Maharashtra seamless-a value plus cyclical play

[Kumarsids]

After increasing stake during Sept Qtr, promoters again buying in last 2-3 months not very substantial though. Tracking position, Promoter integrity and skin in game still keeps me away from taking big bets.

Interview few weeks back was not that convincing too,

• exports down not expecting turn around soon,
  -too much dependency on Oil and Gas and on ONGC in particular
• United seamless acquisition/integration done
• Trying to find other product lines to enhance product range
• Trying to refinance debt (400 crs) at lower rate to 5%
• Group company exposure is still sizeable, will be reduced by 50%
  : Maharashtra Seamless' Sanket Jindal On Receiving Orders From ONGC | Halftime Report - YouTube

[Shani]

Back to back Analyst / Investor Meet happening.
Promoter group continues to buy even at this elevated price.

[StageInvesting]

Very quite thread !

Numbers have changed drastically in last few quartes, lot of tailwinds for the company- export as well as domestic business doing well. Margins are improving .

Experts- what are the red flags here ?

[Harsh_Jain1]

Hi, anyone with an updated view on the stock after the recent run up? Everything seems to be working in favour of the co. Good Q2. Good potential. Any opinions? Thanks!

[Akshada_Deo]

My notes from the recent concall:

Telangana unit commenced aug 2024

1300 cr investment, gross debt done, core operations and shareholder reward only to be used

Morgan stanley domestic india fund co has added

ICD- realise all of them by march 24= 78 crs march 23, 43 crs today

Liquid investment as increased by 25% in last 6 months

Corporate guarantee reduction on schedule, legacy guarantee to be done by sept 2024

Oil sector contributed significantly

87% of ebitda is seamless

orderbook - 1468 crs, 325 crs confirmed but only in pipeline due to purchase order issuance pending dealer export and upstream segment,

Trend of ebitda per tonne 27495 rs, strong execution of order book, oil sector contri significantly, margins to remain good as seamless market is strong and co is well poised. Margins are expected as of now to remain good

Uscpl amalgamated with co, do not provide individual numbers

Iocl order- 2 orders in sept of 23, oil india and iocl, 100-125 crs each, expect to get it done by q3

Share of export has not gone up

Min 5% sales growth fy24 was guided previously, seamless and erw combined will attain the same

Production loss in Q1 due to amalgamation

Interested in JV of someone, trials are ongoing with company

Capex? Down the line in next year

Win rate for ioc and oil= 50%+ business from them, and execution timeline FY25

25% steady tax

Exports are to revive from niv

Dispatches are inc 20%, 90k seamlessQ1, 106k Q2 Q3 more than q2

350 cr hot mill capex pending, 500 crs capex in the next 1 year

Rumour of US market opening up and tariff going down? Open to US market and 6 months ago also exported to north america can cope up, certainly opening up

Domestic market also goes up when US market is higher

Ongv 3500, oil india 500-700 cr to spend in FY25 on pipe procurement= 4200= 50% win rate 2100 crs

Disclosure: studying, not invested yet

[Kushagr]

[Harsh_Jain1]

thanks for the meaningful updates both of you

[jeewangarg]

Capital intensive nature of the industry coupled with challenging operating environment has erected steep entry barriers in SS pipes & tube sector, handing incumbents a definite advantage (Venus Pipe DRHP)

Leadership position in the domestic seamless pipes sector, further strengthened by successful turnaround of USTPL’s operations – MSL is the leading domestic manufacturer of seamless pipes with an estimated production capacity of 4,50,000 tonnes per annum (tpa) with a strong presence in the high value-added, large-diameter seamless pipes segment (outer diameter or OD >10 inch), which sees relatively lower competition. In the seamless pipes segment, MSL primarily caters to companies in the oil and gas sector, where it is a registered vendor for major domestic oil producers and refiners. In addition, it caters to other sectors, including power plants, boilers, general engineering, etc., and undertakes exports as well. MSL’s capacity share in the domestic seamless pipe market got enhanced further with the acquisition of USTPL (having an installed production capacity of 2,00,000 TPA) in FY2019, and its successful turnaround by MSL post commissioning of operations in October 2020. At present, the company is estimated to have a market share of more than 50% in the domestic seamless pipes industry (including USTPL). (ICRA Report dated 12Sep2022)

Promoter Stake Increasing

The rising trend in promoter stake is consistently observable, as indicated in the latest second-quarter fiscal year 2024 conference call.

On December 11, 2023, ICRA updated the rating from stable to positive.

Sector Tailwind PPT 01November 2023

The part I am missing is Valuation. Is stock at right valuation or not.

@Donald Sir, If you can guide us on that, We will be very grateful

[ganeshrpl]

My takeaways from the conf call ( any mistakes are truly mine, as they were my running notes ):

• Highest EBITDA ( but on lower production volumes). Have been able to control costs.
• There is spending in O&G sector, and orders are getting topped up.
• Seamless pipe product down by approx 10% to 98 kMT from 107 QoQ but sales have been higher, indicating higher price for seamless pipes. Ebitda/tonne has also increases Q, Y and 9m YoY too.
• Domestic demand is high. Exports is only 10% and has not picked up over last 9 months, domestic has compensated. If we wanted to get export order, we could have gotten it by reducing the prices/margins, but we had more than enough domestic orders and hence export is lower.
• Promoter stake has increased over the past 2 years from 63 to 68, when will it improve to 75? No timeline, but would like to get to 75%
• Order book: 1563 cr.
  • Orders are typically 3-4 months only
• why is there an increase in EBITDA/Tonne:
  • Good domestic market. Export started declining from April of last year, and our margins started increasing from the same time. This indicates the domestic market is good and is indicative of higher margins.
  • RM prices have declined. Steel price has come down. When the tender from ONGC came 3 months back and we book RM at a lower price. Not all or 100% of RM is booked, hence lower steel [RM] prices have helped in this quarter.
• FY25 the EBITDA/tonne will go back to 20,000 and will not sustain at 30,000 level. FY24 might close closer to 27,000 levels but FY25 will be lower. [ this year was more opportunistic - volatile market, higher prices for end product and RM was lower ]
• No plans for deploying cash back to shareholders. No opportunities seen yet for buying other companies, we are ‘hoping’ for an opportunity. Dividends plan will be in consideration.
• ONGC comes out with lower value and lower duration order, compared to in the past when it was a large one and for a full year out, unlike today where its for 3-4 months.
  • We are one of 3 participants and are the market leader, we will get good orders.
• Exposure to oil and gas segment is 70% other area we cater too are: boiler and general engineering. Power sector uses boiler segment.
• ERW margins are going down. Two types of sectors for ERW we cater to: Oil and water. Depending on the sector, the margins fluctuate. Oil ERW has better margins than water ERW.
  
  

In my view, given that the margins are at an elevated level and the mgmt has stated that the EBITDA might not sustain at these levels of 30k and might revert to 20k levels in the next financial year, I have sold most of my holdings. Have transactions in the past 30 days.

[Malolan_R]

Hello

Very old post on Maharashtra Seamless . Any new thread on this since times have changed ?

[Ali]

As Ganesh previously indicated, the scenario is unfolding as expected. After reaching peak margins, the price is now declining. I anticipate a period of stagnation before any potential momentum, which would likely depend on an increase in volume or margins.

[NIKHILESH_JOSHI]

This weekend, I spent time researching the concall transcripts of major players in the steel pipe manufacturing sector, including Man Industries, Ratnamani Industries, Venus Pipes, Jindal Saw, and Maharashtra Seamless. After going through the transcripts, here are my key observations and analysis:

Observations:

1. The industry is experiencing a strong tailwind, with most companies announcing significantCapEx plans and providing revenue growth guidance of over 20%.
2. The major products manufactured in this sector include ERW (Electric Resistance Welded), Seamless, LSAW (Longitudinal Submerged Arc Welded), HSAW (Helical Submerged Arc Welded), and Ductile pipes. @jeewangarg has already provided a detailed list of which player manufactures which product.
3. Man Industries is undertaking CapEx in ERW and Seamless segments. Additionally, they are opening a new plant in Saudi Arabia.
4. Seamless pipes command higher margins (around 18%), while LSAW, HSAW, and Ductile pipes have lower margins (around 10%).
5. The demand for water transportation pipes is peaking in India, while the demand for oil and natural gas pipes (LSAW & HSAW) is increasing in Saudi Arabia. Globally, pipes for the oil and gas sector have higher demand compared to water pipes.
6. Maharashtra Seamless is the only debt-free company among its peers and has no plans to take on debt for further expansion.
7. Chinese companies currently hold around 54% market share in this space, while India’s share is only 7-8% (as per Venus Pipes’ DRHP). Additionally, there is a growing trend of buyers avoiding Chinese companies, which could provide substantial growth opportunities for Indian players if this continues.

Points for Discussion:

1. With multiple players undertaking capacity expansions, when can we expect oversaturation in the industry?
2. Why did Maharashtra Seamless witness a decline in revenue, even as its peers reported exceptional growth? The concall reason of not compromising on margins was unclear.
3. What is the expected trend for steel prices, a key raw material for this industry?

I have attached some interesting excerpts from the concall transcripts across the sector. More will be shared in subsequent threads.

[NIKHILESH_JOSHI]

[RandyMarsh]

The numbers on this look amazing to say the least.

If what Nikhilesh is saying above is true, and the company can grow topline 20% YoY, then let’s take a brief look at the company’s returns to try and gauge the earnings power.

In 2015 they had 118Cr in earnings on 3,712Cr of debt & equity capital which is a 3% return on capital. As of 2024 they had 951Cr in earnings on 5,723Cr of debt & equity capital which is roughly a 17% return. In the subsequent 10 years they have invested ~2,017Cr in additional debt and equity capital and using this money were able to grow earnings by ~833Cr!

So, the company has been reinvesting 68% of their capital at 41.3% returns. The return on incremental capital invested is 41.3%!. Multiply the above two and you get the value compounding rate of the company which is 28.1%.

The performance of the stock over the same period has been around 21%-24% annualized so a few basis points off the company’s 28.1%, but if MAHSEAMLES is able to keep redeploying the same amount of capital and earn about the same return on it, then coupled with the tailwinds that aid growth, this will be a good business to hold.

These numbers are very good considering this is commodity sensitive and cyclical. I haven’t looked much deeper into this, but someone in the management seems to be doing the right things.

[StonePitbull]

@RandyMarsh

These numbers are very good considering this is commodity sensitive and cyclical. I haven’t looked much deeper into this, but someone in the management seems to be doing the right things.

The numbers are fine and dandy so is the opportunity. I suppose the anti-dumping duty ends by 2026 and unless extended it can impact margins. Another anti-thesis pointer could be competition, as peers are also expanding capacities, but this can be partially offset by the large opportunity set

Disc: 1% of my PF

[NIKHILESH_JOSHI]

@StonePitbull Some analyst asked for this. The management seems confident that government will extend the anti-dumping duty seeing the past performance of this sector. Now the government didn’t change and the relation between India & China haven’t improved. I think Gov will extend.

[ureddypp]

@RandyMarsh

So, the company has been reinvesting 68% of their capital at 41.3% returns. The return on incremental capital invested is 41.3%!. Multiply the above two and you get the value compounding rate of the company which is 28.1%.

Would you mind explaining this a little more in detail.

[RandyMarsh]

When we usually calculate ROIC (Return on Invested Capital), it is more often the returns being generated on capital that has already been invested, could be a one year ago or ten. We want to know the returns the company can earn on their future investments and to get a better idea of that we try and calculate the return on ‘incremental’ capital invested i.e. incremental recent investments.

A rough way to do that is take the amount of capital the said business has added over x amount years and compare with the incremental growth in earnings (net income) in that period of time.

ROICI = Change in earnings / Total Capital Invested.

In case of Maharashtra Seamless, Total Capital Invested from 2015-2024 was ~2,017Cr, TCI is nothing but (Equity + Debt & CLO - Goodwill). And during the same period earnings increased by ~833Cr, so they basically invested 2,017Cr of incremental capital and earned 833Cr. I’m missing a few decimals here but the return on incremental capital they invested is ~41%.

During the above period, the 2,017Cr was ~68% of their cumulative earnings within that timeframe. So they were deploying/reinvesting 68% of their capital @ 41.3%, so to find out what the entire company’s value is being compounded at, we need to multiple the above two percentages and we get 28.1%.

Historically, a stock’s performance over the course of time either reverts or increases to the rate at which they are compounding their own value.

A great big deal of Indian equities actually have high ROICI, this is because there is a lot of scope for growth and even the largest companies in India by mkt cap can still be considered to be in their growth phase. Perks of being an emerging market with a huge TAM.

[vishwesh_sanas]

Competition is growing up. Jindal Saw catching slowly

[ureddypp]

@RandyMarsh

During the above period, the 2,017Cr was ~68% of their cumulative earnings within that timeframe. So they were deploying/reinvesting 68% of their capital @ 41.3%, so to find out what the entire company’s value is being compounded at, we need to multiple the above two percentages and we get 28.1%.

Thank you for the response. The cumulative earnings between 2015-24 according to screener is 3260cr. So the means 61.9% of the capital was re-deployed into the business. You have suggested the no. is 68%. Could you kindly re-check. Just want to make sure I am not making a mistake with my calculations. Thank you.