter ERW pipe in India. Now with the boom in the oil & gas sector, the seamless pipe & tube industry is witnessing an unprecedented demand driven growth for both its plain-end and threaded seamless products.

The company is implementing a strategic backward integration project in Orissa to manufacture Billets, the main raw material for seamless pipes with a capacity of 500,000 tpa at an estimated cost of Rs 550 crore. The project will get delayed due to some problem with the local authorities.

Investment Rationale

Almost doubling its capacity

The increasing complexity of exploration is driving the demand for seamless pipes which would propel the company to sustain its growth going forward. Seamless pipes are the highest contributor to the top line of MSL, with around 77% share.

We expect the contribution to increase as MSL plans to ramp up its seamless pipes capacity by 54% to 5 lakh tpa from the existing 3.25 lakh tpa over the next two years.

In the category of up to 7 inches, the company plans to increase its capacity from existing 1.25 lakh tpa to 2 lakh tpa, while in the 7-14 inches category, it plans to increase the capacity from 200,000 tpa to 300,000 tpa. MSL’s revenue is likely to grow at a CAGR of around 31% to Rs 2388.99 crore over FY07-09E.

Getting into new alliances to boost the product offerings

Increasing complexity such as deep water, off-shore drilling, directional drilling (such as horizontal drilling) is not only increasing the demand for the seamless pipes, but also demand for premium connectors. To cater to the needs of drilling requirements, the company entered into a JV with Hydril, USA in FY07 for premium fittings (connectors) with capacity of 50,000 tonnes per annum of connectors. Realizations on premium connectors are than those on normal connectors, while the incremental cost is only 10% of the realization.

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Valuations Maharashtra Seamless

The company has been re-rated thrice during last 5 years on the back of impressive growth shown by the company. We expect the EPS of MSL to grow at a CAGR of around 34% over FY07-09E on the back of increased demand of seamless pipes and phased capacity expansion. We believe the P/E multiple would mirror the growth in the future.

Strong fundamentals of the company are likely to support valuations & would continue to help it command premium over its peers. We expect EPS to grow at a CAGR of more than 34% over FY07-09E on the back of increased demand of seamless pipes and phased capacity expansion.

The company’s strong fundamentals are likely to support the traction in P/E. The return on capital employed (RoCE) is likely to be over 37% in FY09E due to lower cost of expansion and continued demand of seamless pipes. Return on net worth (RoNW) is also likely to be over 27% in FY09E. The company is valued at a PE of 10.08x FY09E EPS of Rs 60.10. Our base case DCF valuation fetches a fair value of Rs 704. We initiate coverage on the company with a price target of Rs 727, 12x FY09 EPS due to its impressive return ratios & impressive historical performance.

The stock has been seen trading smoothly at a P/E multiple of 12x, one-year forward earnings. But around one year back the stock re-rated following a surge in demand of seamless pipes due to rise in crude prices. We believe its unmatched RoCE and RoNW make it the best buy. We believe the stock should trade in the P/E range of 12x FY09E earnings. We initiate coverage on the company, with a price target of 727 in next 15-18 months.

Source : ICICI Direct

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