About
Maharashtra seamless is in the business of seamless and ERW steel pipes. These steel pipes are made from steel billets and HR coils respectively.

Seamless pipes are used mainly in the oil and gas and other such industries where there is a need to carry fluid under high pressure application.  ERW pipes which have a higher diameter are also used in the same industry, in water distribution and other applications in airports, malls and other civic locations.

The company now has a capacity of around 550000 MT in seamless pipes and produced around 220000 MT. In addition the company has a capacity of around 200000 MT of ERW pipes and produced around 115000 MT.

The company is a certified supplier to several prominent O&G companies such as ONGC, Oil india and GAIL and other companies such as SAIL, NTPC etc. In addition the company is also an approved supplier to several global O&G companies such as Chevron, Saudi aramco and occidental oman etc. The company has benefited from the imposition of anti-dumping duties on seamless pipes from china, due to which its products have become competitive in various foreign markets.

Financials
The company has increased its revenue from around 383 Crs in 2003 to 1760 Crs in 2011 with an annual growth of around 18% per annum. The topline growth has however slowed from 2007 onwards. The net profit has grown at a CAGR of around 20% from around 62 Crs in 2003 to around 346 Crs in 2011 (excluding other income).

The net profits have grown at a higher rate than the topline due to improvement in margins. The net margins have mainly improved due to reduction in overhead expenses as % of sales.

The company has paid off its debt completely and now has a surplus of around 700 Crs on the balance sheet. The company raised around 300 Crs of capital via FCCB in 2005 for expansion which was converted to equity in 2006. This capital has however not been utilized as the company has been able to generate sufficient capital from operations to fund its capex, pay off debt and maintain its dividend.

Positives
The company has been able to maintain an ROE in excess of 25% for the last 8-9%. To get the true picture of the core business ROE, one needs to adjust for the excess cash and revaluation of fixed assets. The ROE numbers have dropped in 2011 mainly due to revaluation of fixed assets which caused the networth numbers to go up by almost 67% in one year.

The company has been able to maintain a reasonable growth in topline which has however slowed down in the recent past. In addition the company has been able to improve its margins from 12-13% levels to around 16% levels.  It remains to be seen if this level of margin will be maintained.

The company has been able to pay off its entire debt and has close to 700 Crs excess capital on the balance sheet. The company has imported a plant from Romania for seamless pipes which it is installing near its current facility. This new plant will take the capacity up from 350000 to 550000 MT. In addition the company is also going in for backward expansion in steel billets which is a key RM for the seamless pipe (remains to be seen if the expansion is a good move). The company can easily meet all its expansion plans with the excess capital on the books.

Risks
The company sells a product which is a commodity product. The company has been able to maintain its gross margins inspite of fluctuation in steel prices which account for more than 60% of the total cost. It remains to be seen if the company will be able to maintain these margins in a slower growth/ higher competition environment (where other companies are expanding capacity too).

The company has managed the liability side of the balance sheet quite poorly. The company raised around 300+ crs in FCCB in 2005-06 which been idle since then. This is expensive capital which has been lying on the books and earning low rates of return. This excess capital has depressed the return numbers for the company.

Next post: Competitive analysis of the company, management review, valuation and final conclusion.

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