Maharashtra Seamless Ltd - Stock Valuation and Financial Performance

Maharashtra Seamless is mostly into the production of seamless pipes which are used in high pressure applications typically used in oil and gas and power industry. It sells its steel pipes in domestic market and exports nearly 40% to United States and Middle East.

Low Price to book value ratio

The P/BV ratio for Maharashtra Seamless is currently around 0.73. This means that the company is a value buy and that its assets are not priced into its market price. However piping industry is a cyclical industry as a result of its direct dependence on Oil & gas and Power Industry capex cycle.

The company recently announced buybacks at a price of up to Rs.300 per share which was at a significant premium to its current market price. This shows that the management has strong faith in the company’s performance and the future prospects for the same.

Demand Distress in piping Industry

The piping industry has lately faced a distress in the piping demand both globally and at the domestic front. This has happened mainly due to two reasons;

-          Slowdown in the execution of the power projects in India.

-          Low capital expenditure in the Oil and gas sector on the global front, especially in the United States.

Impact of Shale revolution on Natural Gas prices

The Shale gas revolution had caused an explosion of Natural Gas in North American markets. Due to increased supply of Natural Gas and policy restrictions that disallow export of excess Natural Gas to any other country besides Canada the Natural gas prices moved from USD 4 per mmbtu to USD 2 per mmbtu. This significant drop had caused many of the upcoming shale gas and natural gas projects to have either low economic returns or negative returns. As a result many of the companies either simply shelved their gas projects or had put them on hold.

Revival of Capex in Oil and Gas Industry

But over the last month the Obama administration has taken strategic decision to allow the exports to other countries as well. The approval for broader liquefied natural gas exports from a $10 billion facility in Texas is a milestone in the U.S. transition toward becoming a major supplier of world energy markets.  Europe, which as of now is very dependent on gas imports from Russia, UK which is dependent on imports of Natural Gas from Qatar as its North Sea reserves dwindle and China which needs Gas to fuel its burgeoning economy and de-addict itself from Coal based growth.

Although this is just one project out of many seeking approval, it signals that the Department of Energy believes the benefits from exporting gas outweigh concerns about the possible downsides for the U.S. economy—namely that domestic prices could rise as gas leaves American shores. We believe this would give immediate flip to creation of more such LNG export terminals in US, allowing American companies to enter in to long term Gas supply agreement with energy consuming countries.

As a result of this we believe a virtuous cycle of capex in US Oil & Gas industry is again in the upswing and would result all-round benefit to all the Oil and Gas based capital goods industry involved esp. seamless piping.

We believe Maharashtra seamless will be one of the major beneficiaries from the revival of capex in Natural gas Industry.

Considering the strong balance sheet as a result of zero debt levels and strong cash and other marketable securities position of about Rs. 600 Cr compared to its market cap of about Rs 1600. We believe that Maharashtra seamless also has all the characteristics of a value buy.

Cautions to be taken

The only caution we would like to add to investors is on two fronts.

Policy design and implementation may take time.

One, piping industry is extremely cyclical industry dependent as it is on Capex cycle of Power and Oil and Gas industry. While we are seeing initial offshoots of revival in Capex cycle of Natural Gas industry, power industry however continues to remain affected due to remain in regulatory morass. Revival in capex cycle of Power cycle would give additional demand boost to piping industry and would act as additional boost to Maharashtra Seamless. We believe getting this done would be job number one for any new Government (NDA/UPA/UF) that comes to form government post 2014 elections. This leads us to believe that it would take at least 2-3 years for this investment to really pay of well for a long term investor.

Matching risk appetite to the percentage of investment into cyclicals.

Two, global economic environment continues to remain fragile, and as a result we are seeing Investor move from risk-on to risk-off with equal trepidation leading to high volatility. On the most pessimistic outlook we believe that there is a likelihood of up to 15-20% price correction leading. As a result we believe that while current remains an attractive proposition for a long term investor with a large risk appetite he should phase out his investments over time to take benefit of the price corrections and see to it that his net investment in cyclical stories does not exceeds beyond 20% of its portfolio. People with moderate risk appetite can also initiate strategy but with a caveat of not exceeding investment in cyclicals beyond 10%.