Recommendation from Iron and steel Company

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

MAHARASHTRA SEAMLESS: PIPING UP PROFITS

HERE IS WHY
 
✓Strong demand for its products
✓Reduction in debt
✓Expansion into other segments

S teel pipes are utilised in many different industries, including building, irrigation, water supply and sanitation, petrochemicals, oil and gas. They are increasingly used in residential, commercial and industrial construction and are primarily used to carry liquids and gases. After Europe and Japan, India is now among the top three global producers of steel pipes. And Maharashtra Seamless Limited (MSL) is one such company which is positioned strongly with good growth potential in this sector. MSL is engaged in the business of manufacturing steel pipes and tubes. 

It provides a whole range of high-class, customisable and innovative seamless pipes and tubes using state-of-the-art technology. It is also engaged in power generation. The company also manufactures ERW and coated pipes. It recently issued bonus shares in the ratio of 1:1. The company’s segments include seamless pipes with a total capacity of 650,000 metric tonnes per annum including the capacity of United Seamless Tubular Private Limited which MSL acquired recently – NCLT approval pending – as well as ERW pipes with a capacity of 125,000 MT per annum. 

It is also engaged in the generation of renewable energy (wind and solar) and manufacture of jack-up rig which is used for drilling oil from deep sea reservoirs. In the rig segment the company has been operating with 98 per cent efficiency on a three-year contract with ONGC. Maharashtra Seamless has been continuously paying off its debt and has reduced it from ₹1,145 crore at the end of March 2020 to ₹266 crore at the end of December 2022. The company expects strong demand position to continue through FY23 as there is good visibility of orders.

Its capacity utilisation of pipe segments will improve in FY23 due to strong demand. The company has a combined order book of ₹1,944 crore (0.54x FY22 revenue). The promoters of the company are increasing their stake, which has increased from 62.93 per cent in FY20 to 67.63 in Q3FY23. The company will also invest about ₹852 crore for replacement and building additional capacity which will help in improving its market position. The company’s revenue has been growing at a five-year CAGR of 24 per cent. 

It delivered an operating profit margin of 18 per cent in Q3FY23. In FY22, the company delivered an operating profit margin of 14.9 per cent. The net profit margin was 9.9 per cent in FY22 and 13 per cent in Q3FY23. It delivered better results in Q3FY23 with an increase of 17.6 per cent in revenue on YoY basis which stood at ₹1,339 crore for quarter ending December 2022. The operating profit of the company stood at ₹238 crore which increased 49 per cent on YoY basis.

The stock of the company is currently trading at a TTM PE of 7.16 times and its price-to-book value is 1.06x. The company’s return of equity and return on capital employed are at 12.5 per cent and 10.5 per cent, respectively. Our expectation is that the company will continue delivering good results in coming quarters given that there is strong demand for its products both in the domestic and export markets with an order book of ₹1,944 crore which was ₹625 crore in Q4FY20. Thus, taking into account the strong fundamentals and the overall business outlook we recommend BUY.