Research:HSBC
Rating:Overweight HSBC has upgraded its rating on Maharashtra Seamless to ‘overweight’ from ‘neutral’ and has maintained the target price of Rs 655. The management announced, during the conference call for its Q3 FY08 results on February 5, that it will spend Rs 1,500 crore in the next three years on building a plant for billets, the raw material for seamless pipes. This backward integration was delayed earlier.
But now, with the likely addition of promoter money of Rs 2,000 crore through fresh equity of 33 lakh shares at the rate of Rs 550-575 per share, the backward integration plant has started taking shape. However, HSBC has not factored the possible equity dilution into its numbers.
The key reason for the fall in the stock recently has been pressure on margins. The earnings before interest, taxes, depreciation and amortisation (EBITDA) margin of electric resistance-welded (ERW) pipes declined to 1.3% in Q3 FY08, while that of seamless pipes was at 23.7%, taking the combined EBITDA margin to 18.2%. With seamless pipes contributing 90% of the current order backlog of Rs 5,000 crore, the margins should recover.
Some of the triggers for the stock are as follows: 1. Favourable anti-dumping duty investigation on Chinese seamless pipes in the US by mid-March ’08, which will increase the possibility of similar duty in India; 2. Recovery of EBITDA margin in Q4 FY08; 3. More information on the billet plant, with respect to land, plant and machinery. The stock is currently trading at the lower end of its historical price to earnings (P/E) band.
