Opinion on Maharashtra Seamless Limited
(This
is for information purposes only. This should not be construed as a
recommendation or investment advice even though the author is a CFA Charterholder. Please consult your financial
adviser before taking any investment decision. Safe to assume the author has a vested
interest in stocks / investments discussed if any.)
Maharashtra Seamless Limited (MSL) belongs to DP Jindal Group. Jindal Drilling & Industries Ltd (JDIL) is another DP Jindal Group company.
Maharashtra Seamless is listed on BSE and NSE, India's two main stock exchanges.
Let us dive into the company.
1. Its business
Maharashtra Seamless operates in three segments, namely, (a) Steel Pipes & Tubes, (b) Power - Electricity and (c) Rig.
It is a big manufacturer of seamless and ERW pipes. Seamless pipes are pipes without a seam or a weld-joint in contrast to a seam or welded pipes. They are capable of withstanding higher pressure, higher temperature and stress.
ERW pipes are electrical resistance welded pipes. The company has plants in Maharashtra and Telangana.
MSL's market share in seamless pipes is 55 per cent, with ERW pipes chipping in with 18 per cent market share.
The user industries for the seamless and ERW pipes are: oil & gas, petrochemicals, power, drinking water, housing, irrigation, automotive and bearing.
Seamless pipes are highly durable and they typically last for 20 to 25 years and as such they are much sought after in oil & gas, power, engineering and infrastructure sectors.
In the upstream segment of oil & gas industry, ONGC Ltd and Oil India Ltd are big players drilling / exploring for oil and gas. They use seamless pipes for their drilling operations.
In the downstream segment, BPCL, HPCL and IOC Limited use pipes for transportation of their products.
In the gas sector, Gail Gas, Indraprastha Gas and Mahanagar Gas use seamless pipes. Even cylinder manufacturers, like, Everest Kanto use seamless pipes.
Companies, like, Thermax, Thyssenkrupp and Cheema Boilers, in the power and boiler sector too use seamless pipes.
The company's power - electricity segment generates solar and wind energy.
The company operates offshore jack up rigs under the Rig segment.
Around 95 per cent of the company's operational revenue comes from steel pipes & tubes segment and about 83 per cent of company's total profits come from this segment.
Seamless pipes is the most profitable business for MSL. ERW pipes are less profitable.
For example, during FY 2023-24, the company's total EBITDA is Rs 1,223 crore - of which, seamless pipes' share is Rs 1,035 crore (85 per cent) and share of ERW pipes is Rs 76 crore (about 6 per cent).
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a financial metric that measures a company's operating performance.
The Rig segment is a drag on company's profitability metrics -- the segment's asset share is more than 10 per cent of total assets.
Order book:
Total order book of the company is Rs 1,700 crore as of 20Oct2024 -- of which, 46 per cent of the orders are from ONGC Ltd and Oil India Ltd.
Contribution from exports is less than 10 per cent of the total turnover of the company.
Main competitors to MSL in the listed space are: Jindal Saw Ltd and Welspun Corp Ltd.
2. Its customers
Main customers of Maharashtra Seamless are: ONGC Ltd and Oil India Ltd.
Others include: BPCL, HPCL, Gail Gas,Cairn Energy, IOC Ltd, Reliance Industries, Larsen & Toubro, NTPC, BHEL, Grasim Industries, Adani group, DLF group and Hindustan Aeronautics Ltd.
3. Management quality
The company is not in the habit of short-changing minority shareholders. The company management is highly disciplined with regard to company's finances and business operations.
The promoters and executive team are well experienced in the filed. The promoters have not pledged any of their shares.
The
promoters buy the company’s stock regularly from the market. Their
shareholding increased from 57 per cent (Mar2014) to 68 per cent
(Sep2024).
4. Balance Sheet
The company has got a strong balance sheet with no financial weakness. Their past investments abroad had gone bad, but overall the company has got good financial discipline.
5. Zero-debt company
In
the past, the company took debt to buy United Seamless Tubulaar Pvt
Ltd, located at Narketpally, near Hyderabad, Telangana. The company repaid its debt
and is now a debt-free company with a cash surplus.
The total cash and cash equivalents of MSL have risen from Rs 1,859 crore as on 31Mar2024 to Rs 2,387 crore as on 30Sep2024.
What
will the company do with the cash surplus of Rs 2,387 crore? Will it go
for a share buyback or will it go for capacity expansion / capital
expenditure or will they consider other routes for capital allocation?
MSL
is planning to incur a capital expenditure of Rs 850 crore between FY
2024-25 and FY 2025-26 and a working capital expenditure of Rs 550 crore –
these spends will be met through accumulated cash reserves and future internal
cash accruals of the company.
6. Profitability
The operating profit margin (OPM) moved between 14 and 22 per cent in the past five years. On a trailing 12-month basis, the OPM stands at 19 per cent.
For the Jul-Sep2024 quarter, the gross profit margin (GPM) is 38.5 per cent, while net profit margin is 17 per cent.
Its return on capital employed (ROCE) is 23 per cent, while return on equity (ROE) is 18 per cent.
7. Consistent dividend payer
Dividend per share is doubled from Rs 5 (Aug2023) to Rs 10 (Aug2024). The company is a consistent dividend payer.
8. Valuation measures
MSL’s
fortunes depend on the oil and gas, petrochemicals and infrastructure
sectors. As such, its business is cyclical – that is one of the reasons
the company’s stock commands lower valuation multiples (price-earnings, price-book ratios and others).
Its
price-earning (P/E) ratio is less than 10 per cent. Its price-to-book
(P/B) ratio is 1.40 and its price-to-sales (P/S) ratio is 1.60. On a historical basis, the valuation measures currently are reasonable.
9. Main investors
Free float of the company's stock is 32 per cent of the total equity shareholding. Of the free float, 25 per cent is owned by FPIs or foreign portfolio investors, 14 per cent is owned by mutual funds and insurance companies, while the remaining 61 per cent of the free float is owned by public (including retail investors).
Number of public shareholders has gone up by more than 75 per cent, from 54,900 in Sep2023 to 96,500 in Sep2024. In the past four years, there has been a spectacular rise in the number of demat accounts, contributing to broader investor base.
In some cases, greater number of retail investors could impart more volatility to stock prices, creating opportunity or threat, depending on what type of investor / trader one is.
Jindal Drilling & Industries Ltd (JDIL) is a subsidiary of MSL and MSL owns 64.3 per cent equity shares of this
subsidiary. JDIL is a listed company in India and its current market
price is Rs 710, with a market cap of Rs 2,060 crore.
10. Summary
Investors' Focus: The Big Picture
Many investors and analysts tend to focus predominantly on quarterly profit and loss statements, often overlooking the balance sheet strengths and weaknesses of a company.
Cash flow statements, too, are frequently ignored. This narrow focus on short-term earnings can cause investors to miss the woods for the trees—failing to grasp the larger, more enduring financial health of a business.
Company Strengths
The company in question boasts a clean balance sheet, with strong liquidity and a cash surplus of approximately Rs 2,400 crore.
It demonstrates solid cash flows and consistent profitability, alongside high corporate governance standards. Importantly, the company is debt-free, operating with a highly conservative approach to its financial management.
Despite these strengths, the company operates in a volatile industry. As a result, its valuation metrics are lower than those of more stable businesses.
The company’s fortunes are closely tied to the performance of its key customers, namely ONGC Ltd and Oil India Ltd. These factors contribute to the company's overall risk profile.
Current Stock Performance
The stock is currently trading at Rs 610, with a market cap of Rs 8,140 crore. Over the past year, its return has been negative, with a decline of 30 per cent, and it is down approximately 45 per cent from its 52-week high of Rs 1,090.
In Nov2022, the company issued bonus shares in a 1:1 ratio.
Dividend yield
Recently, the company paid a dividend of Rs 10 per share, resulting in a dividend yield of 1.64 per cent. This dividend reflects the company's solid cash position and its commitment to rewarding shareholders.
Key Risks
a. Crude Oil Price Volatility:
As a supplier to ONGC Ltd and Oil India Ltd, the company’s performance is sensitive to fluctuations in global crude oil prices. A downturn in oil prices could lead to reduced exploration and drilling activity, which may, in turn, impact MSL’s profitability.
b. Steel Price Fluctuations:
The price of steel, a key raw material for MSL, poses another risk. However, MSL’s strategy of back-to-back raw material booking helps mitigate the impact of steel price volatility, depending on the state of the company's order book.
c. Opportunities from Rising Oil Prices:
On the flip side, rising global crude oil prices could stimulate more oil exploration and production activity, benefiting MSL as demand for seamless pipes and tubes increases.
As of now, WTI crude oil is priced at USD 68.4 per barrel (down 2 per cent year-to-date), while Brent crude is at USD 72.1 per barrel (down 3 per cent year-to-date). Fluctuations in these prices will continue to impact the outlook for companies in the energy sector, including MSL.
Growth Prospects
India’s infrastructure and oil & gas sectors offer substantial room for growth. With 90 per cent of India’s crude oil needs being met through imports, there is considerable potential for increased oil and gas exploration within the country. This could provide a favorable tailwind for companies like Maharashtra Seamless.
Valuation and Investment Opportunity
At a current price of Rs 610 per share, and a market cap of Rs 8,140 crore, the stock of Maharashtra Seamless presents an attractive risk-reward opportunity, particularly for investors with a long-term horizon of three to five years.
While the stock may be out of favor at the moment, it could offer value for patient investors willing to ride out short-term volatility.
Sometimes, stocks in less glamorous sectors or those facing short-term challenges present opportunities for investors with a long-term view.
Conclusion
Please note that this is not a buy recommendation but rather a piece of informational content. Prospective investors should conduct their own diligence and consult a financial advisor before making any investment decisions.
It should also be noted that the author may have a vested interest in the financial products or stocks discussed above.
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Notes:
1. Non-current investments* of MSL as on 31Mar2024:
Jindal Pipes (Singapore) Pte. Ltd. Rs 64 crore
Discovery Drilling Pte. Ltd. Rs 57 crore
Virtue Drilling Pte Rs 244 crore
Bonds in corporates and bank fixed deposits Rs 611 crore
Quoted equity shares Rs 22 crore
Total non-current investments Rs 998 crore
(*
some past investments in some drilling assets abroad had gone bad; and
they are completely written off in the MSL’s balance sheet)
2. Current investments* of MSL as on 31Mar2024:
Bonds in corporates Rs 106 crore
Liquid funds / bond funds Rs 994 crore
Total current investments are Rs 1,100 crore
3. Cash with banks: Rs 56 crore
From the above items 1 to 3, we calculate Cash and cash equivalents as;
Bonds in corporates and bank fixed deposits Rs 611 crore
Quoted equity shares Rs 22 crore
Bonds in corporates Rs 106 crore
Liquid funds / bond funds Rs 994 crore
Cash with banks Rs 56 crore
Data source: company’s annual report for FY 2023-24
Total
Cash and cash equivalents of MSL are Rs 1,859 crore as on 31Mar2024. It
may be noted as per cash flow statement as of 30Sep2024, the company’s
current investments / financial assets rose from Rs 1,100 crore to Rs
1,576 crore.
The total cash and cash equivalents of MSL have risen from Rs 1,859 crore (31Mar2024) to Rs 2,387 crore.
(see investor presentation of Jul2024-Sep2024 quarterly results)
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References:
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Disclosure: I've got a vested interest
in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if
any.
Disclaimer: The analysis and
opinion provided here are only for information purposes and should not be construed
as investment advice. Investors should consult their own financial advisers
before making any investments. The author is a CFA Charterholder with a vested
interest in financial markets.
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