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Maharashtra Seamless - Invest in the Leader

This seamless pipes leader has sound prospects and low valuation

Maharashtra Seamless Limited (MSL) is the country’s largest manufacturer of seamless steel pipes. The D P Jindal group is its promoter. It has the capacity to produce 3.5 lakh metric tonnes (MT) of seamless pipes annually. These pipes are used by sectors such as oil and gas, hydrocarbon industry, boilers and heat exchangers, automotive, bearing and general engineering industries. Its plant for manufacturing these pipes is located in Raigad, Maharashtra. The company has a technical collaboration with Mannesmann Demag Huttentechnik of Germany.

The company also manufactures another category of pipes called ERW pipes. It has the capacity to produce 2 lakh MT per annum of these pipes. ERW pipes are used mostly by industries such as drinking water and sewage treatment. The company also has a power division which produces 7 MW from 20 windmills. This plant is located in Satara, Maharashtra. All the power that is produced is used for captive consumption.

Sectoral outlook
The international demand for pipes is beginning to revive. Another positive development for Indian pipe manufacturers has been the imposition of anti-dumping duty on seamless pipes from China by US and Europe. This has improved the prospects of Indian manufacturers. India is also considering the imposition of a duty on seamless pipes from China. If this happens, it will benefit MSL.
Moreover, the price of oil has risen to around $88 per barrel. This could encourage exploration and production (E&P) activities in the oil and gas sector and will help improve MSL’s order book. Similarly, the demand for ERW pipes is also improving as a lot of water-related projects are coming up within the country (especially under the government’s JNNURM programme).

Strengths
Large order book: The company has an order book worth approximately Rs 415 crore.
Growth initiatives: The company has upgraded its plant (that manufactures seamless pipes) so that it is able to produce pipes of diameter ranging from 1 inch to 7 inch, which are most in demand. For the first time in India the company has begun to manufacture pipes of 14-inch diameter. In the case of ERW pipes also, the company has upgraded its capacity and is now able to offer pipes ranging from 8-inch to 20-inch diameter.

Threats
As an investor you should watch out for the following potential threats. If the price of crude oil declines drastically (say, $30-40 per barrel, as in 2008) then E&P activity becomes unviable. This in turn affects the demand for seamless pipes adversely.
The rising prices of inputs such as iron ore, coal and steel have the potential to affect its margins.

Valuations and financials
Between FY05 and FY10, the company had a high return on capital employed (RoCE), ranging from 17.64 per cent to 24.46 per cent.
The stock is trading at a 12-month trailing price to earnings ratio (PE) of 8.61, which is lower than its five-year median PE of 9.79. Over the past five years its earnings per share (EPS) has grown at a compounded annual rate of 21.6 per cent. This gives it a price-earnings to growth (PEG) ratio of 0.40x, which is quite attractive. You may invest in the stock with at least a three-year investment horizon.