New Telangana Facility Will Boost Seamless Pipes Production From FY26

Key Takeaways

• Improved dispatches and a new facility are expected to boost margins and future revenue growth, aiding earnings.
  
• Strong oil and gas demand with a healthy order book suggests sustained revenue and stable financial performance.
  
• Decline in PAT and EPS despite improved operations and risks from antidumping practices, timing mismatches, and execution delays could adversely impact growth and margins.

Catalysts

Manufactures and sells seamless steel pipes and tubes in India.

• Improvement in dispatches of seamless pipes and higher dispatches of value-added orders have led to an improved margin profile, which is expected to positively affect future earnings.
  
• The commissioning of a new finishing line facility in Telangana by December 2025 is anticipated to contribute to increased revenue growth starting in FY26.
  
• Strong demand in the oil and gas sector, along with a healthy order book, is expected to sustain revenue growth and maintain margins.
  
• Recent credit rating upgrade to AA+ reflects stronger financial stability, potentially reducing borrowing costs and improving net margins.
  
• Efficient management of specialties and treasury positions, combined with strategic focus on shareholder returns through dividends, could positively impact earnings.

Maharashtra Seamless Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Maharashtra Seamless's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.6% today to 14.3% in 3 years time.
• Analysts expect earnings to reach ₹9.0 billion (and earnings per share of ₹67.17) by about March 2028, up from ₹7.9 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.1x on those 2028 earnings, up from 11.9x today. This future PE is lower than the current PE for the IN Metals and Mining industry at 19.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.38%, as per the Simply Wall St company report.

Maharashtra Seamless Future Earnings Per Share Growth

Risks

• The decline in PAT and EPS despite improved operational performance is a risk, as lower returns on treasury could continue to impact net margins and overall earnings negatively.
  
• The order book remains within a fluctuating range, suggesting potential timing mismatches, which might affect revenue stability and growth consistency.
  
• Ongoing risks related to antidumping practices by Chinese manufacturers could pressure margins, especially if the domestic industry doesn't receive the necessary protection.
  
• The impairment of investments in subsidiaries remains a concern, with possible impacts on future earnings and capital employed efficiency.
  
• Dependence on future projects and expansions, such as the finishing line facility in Telangana, indicates execution risk, affecting potential revenue growth if delays occur.

Valuation

• The analysts have a consensus price target of ₹775.0 for Maharashtra Seamless based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹62.7 billion, earnings will come to ₹9.0 billion, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 14.4%.
• Given the current share price of ₹701.55, the analyst price target of ₹775.0 is 9.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.