Rama Krishna Vadlamudi November 10th, 2009

An analysis of the Maharashtra Seamless Limited, which is listed on the

NSE and BSE, is presented below. MSL belongs to DP Jindal Group. The
other companies in the group are Jindal Pipes Ltd and Jindal Drilling and
Industries Ltd. In MSL, the promoters hold around 52 per cent stake in the
paid-up capital of the company. As on September 30, 2009, the promoters
have not pledged any of their shares. Management of MSL is said to good
and reliable from a corporate governance point of view. It’s a cash-rich and
debt-free company. However, its latest order book is around Rs 410 crore
with practically no orders from foreign companies/abroad. This order book
is much lower compared to its competitors, Jindal SAW and Welspun-
Gujarat Stahl Rohren which are having an order book of Rs 3,500 crore
and Rs 10,000 crore respectively. However, from a valuation perspective,
MSL is attractively placed at the current market price of Rs 312 (close
price of 9.11.09) with a PE ratio of 8.3 and a price-book value of 1.70.

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 General

• The company belongs to DP Jindal Group. The other companies in the

group are Jindal Pipes and Jindal Drilling and Industries
• Promoters hold 52 per cent stake
• They haven’t pledged any shares
• Management is said to be good and reliable (good corporate governance)
• MSL’s plant is located at Nagothane, 100 km off Mumbai Port
• It’s a cash-rich and debt-free company
• Its capex for 2009-10 is of the order of Rs 250 crore to be funded entirely
by internal accruals

Business Model

• MSL deals in two kinds of pipes, namely, Seamless pipes and ERW pipes
• In Seamless pipes, where its market share is 50 per cent, its competitors
are ISMT and Jindal SAW
• In ERW pipes, its competitors are Surya Roshni and Welspun Gujarat
• The company has got captive wind power plants. And the power produced
is used for internal consumption.
• It had bought a steel plant in Romania for backward integration to
manufacture steel. The steel plant was dismantled in Romania and shifted
to Maharashtra. At present, the erection of the integrated steel plant is
going on. And the plant is expected to be completed by December 2010.
• The plant when completed is expected to reduce the burden of high raw
material costs for MSL
• The main raw materials for the company are steel round billets and HR
coils which accounts for 50 to 60 per cent of the operating costs. The
company at present sources them from domestic steel produces and
around 40 per cent of the requirement is imported.
• The company is expecting new orders from Power Projects and Boiler
sector. With new power projects coming up in the country, like UMPPs,
MSL is expected to benefit from this segment. This is in addition to
Exploration and Production segment of the Oil & Gas industry.
• Freight cost amounts to 5 to 7 per cent of operating costs. Any decline in
freight rates (reflected in Baltic Dry Index) is a positive for the company.

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 POSITIVES

• Any rise in international crude oil prices will have a salutary impact on E &
P activity of the world’s Oil majors and their requirement for seamless and
ERW pipes will go up; which in turn will give a boost to MSL’s revenues
• Steel prices have fallen since last year and this is a big profit margin-
booster for the company. As a result of the decline in steel prices, the
company’s OPM has risen by 11.5 percentage points to 27.20 per cent in
September 2009 quarters (over Sep.08 qtr).
• It’s practically a debt-free company and known for its high transparency
• It’s a cash-rich company with a cash and cash equivalents of Rs 622 crore
as on 30.9.09, working out to Rs 88 cash per share

NEGATIVES

• Low order book of Rs 410 crore as on September 30, 2009. (Its

competitors, Jindal SAW and Welspun Gujarat are having order books of
Rs 3,500 crore and Rs 10,000 crore respectively)
• Out of the present order book of Rs 410 crore, the export orders are
practically NIL. The global recessionary trends have impacted the
company. However, any revival in the US markets from oil giants, like,
Chevron and Exxon Mobil will be a booster for its sales.
• However, the company maintains that its business is not driven by orders.
It’s expecting new orders before January 2010, especially from ONGC
• Any increase in steel prices would put pressure on company’s OPM
• China dumps its pipes in international markets and this is a possible threat
for MSL’s products. However, recently, the USA and Europe have
imposed anti-dumping penalties on Chinese pipes which is expected to
benefit Indian companies, like, MSL.
• Delay in execution of steel plant for backward integration would hamper
the operations of MSL
• The company is susceptible to rupee appreciation/depreciation and its
profitability may be impacted by its exposure to foreign exchange
transactions

September 2009 Quarterly Results

• Sep.09 quarterly net sales declined by 32 per cent (y-o-y) to Rs 410 crore
• However, Net profit jumped by 11 per cent to Rs 71 crore due to huge
expansion in margins
• Steel prices have fallen since last year and this is a big profit margin-
booster for the company. As a result of the decline in steel prices, the
company’s OPM has risen by 11.5 percentage points to 27.20 per cent in
September 2009 quarters (over Sep.08 qtr).

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 • Lower sales is due to decline in metal prices and higher profits are due to
greater EBITDA margins driven by lower metal prices since last year
• Seamless pipes realization declined by 26.5 per cent year-on-year on
account of decline in metal prices which led to decline in company’s
September 2009 quarterly sales to Rs 410 crore.
• However, ERW pipes have shown better sales which boosted the
profitability of the company also

VALUATION
• At CMP of Rs 312 (close prices of 9.11.09), the PE ratio is 8.3 and the
price-book value is 1.70. These ratios are lower compared to its
competitors Jindal SAW and Welspun Gujarat which command a PE ratio
of 9.1 and 13.8; and price-book value of 1.74 and 3.25 respectively
• Jindal SAW and Welspun Gujarat command higher valuation
comparatively as their order book is extremely robust; due to which
investors are giving higher discounting to these companies
• MSL’s operating profit margin (OPM) for the quarter ended September
2009 is 27.20 per cent (a jump of 11.5 percentage points compared to
14.7 per cent in September 2008 quarter) due to decline in metal prices
• The company, in general, does not compromise on margins and as a
result it’s order book is not very visible as compared to competitors which
compromise on profit margins
• Compared to MSL’s OPM of around 27 per cent, the OPMs of Jindal SAW
and Welspun Gujarat are much lower at 19 and 16 per cent respectively
• MSL’s ROCE and RONW are at 30.6% and 21.5% respectively for 2008-
09 and these are one of the highest in the pipes industry in India
• Jindal SAW and Welspun Gujarat have much lower capital efficiency with
their ROCE at 18.6 and 17.2 per cent; and RONW of 16.2 and 14.8 per
cent respectively for 2008-09
• MSL’s cash and bank balance is at Rs 622 crore amounting to Rs 88 per
share (September 30, 2009)

Some Definitions

• In Seamless pipe, there are no welding or joints and is manufactured from

solid round billets. It is mainly used for High-pressure applications such as
Oil & Gas-Exploration & Drilling, Air and Hydraulic cylinders, Bearings,
Boilers, Automobiles etc.
• ERW (Electric Resistance Welded) pipes are welded longitudinally,
manufactured from Strip / Coil and can be manufactured up to 24" OD.
They are mainly used for low/ medium pressure applications such as
transportation of water / oil.
• SAW (Submerged Arc Welded) pipes are either longitudinally or spiral welded,
manufactured from plate / coil and can be manufactured up to 100" OD. It is used
for transportation of large volume of liquid / gases.

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 MSL’s CLIENTS
• ONGC, Oil India and GAIL
• IOC, BPCL, MRPL and HPCL
• Bajaj Auto, M&M and Telco
• ABB, BHEL, Thermax and Paharpur Cooling Towers
• Indian Railways
• Export clients from the US, Europe, Middle East and Far East – like, Chevron,
Texaco, Kuwait National Petroleum, etc

For more information on the company, please visit the company’s website at:

http://www.jindal.com/msl-invest.htm

The company gives a comprehensive analysis of its business on its website for the benefit of
investors and other stakeholders.

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AUTHOR’s DISCLAIMER: This should not be construed as a recommendation by the author. The
author holds a small stake in the company’s equity shares and as such it’s safe to assume that the
author has a vested interest in the stock price and general market going up. The views of the author
are personal. Readers or investors must consult their certified financial advisor before taking any
decision on their equity investments and the investment should be in line with their risk profile &
risk appetite and their general market perception. Any equity investment should be within their
overall ASSET ALLOCATION, which is extremely vital.

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