Maharashtra seamless-a value plus cyclical play

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This is the first stock for which I would like to put my case forward.

Points in favor:

#Very strong balance sheet

#Cash is good-very less debt

#Price is 52 week low-274,BV=391.3,p/bv=.72

#Good dividend

#D/E is .01 compared to .94 of Welspun

#quoting at less than 10 times PE Of Welspun a market leader. Rerating has to happen.

#Company has been steadily growing since last 10 yrs.

#The last bull rally is always speared by cyclicals/commodities and steel is one of the rulers.A rally is round the corner.Should be buying steel when GDP forecast is very less.

Points against:

Margins have come down because the anti-dumping duty has been withdrawn.it is facing very good competition with China.

My understanding is that with the fundamentals being strong there are good chances of a surge from here.There is a good chance of overriding the withdrawal happening sooner than later.This has happened in case of opal glassware.At a current CMP of 274 it looks like a very good value buy.

Requesting seniors to review my post.

Disc:I am invested here.Also I have been following all your posts and have learnt a lot.This is a basic level analysis i have put forward and any feedback is most welcome.

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I see the top-line and bottom-line both coming down since last quarter.

This is not a good sign and a thus good reason for the stock to be at 52 week low.

Do you see any specific reason why the steel demand would go up in the near future?

At least the three sectors that heavily depend on Steel i.e. Real Estate, Automobiles and Infrastructure do not seem to be recovering any time soon.

Also this is part of Jindal group which is news for all the wrong reasons. I suppose the coal blocks allocated to the Jindal group was through this company. Please correct me if I am wrong.

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Sales have come down due to reduction in margins because of the Chinese competitionwhich has eaten into their market.Sooner or later there would be an anti-dumping duty imposed and then we shall see the topline and bottomline growth.

Please observe that there has been a steady consistent growth since the last 10-15 years.Undoubtedly it has been a steady performer and as per graham if there is an external issue because of which a consistent performer has some decrement in sales,it is simply a matter of time for the revival to happen.

Regards,

Rajarshi

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I had recently read a research report on mah seamless where there was a buy call on the stock when it was around 285 and at lower end of valuations. But to me the report looked more like a deskjob and too much like an earlier research report from same guys where this company at around 380 or so was touted as a buffett kind of buy and forget kind of stock for next 10 years.

That tells me that the recommendation service has a fixation on this stock and hence may not have highlighted the negatives adequately.

I personally dont know much about the company as it is out of my circle of competence and its sector or its standing so not much by way of definite views on company.

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Maharashtra Seamless of D P Jindal Group could have been a great play in the theme of rising crude price, gradual higher deployment of rigs around the world and a very high operating leverage. Presently out or total capacity of 550,000 T, only 35% capacity is utilized. Actually one plant of 200000 T capacity is shut down for lack of demand and would be operational soon as Anti Dumping duty on China would hopefully continue beyond Feb 17. Market cap of the company is Rs. 1700 cr. and it’s quoting below book value.

The results which came today for Q2 17 (standalone only) is good, which actually raised my interest to study the company. Unfortunately, they didn’t provide the consolidated numbers with Q2 results. Here is the Q2 17 result link

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/340C83C7_B5F9_4CC1_BC59_B07FF0672D5B_151100.pdf

However, on going through past 3 years AR I doubt if we can be comfortable about the corporate governance standard and capital allocation ability of the company? Here are few pointers …

  1. It has 2 JV, 3 subsidiary, 1 step down subsidiary and 3 associate companies. Standalone Revenue is Rs. 1019 Cr in FY 16 (Rs.1355 Cr in FY 15) and profit of Rs. 39 Cr (Rs. 122 Cr in FY 15). The fall in revenue and profit is understandable due to lower commodity and energy prices. It completely halted the activity of companies like this. The Consolidated revenue for FY 16 was Rs. 1023 Cr. (Rs. 1355 in FY 15) and consolidated profit was Rs. 9 Cr (Rs. 117 Cr in FY 15). So, it is seen that all the subsidiaries are bleeding, hardly generating any revenue. All subsidiaries and associates together able to erode profit of good quality standalone business substantially by generating meagre revenue, bloating balance sheet and even debilitating the main business numbers.

  2. As on 31/03/2016, Standalone steel pipe business is debt free whereas Consolidated books have Rs. 396 cr of Long term loans. Standalone business which does all the business has Short term loan of Rs. 7 cr whereas Consolidated book has Short Term loan of Rs. 348 Cr.

  3. The company has Rs. 551 Cr of quoted investments in liquid mutual funds. And also have Rs. 265 Cr of unquoted investment (a large part of this is again in Mutual fund but that is pledged for loans taken by an associate company). Total Mutual Fund pledged for availing loan is Rs. 160 Cr. Also, shares of one subsidiary pledged for providing loan to an associate)

  4. Rs. 2250 Cr worth of guarantee and collateral security provided by the standalone entity for raising loan for subsidiary, associate and JV companies. The amount is more than present market cap of the company.

  5. Balance receivable from Subsidiary / Associate and JV companies are Rs. 250 Cr. and it’s continuing in the book for last few years.

  6. Loans and advances given to Subsidiary / Associate / JV totals Rs. 317 Cr in 2016 from Rs. 296 Cr in 2015.

  7. Interest charged to the loans given by company are much below market rate and no definite repayment period is stipulated.

A separate point, revaluation of the plant, machinery, land and building were done in Standalone but the rationale of the same were not very apparent. Also, I was unable to make out how Rs. 668 Cr Gross block worth Plant and Machinery can be further revalued to add another Rs. 546 Cr in revalued asset. What type of plant and Machinery can embed these types of values in it?

Lastly, no discussion whatsoever has been made in the AR about what the subsidiaries are proposed to do except an one liner that one of the companies has an Iron Ore mine in Brazil.

So, even though the core business may do well and high operative leverage is present in the business, can we comfortably invest here?

Opinions invited. I find the case quite interesting! Possibly (repeat possibly) a pointer to the lack of capital allocation discipline, information dissemination and corporate governance ethics so acutely lacking in many cases in Indian corporates. .

Disclosure: Author is a SEBI Registered Investment Adviser and runs advisory firm https://aveksatequity.com. This post is entirely for discussion purpose. This is not a buy, sell or hold recommendation. Please do your own due diligence before investing or seek help of your investment adviser.

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Results of q4 2017 declared. 44,423 profit in q4 17 compared to 32,428 in q4 2016.

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Hi All,
I am observing that this stock has fallen for some time, Even while Market is going up quite a lot. I am wondering could it be because of the Dividend given a week Back. Because, Since the dividend date this scrip has fallen consistently,

What sort of future outlook can we expect from this Company’s Share ?
Thanks in advance,
Suraj

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I went through some 10 years of Maharashtra Seamless updates on bse web site.
Their future prospects look very good as they are running at full capacity or will almost be at full capacity and taken over a large plant that will give them 50% more capacity to drive growth.
I had 2 negative observations:

  1. The recent growth in orders is due to oil exploration activity which largely was due to recent oil price surge. With that gone, I am not sure if order means conversion
  2. Management have previously in their updates continued to talk how anti dumping duties will benefit them in 2013 or something and how new capacity will benefit them. However they have had nothing in terms of eps growth to show for that so I am not inclined to take their new claims at face value
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The problem with this space is rise in competition by steel players who have forward integrated in pipes … Jsw and Tata have done it . That will keep cap on ability to earn huge margins

Mah seamless are competitive vis a vis chinese & local steel players on account of low cost plant … but when anti dumping duties are not there their profit margin collapses along with lower operating leverage . 2013-14 is good year to see how low it can go – EPS of Rs 13 / share …

But if pipe demands grows as per plan on account of CGD players expansions across cities & increased Oil pipes lines across the country … then we have upward EPS of of Rs 80 / 90 considering increased capacity vis a vis last cycle … @ max of 10 PE multiple we can see Max upside to Rs 800 in bull market and in bear market it can go down to @ 8 -10 PE x Rs 13 EPS = Rs 110 / 120 …

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New acquisition by Company.

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I have shared my views on Maharashtra and some other companies. Alternate views and suggestion are welcome

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Can anyone explain what is the exceptional item 14.5 crores mentioned in Q4 results?

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BTW its not 14.5 crores, its 145.98 crores !! … It looks to me a classical case of the company short charging the minority shareholders. Firstly, invest in an un-related business in a foreign country and then declare impairment in such investments (for the year as whole they’ve 210 crores of exceptional loss). When your primary business is doing good and has enough scope, why would they invest in mining assets in another country ?. Looks like a way to siphon off the money (may be there’s a real loss, but until proven I can’t see it otherwise).

Read note 7 in the results report on why this exceptional loss is.

Disclosure: Not invested and was under watchlist (not anymore).

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I kind of agree that Minority Shareholders are taken for a ride (unless proven otherwise)

My bad should have looked at the Balance sheet more closely . As per 2018 - Standalone (last year), I can see a very high Contingent Liability of 1873 Cr primarily due to Guarantees and Letter of Credit. Additionally they have declared Current Asset of 434 Cr in Sh. Term Loans & Adv . Which means 15% of their Networth of 2971 Cr itself is on shaky ground.

Plus the some of their subsidiary are not even able to pay the interest on loans. So in hindsight it looks easy to point out there was a risk. Anyways, will add this to my checklist of Risk and better later than never.

Disclaimer : I have already exited the company and my views may be biased

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Postponed for 2nd July , reason not mentioned.

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anyone tracking Maharashtra seamless recently ? Acquiring Oil rigs that they had guaranteed and still one more is outstanding is chillings… does anyone have other views