The stock of steel pipes and tubes maker Maharashtra Seamless has lost close to 39 per cent since August last year. This has been despite the favourable impact of imposition of safeguard duty on the import of seamless pipes and tubes into India.

While the resultant protection has helped Maharashtra Seamless improve volumes and realisations for seamless pipes for the year ended March 2015, this alone may not suffice. With the fall in crude oil prices adversely impacting investment activity in the oil and gas sector, a key user industry, the demand outlook for the high-margin seamless pipes does not look optimistic.

Pick-up in demand for steel tubes and pipes from other sectors, such as boilers, power, general engineering and infrastructure is expected to be uneven and in many cases still lacks visibility. Also, at ₹188, the Maharashtra Seamless stock discounts its estimated earnings for 2015-16 by 9.4 times, below its five-year average valuation of 11 times. Yet, given the uncertainty on the demand front, investors can consider exiting the stock.

The oil turmoil

Maharashtra Seamless is among the largest producers of steel tubes and pipes in the country. Its seamless tubes and pipes, which can withstand high pressures, find application in oil and gas exploration and transportation, automobiles, boilers, general engineering and infrastructure. The less lucrative ERW (electric resistance welded) pipes and tubes find usage in transport of oil and gas as well as water and sewage and in the infrastructure sector.

The fall in global crude oil prices has forced energy companies the world over to cut back or postpone investments in exploration and production activities. With OPEC continuing to stick to its earlier high production targets, oil prices are expected to remain weak in the near future. This does not augur well for Maharashtra Seamless, whose clientele includes oil and gas majors, such as Shell, ExxonMobil, Gulf Oil Corporation and Chevron Corporation. Unlike global energy companies, domestic public sector oil players such as ONGC and Oil India have upped their capital expenditure plans for 2015-16. But unless crude prices recover, the feasibility of these capacity additions could be questionable. Moreover, private players such as Cairn India too have slashed their investment spending for the current fiscal.

Not much is expected by way of demand from the power sector, too. While investment by public sector utilities, such as NTPC, is likely to go up, that by private sector players, many of which are highly leveraged, is expected to stay muted. Also, there is not much visibility on improving order books of capital goods firms and uptick in infrastructure demand.

Import curbs helped

Maharashtra Seamless posted net profit of ₹118 crore (up 16 per cent) on sales revenue of ₹1,355 crore (up 12 per cent) in 2014-15. Improved sales volumes of both seamless and ERW pipes and tubes and higher operating profit of seamless pipes and tubes helped.

This was thanks to the imposition of safeguard duty on imports of seamless products into the country last year.

The impact of this may, however, not last long as the duty protection gets phased out gradually — from 20 per cent between August 2014 and August 2015 to 10 per cent between August 2015 and August 2016 to finally 5 per cent between August 2016 and February 2017.

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