Buy Maharashtra Seamless; target of Rs 570: ICICI Direct

ICICI Direct's research report on Maharashtra Seamless

Maharashtra Seamless reported healthy set of Q1FY19 numbers. The company reported seamless pipes sales volume of 65114 tonne (down 9% YoY, 10% QoQ). ERW pipe sales came in at 16056 tonne (up 34% YoY, 11% QoQ). Overall, the pipes sales volume came in at 81170 tonne (down 3% YoY, 7% QoQ) Topline for the quarter was at Rs 607.4 crore (up 35% YoY but down 4% QoQ), broadly in line with our estimate of Rs 630.4 crore EBITDA was at Rs 143.67 crore (up 136% YoY, 16% QoQ), higher than our estimate of Rs 118.20 crore. The corresponding EBITDA margin was at 23.7% (vs. Q4FY18: 19.7%, Q1FY18: 13.5%, our estimate of 18.8%). Raw material expense as percentage of sales was at 58% (vs. Q4FY18: 60%, Q1FY18: 65%), thereby aiding margin expansion The company reported other income of Rs 35.14 crore (up 100% YoY, 122% QoQ). Ensuing PAT was at Rs 100.4 crore (up 170% YoY, 14% QoQ), higher than our estimate of Rs 77.6 crore.

Outlook

Demand for steel pipes (both seamless and ERW) is likely to get a boost from government initiatives towards infrastructure and revival of capex in the oil & gas sector. Maharashtra Seamless commands ~35-40% of the market share domestically in the supply of such pipes and tubes. Hence, it is likely to be a natural beneficiary of any demand pick up. The company currently has an aggregate orderbook position of Rs 1000 crore as on date, thereby providing healthy revenue visibility. We value the stock on 8x FY20E EV/EBITDA and arrive at a target price of Rs 570. We maintain BUY rating on the stock. We like the company given its leaner balance sheet and healthy profit margins vis-à-vis its domestic peers.