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Maharashtra Seamless Ltd
Earnings Call Analysis
Q2-2024 Analysis
Maharashtra Seamless Ltd
The company highlighted a key operational nuance; manufacturing large diameter orders leads to lower tonnage despite the mills running 24/7. This lower tonnage might seem to indicate underutilization of capacity. However, this strategic choice is reflected in the company's enhanced EBITDA and margins.
Executives discussed the reopening of the U.S. market and potential reduction in tariffs, noting historical precedence as a significant exporter to the U.S. While the domestic market remains profitable, exports to the U.S. are now seen as complementary, with room for synergistic growth in tandem with domestic sales. The company is open to seizing robust demand as the U.S. market dynamics evolve, indicating flexibility in their market strategy.
Addressing new product development, the company detailed their initial stages in developing green hydrogen pipes, targeting the burgeoning market for hydrogen gas production. While the market and its potential size are still in research stages, this innovation represents the company's commitment to leveraging new technology for future growth opportunities.
The company has laid out plans for deploying INR 852 crores, with a focus on enhancing the core pipe business and returning value to shareholders. Moreover, they remain on the lookout for strategic investments in line with their business model, reflecting a proactive and investor-conscious approach.
In terms of product segmentation, the company's portfolio includes seamless and ERW pipes. Seamless pipes are predominantly used in oil and gas sectors, as well as boiler and general engineering segments. ERW pipes are applied in both oil and water segments. Currently, oil and gas comprise 70% of their market, with an outlook for increased inquiries in the boiler and water segments. This indicates the company's diversified market presence, reducing reliance on a single sector.
Future projections anticipate significant capital expenditure from key players like ONGC, expected to spend between INR 3,000 crores to INR 3,500 crores by FY '25 for pipe procurement. This bodes well for the company, given its substantial exposure to the oil and gas sector. The increase in CapEx and procurement suggests a promising future for the company, with steady demand in its primary market segment.
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Ladies and gentlemen, good day, and welcome to Maharashtra Seamless Limited Q2 FY '24 Earnings Conference Call hosted by PhillipCapital (India) Pvt. Ltd. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Vikash from PhillipCapital (India) Pvt. Ltd. Thank you, and over to you, sir.
Good evening, everyone. A warm welcome on Maharashtra Seamless 2Q FY '24 earnings call. From the management side, we have with us Mr. D.P. Jindal, Chairman; and Mr. Kaushal Bengani, Deputy General Manager, Investor Relations and Finance.
Without taking any much time, I'll hand over the call to Kaushal for the opening remarks. Over to you, Kaushal.
Thank you, Vikash. Good afternoon, and thank you participants for joining in our earnings call. Performance of Maharashtra Seamless continues to improve following our sustained efforts to improve operations. In Q2 FY '24, we have improved upon our margins and have achieved highest quarterly EBITDA, following strong execution of orders and better marketing initiatives.
I will briefly summarize key financial indicators. In Q2 FY '24, our revenue increased by 25% from Q1 FY '24. EBITDA increased by 36%. PAT and EPS both increased by 19%. On comparison with corresponding quarter of last year, that is Q2 FY '23, our performance in Q2 FY '24 was also better. Against corresponding quarter of last year, our revenue increased by 9%, EBITDA increased by 34%, PAT and EPS both increased by 51%. This performance reiterates strength in our operations despite a troubled macroeconomic environment and inflationary pressures. Our ability to control cost remains unmatched as the same is achieved without compromising production and sales. Apart from financials, there are 5 key points which we would like to draw attention to.
The first is the commencement of capital expenditure. We have commenced our plans of capital expenditure by acquisition of land for installation of finishing facilities at our Telangana unit. We are in the process of placing orders for relevant machinery and expect installation to be completed by August to November of 2024.
The second point is regarding our debt position. We became 100% gross debt-free and currently has liquid investments of almost INR 1,300 crores. I take this opportunity to communicate yet again that the liquid investment will only be utilized for core operations and shareholder benefit. They shall not be utilized for any other activity. We have maintained this position for the past 2 years, and there has been no change in that.
The third point is regarding our inclusion in Morgan Stanley Capital Invest India Domestic Small Cap Index. Apart from index rebalancing, we have received tremendous interest from foreign institutional investors who have increased their holding from 2.84% to 7.98% within a span of 6 months. Our shareholders will be positively surprised with this development.
The fourth point is regarding our investor engagement, which has improved significantly, and we have represented the company in 2 investor conferences already this year, and we expect to participate in at least 3 more.
The last point and the point which has the most significance to a lot of participants is the market demand going forward. Capital goods and infrastructure, in general, are displaying strong demand for the medium term. This directly impacts the seamless pipe market. In FY '25, ONGC is expected to spend between INR 3,000 crores to INR 3,500 crores on procurement of pipes. Oil India, which is another large customer is also expected to spend between INR 600 crores to INR 800 crores. The seamless pipes market remains buoyant, driven by capital expenditure and spending in oil and gas sector.
I would now like to take you through the presentation. The first few slides talk about our capacities and about the financial highlights, which I've already touched upon. Slide 8 talks about the operational and financial performance in the current quarter and corresponding quarters and half year. You will note that our performance has gone from strength to strength and we are enthused to communicate this to you. Regarding our EBITDA mix, our seamless pipes segment remains the largest contributor to overall EBITDA, contributing 87% of the total EBITDA of 300 -- out of the total EBITDA of INR 333 crores.
The next slide talks about the ICDs and equity and preference share investments. On the ICDs, we had committed some time ago that we will realize all of them by March 2024, and we are on track to do the same. ICDs have reduced from INR 78 crores in March '23 to INR 49 crores in September '23. Our liquid investments have increased by 25% from March '23 to September '23. This has been on account of better execution and tax advantage. We expect to have even higher liquid investments going forward after considering capital expenditure as well. Corporate guarantee reduction is on schedule. This corporate guarantee is expected to be fully satisfied by September 2024. There will be no cash outflow from Maharashtra Seamless on account of this legacy guarantee.
The order book on Slide 15 stands at INR 1,459 crores. This appears to be a reduction from the earlier order book, which was communicated in July, which was INR 1,725 crores. I would like to clarify that orders of around INR 325 crores have been confirmed and are in pipeline. The reason why they have not been included is because the purchase order is awaited.
On the sales and marketing update, we have been going from strength to strength, and we expect more orders for various products that we manufacture. And I would request the shareholders to kindly go through Slides 17 and 18, so that they have a better assessment of where the demand is originating from and how we are poised to take advantage of the same.
The last slide talks about the shareholding structure, wherein we can see that promoters have increased stake from 67.8% to 67.86%. FII and DII holding has also increased significantly and list of marquee investors have also been given.
I would now hand over to Vikash to open the floor for questions.
[Operator Instructions] The first question is from the line of Pratiksha from Aequitas Investment.
My first question is on the EBITDA per tonne that we have in Seamless division this quarter. So just wanted to understand what led to the rise in EBITDA for this quarter? Was this -- is this range of EBITDA sustainable going forward?
EBITDA per tonne this quarter stood at INR 27,495. This was on account of strong execution of our order book. The oil sector contributed significantly to this. Going forward, we expect margins to remain good as the seamless pipe market is buoyant, and we are well poised.
So can we assume this to be sustainable then?
We can only say that margins are expected to remain good because market demand is quite good.
Okay. Also if you could tell us the execution that we did from USTPL plant in this quarter?
We provide -- USTPL was amalgamated with Maharashtra Seamless and it is part of Maharashtra Seamless, so we do not provide that separately.
Okay. All right. You've mentioned about the order from IOCL that is supposed to be executed, big order from IOCL. If you could elaborate on that and whether the complete order is a part of the order book that we have right now.
So I'll just touch upon the previous point. Dispatches have increased by 20% from previous quarter. Just to complete the point that our quarter-on-quarter performance has improved. Regarding the IOCL order, which we have mentioned, there was -- there were 2 orders, which we received in September of '23 from Oil India and IOCL. Both were in the range of INR 100 crores to INR 125 crores. And we expect to fully complete both of these orders within current quarter, which is quarter 3.
Okay. And if you could elaborate about the pipeline for both Seamless and ERW for the H2?
There are orders of around INR 325 crores, which are in pipeline, which we have received, but it has not been included in the order book because issuance of purchase order is pending. So they are from the dealer segment, export segment and upstream segment.
Dealer, export and?
Upstream.
Okay. And just the last question. Going forward, so this time the order book mix is -- the share of export has gone up. Do we expect this trend to continue going ahead as well?
The share of exports has not gone up because exports and other segments have been consolidated when this order book was prepared. So since we had a significant execution of ONGC and Oil India orders, it appears that the Other segment has gone up, but that has remained more or less constant. Only strong execution has taken place on ONGC and Oil India side.
The next question is from the line of Saket Kapoor from Kapoor Company.
Sir, so in continuation, [Foreign Language], do we expect this execution phase to remain the same for H2 also?
Yes, we will continue this way, and we would like to improve further.
Okay. Lastly, sir, when we were working with our volume numbers for the year as a whole, we were guided minimum 5% growth. So we are maintaining with that 5% sales growth for the entire -- for FY '24 also?
Yes, we maintain that 5%.
Okay. So just to put the maths into work, sir, this last year, the volumes were evenly placed between 216 and 215, between H1 and H2. But this year, because of the production loss in quarter 1, we did H1 at 195. So to meet our 5% volume growth guidance, if we do the calculation, it has to be around 130 to 135 for the remaining 2 quarters. Is that understanding for the dispatches correct? I'm talking particularly for the Seamless segment only.
On the Seamless front, we took -- it will not be appropriate to split both segments. However, Seamless and ERW combined, we will have 5%.
Okay. Sir, and Kaushalji, you've mentioned about this -- the activation of the new finishing line at Narketpally in the month of August to November, I think, so if I heard you correctly. So there is a delay of 4 to 5 months, okay? Can you explain the reason for the same and capital work in progress, [Foreign Language]. So when exactly are we going to make the payment for the same?
Well, actually, there are some delays on the procurement of the line there. So now the line is finalized and orders for the machineries are already placed, so we expect everything will be completed within the 1,024. We'll start production before December.
Okay. Sir, land purchase, what could be the value accrued to the land purchase?
About INR 13 crores or so.
And sir, as our previous participant, madam was mentioning about the sustainable EBITDA per tonne and Kaushal-ji, you mentioned that it is going to be good. So if we take into account the current texture of the current order book, and the EBITDA margins that we have done for Q1, do we have the same nature profile in the order book mix that we are going to execute going ahead because as we do back-to-back raw material arrangement, so we can outline how the profile would look like because I think so from Q1 to -- on a sequential quarter basis, it is up from sub-23,000 to 27,500. So we would like to just understand the key reasons and the -- and what I have said, yes.
So the 6 years up to now, the order books are at a good price and raw material price is also we are looking with the margins. So we would like to maintain the same. Yes.
Okay. Correct. And sir, one more CapEx about this Nagothane of INR 350 crores. Where are we in terms of this CapEx money? What are the key parameters for this CapEx? Again, we will look for new land? Or is this only the placing of orders for the machinery, this INR 350 crores?
So in Nagothane, we don't need a new land. I will say in year 2024, we'll be completing all the expansion plan other than this INR 350 crore. This INR 350 crore will be delayed. Till now, we have not taken much of action here.
On the INR 350 crores expenditure.
On the INR 350 crore expenditure. Balance all others will be completed within the 2024.
Calendar year 2024.
Right sir, lastly, on the premium thread part, I think so earlier also, Jindal, [Foreign Language].
That already, we are discussing and some trials in the factories going on. So as soon as trials are completed, then we will enter into a joint venture.
[Foreign Language]?
Yes.
Okay. And lastly, sir, on the tax advantage parts post the merger, the carryforward losses have been subsumed with the profits done for the first half?
Yes, all that is consumed in this quarter -- last quarter.
Okay, sir. We hope for the -- how the promoters plan to utilize the cash going ahead. Since now, our CapEx also is -- we'll be making the major CapEx only down the line sometime ahead in the next year, how will the cash utilized, and what would be the dividend distribution policy. We hope that the promoters come up with -- the Board comes up rather with a detailed coded dividend distribution policy. That would be a good idea. And also on your outlook on the buyback of share, the valuation looks attractive, provided the numbers that have been given -- being done this year.
[Operator Instructions] The next question is from the line of Vignesh Iyer from Sequent Investment.
Sir, congratulation on a good set of numbers. Sir, coming back to what you said during the commentary part of it, you said ONGC is expected to spend around INR 3,000 crores to INR 3,500 crores and IOC around INR 500 crores, INR 600 crores. So what is the expected win rate for us considering our market share is around 50% plus?
Certainly, we'll be taking more than 30% -- 50% of the business.
Right. And what would be the execution time line for this?
So this expenditure is for FY '25. So execution will also be in that period.
Okay. Right. Sir, so we have utilized all of our carryforward losses. So what would be a steady-state tax rate from here on every quarter, if you could let me know the number.
It could be 25%.
The next question is from the line of [ Udit Sehgal ], an individual investor.
In SS, we don't seem to be doing any volume growth, whereas some volume growth is coming in ERW. So I wanted to know, okay, what is the scope for the growth? Will it come from the ERW or the SS until our new finishing line comes up?
In the quarters ending June '23 and September '23, we have dispatched as much as we had dispatched previous financial -- in the previous corresponding period. The reason why we did not show tonnage growth in this 6-month period was because of preventive maintenance taking in one of our plants. However, we have shown EBITDA growth. Going forward, once this finishing line is installed by November of 2024, we will start to display significant tonnage growth as existing capacity of 1 lakh tonnes, which is currently inactive will become activated.
Secondly, sir, I wanted to know, Mr. Jindal just clarified that there is a delay in the Nagothane project. What exactly is the project? What do we mean by hot mill upgrade?
One second, I'll just interrupt. There is no delay. The capital allocation plan, which has been spelled out is from financial year '24 to financial year '26. We have 3 years to complete this financial expenditure. The priority for the hot mill upgrade from hot mill to PQF of INR 350 crores is the low end.
[Operator Instructions] The next question is from the line of [ Ankur Savaria ], an individual investor.
I really want to congratulate you on the great set of numbers that you have performed. And my question is that could you throw some light on the competitors that we have in India in the Seamless division?
We have 2 competitors, Jindal Saw and ISMT.
ISMT?
Yes. We are market leaders. We are pioneers of this industry. We have set up this industry in India. And we currently have a 55% market share. We have been market leaders from 1991 until today.
That's great. So my next question is that about a year that you had commented that the promoter would like to increase the share to 75%. Is it still on card since there is hardly anything left with the general public?
Promoters have increased the stake in Maharashtra Seamless over the past 2 years. Earlier, stake was close to 63%. Current stake is 68%. Promoters have -- promoter and promoter group have earlier committed that they will gradually increase stake to 75%. That is still an open option.
Okay. And my last question is, sir, in your presentation, you have mentioned about the demand in the natural gas sector in India. Sir, could you throw some light as to what are the opportunities we are having. And do we really see a growth coming in that rapidly?
Yes, we do because as the demand for pipe -- natural gas will increase, demand for our products will also increase.
[Operator Instructions] The next question is from the line of Radha from B&K Securities.
Sir, so one of the previous participants had asked that why the export mix is going up in the order book. So you mentioned that because of higher execution in India. But actually, if there is higher execution in India, then it would mean that the export execution is lower. So is there any -- I mean, from the demand perspective, how is the demand India versus exports?
I had clarified earlier that exports and other segments have been combined together when the order book has been presented. It appears that the export and other segments have a higher composition, but that is not the case. The reason why that is, is because earlier we had larger ONGC and Oil India orders, which have been executed in previous quarters. Currently, we have orders of close to INR 325 crores, which have not yet been issued to us, but have been confirmed and they are not reflected in this order book.
In terms of exports, crude oil is in excess of $90. We are getting good inquiries from the export market. In the previous 6 months, exports was a small component of total sales. However, exports are expected to revive from end of November onwards because of the crude oil situation.
And sir, secondly, you were speaking something on the dispatches have increased by 20% from previous quarter. So you're talking about the current quarter dispatches?
Yes. so quarter 1, we dispatched 90,000 tonnes of seamless; quarter 2, we dispatched 106,000.
This quarter also...
This quarter, in the third quarter also, we will dispatch more than what we have dispatched in the second quarter.
The next question is from the line of Amol Rao from Kitara Capital.
Two questions. One is on the CapEx front. Did I understand it correctly with the exception of the hot mill upgrade, which is approximately INR 350 crores thereabouts, all other CapEx that is outlined by the company is underway and should compete within probably 15 to 18 months. Is that correct? So that INR 500 crores worth of CapEx over the next 15 to 18 months?
Within a year, I will say.
Okay. Within a year. That's excellent. And sir, secondly, and please correct my understanding. Sir, we have registered a growth in dispatches. But sir, is this slightly below our potential, I mean, in the sense that 10% to 15%, 20% more is the demand that is there in the market? But is it that there is a shipping time difference? Or is it that the clients are coming into order now and that's how we are planning to ramp up our dispatches. Is that -- is my understanding correct on that front, sir? Because crude has been at an elevated level for the last almost 4 or 5 months, that's why I'm asking.
Yes. So what you are saying is correct. However, a nuance, which has to be considered is that when we manufacture large diameter orders, although our -- versus a situation when we manufacture small diameter orders, although our mill is functioning 24 hours a day, we will end up with lower tonnage.
Lesser tonnage, yes lesser tonnage, correct.
So in terms of tonnage, it appears that we are lower than our potential, but the same is reflected in the EBITDA that we are able to generate, the margins that we are able to generate.
Fair enough, sir. Point accepted. My question is answered, sir.
The next question is from the line of Vikash Singh from PhillipCapital.
Sir, just wanted to understand one thing. There's a lot of talk about the U.S. market, again, opening up and the [ term tariff ] would be watered down. We once upon a time was a very large exporter to U.S. So just wanted how your thought process as we again started to looking at that market? And could -- this could be again, 20%, 25% of our total volume or we would adopt a different strategy at this time?
So certainly, we are open to U.S. market and 6 months back also, we have exported a lot of quantity to U.S. and Canada. So we are -- we will certainly cope up with that situation. And U.S. market is certainly opening up and robust demand will be coming.
So given the opportunity to sell, is it still domestic market is more profitable than the export or the U.S. market would be a one-off where the margins would be higher?
So how...
No, not necessarily. It will be complementary to each other. So domestic market will also go up when the prices in U.S. is higher.
Understood, sir. Sir, my second question pertains to the new product development. A couple of quarters back was talking about we are -- since the volumes are kind of getting plateaued, we are in the process of developing new products, which would fetch higher margins. So could you give us some more thought if we have -- what we have done so far in this regard?
Well, we are at very initial stage to develop this green pipe, hydrogen pipes, which will be used in producing hydrogen gases. So a lot of pipes are required there. So special green pipe hydrogen will be there. Premium correction and that is already there. This hydrogen pipe will be a new item.
Understood, sir. And what -- how big this market could be?
That is -- the market is developing, still in research stage. So the type of pipes and other things we have to see.
Understood, sir. Sir, just one last question. We have also indicated long back that eventually, the Maharashtra Seamless is holding 1 rig, and we may look to sell this rig off basically. So any -- since the oil prices are already at a good level, so any progress on that regard? Or given our cash flows are very strong, so we have dropped this plan?
No, we have not dropped it, but we are looking right time to go.
So what will you do with this cash basically because we are -- anyway which we are having significant free cash flow from our normal operations, and don't have much avenues to invest it. So just wanted your thought process. What we will do with this excess cash?
First, we have a plan for this INR 852 crores. And then we are also open for any new opportunity in the same field pipe business. And certainly, we will look at -- our investors are also benefited from this cash.
[Operator Instructions] The next question is from the line of Vivek, an individual investor.
I'm a new investor in your company. So I just wanted to understand that apart from oil and gas, are there any other sectors where our products are sold? Or is it exclusively oil and gas and so our fortunes are basically linked to the oil and gas sector?
We manufacture seamless and ERW pipe. Seamless pipes are used in oil and gas sector, in boiler segment and in general engineering. Anywhere there is drilling activity, a seamless pipe is required. In the boiler segment, our pipes are required for heat exchangers. And anywhere a new factory or a plant is installed, they require seamless pipes. The other kind of pipe that we manufacture are ERW pipe. They are used in oil segment and water segments. Pipes, which are API-certified are used in the oil and gas sector and Bureau of Indian Standard certified pipes are used in the water sector.
So sir, as of now, how much will be the share of oil and gas sector and the other sectors put together?
So 70% is our exposure to oil and gas sector because our pipes are primarily used in drilling and transportation of oil and gas. 15% is the exposure to the boiler segment and 15% is the exposure to the general engineering segment.
And sir, with the recent pickup in CapEx over the last 3, 4 quarters, are we seeing increased inquiries on the boiler and the water segments?
Yes. We are getting good inquiries from the boiler segment for seamless pipes and water segment for ERW pipes in addition to our existing regular inquiries from the oil and gas segment.
Okay. So sir, do you expect in the coming 2 years, the share of the non-oil and gas sector to go up from about 30% to, say, 40%, 45%?
It is difficult to say because we don't have any concrete data. The only data we have in this regard on the oil and gas sector is that ONGC is expected to spend between INR 3,000 crores to INR 3,500 in FY '25 for procurement of pipe. And Oil India is expected to spend between INR 500 crores to INR 700 crores in FY '25 for procurement of pipes.
[Operator Instructions] Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Vikash for the closing comment.
On behalf of PhillipCapital, I would like to thank Maharashtra Seamless Management for giving us the opportunity to host the call. And I would hand over the dais to Mr. Kaushal Bengani for any closing remarks. Kaushal, over to you.
Thank you, Vikash. Thank you, shareholders, for interacting with us. We are committed in creating value for all shareholders, and we have been able to do so with your support. We will continue to work upon improving our operations and dispatches. And I will request Mr. Jindal to give his final remarks and also thank him for taking time out from his schedule for today's engagement.
Thank you, investors. Hope we will continue like this. And one point was in the last question that why oil sector is more because oil sector can pay better price, better margins. So we are choosing oil sector. Of course, there is a huge demand in water pipes, but the margins are thin. Thank you very much. Thanks.
Thank you.
Thank you. On behalf of PhillipCapital (India) Pvt. Ltd., that concludes the conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.