The Hindu Business Line : Maharashtra Seamless: Buy

STRONG operational and financial contours, a healthy order-book, a positive business outlook and likely gains from its proposed backward integration make the stock of Maharashtra Seamless (Rs 552) attractive. Although the stock has run up sharply since our last recommendation in July 2005, we remain positive on its prospects. Any weakness linked to the broad market can be used to accumulate the stock.

The stock trades at a multiple of about 14 times its expected per share earnings for FY-06. Although this may appear stiff, considering the burgeoning opportunities in the oil and gas exploration and production sector — its principal user segment — we believe such a valuation is justified.

Maharashtra Seamless has been reporting consistent performance over the past few years. Earnings posted a CAGR of 40 per cent over the past four years and the return on shareholder funds for FY-05 was a healthy 28 per cent. Its performance in the first half of FY-06 has been impressive. Revenues rose 21 per cent and earnings over 40 per cent. The softening steel prices have had a positive impact on the company's operating profit margins, which expanded by about 360 basis points to 22 per cent. Price-cuts announced by steel-makers in the second quarter are likely to be reflected in better margins over the next few quarters. The proposed backward integration project for manufacturing steel billets (the primary raw material), which is expected to go onstream by June 2007, is likely to ease pressure on input costs.

The company makes seamless and ERW pipes, which find wide application in the oil and gas exploration and social infrastructure sectors. It has the largest market share in seamless pipes (about 37 per cent) and derives about 65 per cent of revenue from this segment. The oil and gas exploration and production has been witnessing a sharp rise in activity, and is likely to continue over the next couple of years. A higher demand for pipes is likely to translate into higher volumes.

The company's client base includes ONGC, BPCL, GAIL, OIL, BHEL and L&T, which have announced huge outlays for laying pipelines to transport gas and oil. There is enormous potential, particularly in the gas sector, for making the gas available from basins to inland centres for commercial use.

GAIL alone has announced an investment outlay of Rs 20,000 crore. The company now has an order-book of about Rs 450 crore, which is more than half its FY-05 revenues.

The company's joint-venture with Hydril of the US for making high-end pipes has commenced commercial production. The demand for these pipes, which are used in high-pressure oil and gas wells, is rising. This is likely to bestow twin benefits in terms of higher volumes and better realisations.

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