The Hindu Business Line : Maharashtra Seamless: Buy

Robust earnings momentum, buoyant demand from user segment, widening client base, healthy order-book and attractive valuations lend credibility to the stock of Maharashtra Seamless. Investors can consider fresh exposure to the stock at its current price of about Rs 310.

Robust earnings

Maharashtra Seamless has recorded consistent growth in revenues and earnings over the past few years. Keeping up the momentum, the company has come out with a strong set of numbers for the June quarter. Revenues grew by over 65 per cent and earnings about 140 per cent on a Year-on-Year basis.

Aided by strong demand, the volumes in seamless pipes rose 20 per cent. Average realisations, which were higher by 5-10 per cent, helped the company improve its operating profit margins to 26 per cent from 20 per cent a year ago.

The company's order-book remains healthy at half its FY-06 revenues. It has orders worth Rs 450 crore for seamless pipes and Rs 60 crore for ERW pipes.The firm trend in steel prices may restrict the scope for steep expansion in margins over the medium term.

This, however, is unlikely to be a major concern for the company. Its proposed backward integration project for manufacturing round steel billets (base raw material), which is likely to go on stream by June 2007, is expected to ease pressure on input costs in the long term.

Buoyancy in demand

With rising level of activity in the oil and gas exploration sector, the demand for seamless and ERW pipes is set to rise over the next few years. Maharashtra Seamless has the largest market share in seamless pipes (about 37 per cent) and derives about 65 per cent of revenue from this segment.

The company, which supplies to the domestic and overseas markets, is likely to see greater orders flowing in, thereby translating into higher volumes.

The company proposes to augment its capacity from one lakh tonnes per annum to three lakh tonnes per annum over the next few years. As the contribution from these capacities kick in, Maharashtra Seamless is likely to be well-placed to absorb the rising demand.

Widening client base

The continuing upswing in the crude oil and gas market has been instrumental in the company adding clients.

The company has made significant inroads into the international market as well. Its joint venture with Hydril of the US for making high-end pipes has met with success. It has successfully executed a contract for supplying line pipes to AFPC, a joint venture between Shell and Syrian Petroleum Corporation.

With this, Maharashtra Seamless has approached Shell Global for supplying its global requirement. Kuwait Oil Company (KOC) — the largest oil company in West Asia — has approved Maharashtra Seamless as the supplier of seamless casing, tubing and line pipes for all KOC's requirements. This is expected to generate sizable business for the company in the international market.

It has also supplied seamless pipes to ONGC, British Gas Exploration India, Cairn Energy India and Oil India, among others, during the quarter.

As there is enormous potential for making the gas available from basins to inland centres for commercial use, we believe, the company with an established track record, is likely to be the prime beneficiary.

At its current price, the stock trades at a multiple of about 10 times its likely FY earnings on a diluted basis. This appears attractive on the back of rich business prospects and the company's ability to grow faster.

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