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Growth In Pipeline

Man Industries' healthy balance sheet promises bright future

Profile

Starting as a small trading company, Man Industries Limited (MIL) is now a global business conglomerate having diversified business interests in manufacturing and supply of steel line pipes for high and medium pressure applications such as oil, gas, petrochemicals and water transportation.  It’s the flagship company of the Man Group, UK, with 32 years of experience in the business.

A testimony of MIL’s growth is its impressive clientele comprising names like Bechtel Corporation, Indian Oil Corporation, Reliance Industries, Bharat Petroleum Corporation, Shell, ONGC and Petronas, amongst others.

Promoter

The company was established under the leadership of J. L.  Mansukhani, whose experience is rich and varied in the arrays of construction, metal trading and steel industry. R.C. Mansukhani, Chairman and J. C. Mansukhani Vice- Chairman and MD, have been the forces leading the company from strength to strength.

Investment Rationale

Increasing Pipe Demand
Crude oil prices seem to have stabilised of late, which has led to a renewal of interest in oil exploration and production activities globally. This development augurs well for pipe manufacturers as the demand for their products is expected to increase. Furthermore, with the products of Indian companies like MIL increasingly being accepted in global markets, they will benefit from this opportunity. Domestically as well, the demand for pipes is expected to be around 21,000 kms over the coming five years. MIL, being an established player, is expected to fulfil a bulk of these orders. Along with this, MIL is also expected to benefit from the huge potential in the water transportation segment.

Potent Product Mix
One of MIL’s strong points is its de-risked business model. It boasts of similar manufacturing capacities for both LSAW and HSAW pipes, which ensures stability and, to a certain point, protects it from risks in any one of the two segments as it does not have to rely heavily on one particularly part of the business. MIL has also undergone expansion in the past three years and is ready to grab opportunities in the booming pipe industry as and when they crop up.

Strong Order Book
MIL recently won a huge order worth Rs 1,340 crore in the Persian Gulf. At present, the company’s order backlog stands at Rs 2,000 crore. MIL also has L1 position in orders worth Rs 1,100 crore, which are likely to be awarded soon. Moreover, the company managed to maintain margins in the challenging environment of FY09 and with times changing for the better, these margins are expected to be sustained.

Realty Portfolio
MIL has interests in the realty sector through its subsidiary Man Infra. The company is currently building two commercial projects in Mumbai (Bandra and Vile Parle) and one residential-cum-commercial project (Nerul). These realty projects are valued at Rs 103.4 crore.

Healthy Balance Sheet
Recently, MIL’s board approved the buy-back of its foreign currency convertible bonds (FCCBs) worth $50 million due to deferred investment plans. The FCCBs were convertible into equity shares and hence, with this buy-back there will be no equity dilution, which is good for the company’s earnings. Furthermore, with all of its capital expenditure plans completed and an impressive returns ratio, the company’s balance sheet looks good.

Risk & Concerns

Unpredictable Crude Prices
At the moment, crude oil prices are attaining a stability which is bringing about an increased spend on E&P activities. However, if oil prices, known for their unpredictable nature, drop again then E&P projects could be placed on hold. This in turn will reduce demand for pipes.

Order Book Concerns
MIL’s earnings could be affected in a major manner by cancellation of orders or delays in order execution. Apart from that, a slower than expected order inflow could also spell bad news.

Valuation
The stock is currently trading at about 3.1x FY2011E earnings and at an EV/EBIDTA of 1.2x, which is significantly lower than its historic average (of about 9x). With an expected revival in the industry, the valuation multiples are likely to improve. Further, its valuation gap with the larger pipe makers has widened significantly in recent times, but the same is likely to narrow down.

Assuming a substantial discount to the average multiple, MIL is valued at the average of 5x one-year forward PE multiple and 2x one-year forward EV/EBIDTA multiple.