Maharashtra Seamless Limited (MAHSEAMLES.BO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q3 FY '24 Earnings Conference Call for Maharashtra Seamless Limited hosted by PhillipCapital India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vikash Singh from PhillipCapital India Private Limited. Thank you, and over to you, Mr. Vikash.

Thank you, Manav. Good afternoon, everyone, for Maharashtra Seamless Q3 FY '24 Earnings Call. From the management side, we have with us Mr. DP Jindal, Chairman; and Mr. Kaushal Bengani, Senior Manager, Investor Relations. Without taking any much time, I'll hand over the call to Mr. Kaushal for the opening remarks. Kaushal, over to you.

Thank you, Vikash. Good afternoon, and thank you for joining our earnings call. We are proud with our outperformance in Q3 FY '24, with the achievement of higher EBITDA and improvement in margins, both of which were accomplished in the backdrop of strong performance in second quarter of FY '24. We are pleased to inform you that our core operations have gone from strength to strength as we continue to exceed expectations by working continuously with an intent to create value for all stakeholders. In Q3 FY '24, like we have done in earlier quarters, we have improved upon our margins and have achieved highest EBITDA following strong execution of orders and better marketing initiatives. I will briefly summarize key financial indicators. On comparison, this corresponding quarter of last year, that is Q3 FY '23, our revenue in Q3 FY '24 increased by 8%, EBITDA increased by 51%, PAT increased by 67% and EPS increased by 62%. When we do a comparison with last quarter, Q2 FY '24, although our revenue dipped slightly, however, EBITDA increased by 11%, PAT and EPS both increased around 10% on account of improvement in margins. On reviewing our 9-month FY '24 performance versus 9-month FY '23 performance, revenue increased by 4%. EBITDA increased by 30%, PAT and EPS increased by 56%. This performance reiterates strength in our operations despite volatile macroeconomic environment and inflationary pressures. Our ability to control cost remains unmatched as the same is achieved without compromising production and sales. Apart from financial indicators, there are 5 key points which we would like to draw attention to. The first is the status of capital expenditure. We have commenced our plans of capital expenditure by acquisition of land for installation of finishing facilities at our Telangana unit in previous quarter. We have placed orders for certain equipment and are in the process of placing orders for other relevant equipment. We expect this installation to be completed by December '24. We are a 100% debt-free company. We currently have liquid investments of almost INR 1,500 crores. I take this opportunity to communicate yet again that our treasury will only be utilized for core operations and shareholder benefit. They shall not be utilized for any other activity. In Q1 FY '24, we were made part of the Morgan Stanley Capital Index 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 10.5% within a span of 9 months. The DII and FII holding currently stands close to 15%, which is up from 7% at the start of this financial year. The fourth point is in relation to the market demand. I wish to reiterate that capital goods and infrastructure in general and oil and gas specifically continue to witness strong demand in short to medium term. This directly impacts the seamless pipes market. Our seamless pipes market remains buoyant, driven by capital expenditure and spending in oil and gas sector as we have seen our order book being replenished and maintained at good level. Our investor engagements have also improved significantly, and we have represented Maharashtra Seamless in 4 investor conferences this year, and expect to participate in at least 2 more. I would now like to take you through the presentation. The first few slides detail the various activities of the company. Slide 5 is about the quarterly performance over the past 5 quarters. You will note a significant jump in EBITDA and PAT margin over the past 2 quarters. The next slide is a profit and loss comparison on quarterly basis. A key point to note here would be the reduction in other expenses that we have managed in this quarter, highlighting our strong operational performance and our ability to control costs even in inflationary environments. The next slide is about the annual performance of previous years. Slide 8 is the operational and financial performance of the company. Whilst in the third quarter, production has been slightly lower than what it was in previous quarters, sales have been more and margins have been better than previous quarters. A 9-monthly comparison of FY '24 versus FY '23 will clarify the improvement in margins that we have achieved, along with similar levels of sales. This has been on account of better marketing initiatives by our marketing team. The next slide is about EBITDA mix of Maharashtra Seamless. As always, almost 85% to 90% of EBITDA is from the Seamless segment and that's the trend that we expect to continue. A point of interest for various participants are the ICDs, which remain on a declining trend. Currently, they are at INR 14 crores and will be fully realized by March '24. This was committed by us over the past 1.5 years, and we are on set to achieve this. Liquid investments as on December '23 are at INR 1,465 crores. As is apparent from the table on this slide, liquid investments have tripled over past 2 years. Corporate guarantee continues to reduce as was committed and Slide 13 updates on the same. The capital expenditure planned for FY '24 to FY '26 is detailed on Slide 14, which we've also communicated earlier. Entire capital expenditure will be from internal accruals, and there will be no requirement of any debt. Order book as on 26th January 2024 stands at INR 1,563 crores, which is a good level. We expect margins to remain steady based on current trend of seamless pipe prices. And a few days ago, we received a contract from IOCL, which we have communicated, indicating the buoyancy in the market. There's a sales and marketing update given on Slide 17. I would like to read a couple of points out regarding the activity which is taking place, which will help participants understand where demand is originating from. Orders from ONGC and Oil India are being procured and dispatched rapidly as domestic demand is robust. ONGC has made significant natural gas discoveries in the Mahanadi basin. These discoveries were made in a restricted area, which was opened up. New oil blocks, Amrit and Moonga, have also been recently discovered in Mumbai offshore. Oil companies are drilling additional wells as E&P activities have increased. This has been driven due to elevated crude oil. Existing orders for drill pipes, which are a value addition and import substitution product are also being dispatched. We expect fresh tenders for drill pipes in FY '25 as domestic market size is around 10,000 tonnes. I've spoken about the IOCL orders, which we have received a few days ago. The next slide details various marketing trends, which are in place, and I would request all participants to take some time out to go through Slide 17 and Slide 18, so that they are able to understand the growth which is possible in this market and our market leadership position in the same market. Slide 19 talks about the key changes in the shareholding structure, which I touched upon earlier. I would now like to hand over back to Vikash and request him to open the floor for questions.

Thank you, Kaushal.

[Operator Instructions] We have our first question from the line of Jatin Damania from Svan Investment Managers.

Congratulations for a great set of numbers. So I just have 2 questions. So basically, how is the demand for Seamless currently? And what would be the sustainable EBITDA per tonne for the same? Because we're seeing sequential improvement.

Demand for pipes is good as is reflected by our existing order book of INR 1,565 crores. Very recently, we got a new contract from IOCL of INR 116 crores, which we have communicated. The margins that we are seeing, they are very good margins. Generally speaking, our margins have ranged from INR 9,000 per tonne to INR 30,000 per tonne. So depending on the position of the order book and the cost of raw material, we will get the necessary margins. It is difficult to specify a number because we have short-duration order books of around 3 to 4 months, which is replenished on a daily basis.

We have a next question from the line of Riya from Aequitas Investments.

My first question is how much percentage of the revenue is currently exports and similarly for order book?

Exports are less than 10% of total revenue. Whilst export demand has not picked up over the past 9 months, it has not had a meaningful impact on the company because the domestic demand is very good. And we've been able to sustain and improve upon our margins primarily on the basis of the domestic demand prevailing.

Got it. Also other expenses as a percentage of revenue have significantly declined in this quarter. Is there any one-off savings in cost this quarter?

No. Actually, what had happened was in the previous quarter, there were certain administration and selling expenses, which were on the higher side, which did not happen in this quarter as we've been able to control our costs.

This will be the normal range for other expenses?

Yes.

Got it. Also, in terms of orders from Oil India and ONGC, we're seeing it around INR 500 crores to INR 600 crores level. However, a few quarters earlier, we saw it was at around INR 1,800 crores level. So what kind of pipeline are we seeing right now?

Every year, Oil India and ONGC, they come out with tenders. So the tender that is awarded is usually a good-sized tender. It's part of the annual requirement of ONGC and Oil India. So when we had reported the number a few quarters earlier, as you said, we must have received the order, let's say, 20 days or 10 days prior to the date of reporting, which is why the figure was higher than it is right now.

Also in terms of going forward election is coming. So do you think the pipeline or the order inflow for some time for election would be a little grime?

Very short time impact.

Shouldn't be any meaningful impact.

[Operator Instructions] We have a next question from the line of [ Rahul Jindal ] from Summer Wealth. Mr. Rahul, are you there?

Am I audible?

I would request you to use the handset. You are not audible.

Please check now. Am I audible?

Yes. Please go ahead.

Sir, I wanted to know what growth opportunity do you see as a market leader for upcoming years after enactment of this antidumping duty?

Antidumping duty is in place til October 2026. We expect the duty to continue going forward considering the government's impetus towards Make in India and Atmanirbhar initiatives and the way domestic industry is performing in the past few years.

Sir, any volume growth guidance?

We have put out a capital expenditure plan in our presentation. We currently have production capacity of 1 lakh tonnes, which is inactive at our Telangana unit. In order to utilize that production capacity of 1 lakh tonnes, we are putting in a finishing line at the Telangana unit. Once that line is in place, there will be an immediate improvement in the tonnage that we are able to produce.

We have our next question from the line of [ Simran Bhatia ] from [ Arman ] Financial Services Limited.

There are 2 set of questions I want to ask. First, in terms of operating margin, let's say, FY '25, how we can expect it should be there? Can you answer this first question?

As we have mentioned earlier, we maintain short-cycle order books of around 3 to 4 months. Therefore, going into FY '25, we will not be able to give you an assessment of the exact number. But generally speaking, margins are good because market is good.

Okay. Okay. And sir, my second question is that the promoter stake has increased to 68% from 63% in the past 2 years, and you are committed for 75% promoter. So when we can expect this to increase, any tentative time lines in the next couple of years or in the next couple of months?

There is no fixed time line. It is an interest of the promoter to increase their stake to the maximum possible level, but there is no defined time line.

We have our next question from Sneha Talreja from Nuvama Wealth Management.

Congratulations on good numbers. Just one question from my end. If I look at your seamless volumes on a 9-month basis, that seems to have declined. But despite that, I see EBITDA per tonne increasing substantially. What are the key reasons in case you can highlight? One of the reasons I understood was savings in other expenses, which is particularly for this quarter. But on an overall basis, what are the reasons of increase in EBITDA per tonne?

The main reason for increase in EBITDA per tonne is the good domestic market that is currently in place. You will note that exports started declining from April onwards. However, our margins started to improve from April onwards compared to a situation in March when exports were good. So domestic demand is good, and that is a key growth driver for the company. Our marketing team is also befitting of our organization because they have engaged in better marketing and sales practices.

Another point was the raw material price has declined. So our order prices were good, but the raw material price has declined.

Just a follow up on that. While your raw material prices have declined, what I understand is you have back-to-back orders also. How did that end up benefiting you?

No, it was not fully 100% back-to-back. But whatever new raw material we have purchased, that the price of steel was low.

What percentage of your raw material requirement is back-to-back hedged?

We don't want to disclose that, but majority of the orders that we have are supported by back-to-back booking of raw material which is why we are able to sustain and improve upon margins even in volatile environment.

No, I tell you an example. Suppose today, we get order from ONGC or Oil India at a higher price, say, INR 1 lakh per tonne. So -- but the steel price has come down. So this order, we have quoted, say, 3 months back. In 3 months, the steel price has come down. So we are booking at a lower price.

Understood. Understood. That example was helpful. Just one last thing from my end. What is the current differential between -- or what is the general differential between exports margin versus domestic? Which is a better-margin business to be in?

Well, almost -- we compare both the market. We would like to take the same margin in the export but because of the export market is weak, so we are booking less quantity.

Otherwise, on the margin front, both are almost similar you mean to say?

I will say if we reduce the margin in export, we can book more quantity, but we have a domestic quantity, so we are not booking exports.

We have a next question from the line of Radha from B&K Securities.

Congratulations on good performance. Sir, I wanted to understand what kind of volume growth are we targeting for the next 2 years in both Seamless and ERW?

On the Seamless front, we are putting in a finishing line at our Telengana unit. Once that is in place, we will see volume growth coming in. On ERW front, we will be producing similar quantities that we produced this year. So in fact, there is likely to be volume growth in the ERW segment in FY '24 versus FY '23.

Sir, I was asking about FY '25 and '26 because this -- even if...

It will be at the similar levels as it has been in FY '24 for ERW. For Seamless, it is a function of how quickly the Telangana finishing line will be in place. Considering our order book, we expect good production.

Okay. Sir, the -- actually, that Telangana line for 1 lakh tonnes that will come by December '24, you mentioned. So...

It will start by -- it will be completed by December '24 and start by January '25.

Yes, it will affect '25, '26.

And sir, other than that we have 5.5 lakh tonnes of seamless. So what could be the maximum utilization that we can do with the 5.5 lakh tonnes?

It is a function of product mix.

So with the current product mix, what could be the numbers that we can achieve?

We can achieve higher production, but often we get different size orders and our objective is to maximize profit rather than maximize production.

And sir, secondly, this Telangana line, I believe that you can expand this to 3.5 lakh tonnes also in the future.

No, we never said that. Currently, the capacity for the Telengana unit is 2 lakh tonnes production capacity, out of which 1 lakh tonnes is the finishing capacity available. Since there is a bottleneck of 1 lakh tonnes on the finishing side, we are putting that up.

We have our next question from the line of Amit Kumar from Determined Investments.

Just 2 questions. One is, what would be the share of export revenues on a 9-month basis? And this new Telangana finishing line that you are putting up, so next year or the year after, do you believe that domestic demand would be sort of enough to fill that capacity? Or would you again need to look at export markets?

We will be looking for the export market mostly.

Okay. And what was the share of exports? As you said, it started declining from April. But on a 9-month basis -- for 9 months also less than 10%?

Yes, yes.

We have our next question from the line of [ Prince Bharana] from [ Prompt ] Hospitality.

First of all, congratulations to Maharashtra Seamless. I have one question. I just wanted to know the revenue recognition policy of Maharashtra Seamless. Is it like -- is the revenues booked as soon as the order is received? Or is it recognized as and when the inventory is dispatched? And I have another question. Like the number of rig count is increasing in U.S. and Canada. So why is the export orders for Maharashtra Seamless not increasing?

So revenue recognition as per Ind AS requirements is on basis of dispatch. When we dispatch the pipes, we [indiscernible]. On the question regarding exports, we mentioned earlier that if we decide to reduce prices, we can get a lot of export orders. But our objective is to maximize profit rather than any particular segment.

And domestic demand was more, so to meet the domestic demand, so we have booked less order in the exports.

We have our next question from the line of Saket Kapoor from Kapoor & Company.

[Foreign Language] Sir, firstly, if we take the volume number for the last year in terms of -- for the seamless in particular, we did 4,31,000 of production and 4,36,000 as our sales. And as of now, we are slightly lower in terms of the run rate. We have done 3,02,000 for seamless. So what should be the probability taking into account the shorter-duration order books we have? What should we end the year, sir, on top of 4,36,000 sales volume, which we have done for FY '23?

In FY '23, as you said, we have dispatched 4,36,000. We were targeting a higher level or similar level in FY '24. However, we've got some good-value orders, and there was also maintenance in one of our facilities, which is why production and dispatch has been lower. If you take an average of our performance in 9 months and extrapolate it, we think we'll get that level of tonnage. However, I would also like to point out that despite a slightly lower level of tonnage in FY '24 versus FY '23, you will see that our profit that we have been able to generate in the past 9 months is slightly less than the profit that we've been able to generate in the past 12 months -- in the 12 months of FY '23.

Yes, sir. That is clear. I was just trying to understand whether the current order book also, will it translate into higher tonnage? Or is it the similar type of orders, which we have executed in Q3 that is percolate going ahead for Q4 also. If you could give some color on that. So that even on lower tonnage, yes.

So we've -- what we have done in the first 9 months, if you can extrapolate that on a pro rata basis, then that is what we'll likely to achieve, slightly better than the pro rata levels. That is what we...

That is the volume part that you're mentioning?

Yes, sir.

And also on the margin part, since you have the lower-duration order book and you know the current raw material market also shaping up. So extrapolating these 2 factors, do they give the same color mix? If we take the 9-month average, we can come to a conclusion that margins will be in this band?

Well, let me tell you the -- our seamless EBITDA was INR 30,000. So it's very difficult to maintain INR 30,000. But we will certainly be averaging out, say, INR 20,000. I'm not talking about quarter 4. Quarter 4 order booking is good. But in next year, we will be aiming at INR 20,000, not INR 30,000. INR 30,000 is quite high EBITDA.

Sir, just to harp again on it. Sir, we did 9-month average at INR 27,137.

9 months, okay.

Yes, 9 months average is INR 27,137. So going ahead, looking at the status of the order book, can we look forward for INR 27,137 to average out for the full year or even now the mix is over [Foreign Language] and going ahead, we are expecting a lower EBITDA per tonne for the fourth quarter?