Feb 09, 2013, 04.52 PM IST | Source: Moneycontrol.com

Accumulate Maharashtra Seamless; tgt Rs 255: Dolat Capital

Dolat Capital is bullish on Maharashtra Seamless and has recommended accumulate rating on the stock with a target price of Rs 255 in its February 08, 2013 research report.

Dolat Capital is bullish on Maharashtra Seamless and has recommended accumulate rating on the stock with a target price of Rs 255 in its February 08, 2013 research report.

"Maharashtra Seamless, net sales declined by 36.6%YoY/18.5%QoQ to Rs 3.91bn (DCe: Rs 5.34bn) primarily due to lower volumes. Sales volumes in seamless pipes at 46466 tonne (-17.3%QoQ/-34.5%YoY) and ERW pipes at 18386 tonnes (-45.5%QoQ,/ -7.7%YoY) were weak in both the segments. The volume slippage was largely on weak demand across geographies. Demand in US was affected by the destocking activity in US coupled with the decline in rig counts. In India, demand was overall weak, with heightened competition from the Chinese suppliers and oversupply in India. Lower volumes, higher fixed cost coupled with lower realizations led MHS reporting lowest ever margin of Rs 5047 per tonne in seamless pipes. This is on back of low capacity utilization of seamless pipe mill post the commencement of the new mill, high raw material cost and higher competition from the Chinese mills.

EBITDA per tonne in the ERW segments was at Rs 3800 per tonne (Dolat Est Rs 3600 per tonne). EBITDA fell by 38.7% QoQ/67%YoY to Rs 3.38bn (DCe: Rs 6bn) and reported an EBITDA margin of 8.6%. PAT declined by 34.5%QoQ/65%YoY to Rs 284mn.

MSL's order book also substantially declined by 52.8%YoY/35%QoQ to Rs 2.6bn and has remain muted , indicating weakness in the market. MHS also sounded cautious on the the outlook for Q4FY13 although expects demand to pick up from Q1FY14. MHS has reduced the volume guidance for FY14 to 270,000 tonne given the weak demand and EBITDA per tonne to Rs 10,000 per tonne. We believe the near term scenario for seamless pipe continue to be challenging in domestic markets (Chinese completion and excess supply) and international market (Reduction in rig counts, destocking in US and commissioning of local supply in US).

We have reduced our EBITDA and PAT est. by 14% and 33% in FY13E and 13% and 26% in FY14 respectively due to reduction in volume est. for seamless pipes by 13% in FY13E and 12 % in FY14E. MHS stock may underperform in near term due to demand issues coupled with lower utilization in the seamless pipe segment. We have reduced both the earnings and the multiple from 5.5x EBITDA to 4.5x EBITDA. We reduce our target price for MHS to Rs 255 (4.5xFY14 EV/EBITDA) and maintain our Accumulate rating given reasonable valuations," says Dolat Capital research report.

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