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

Ladies and gentlemen, good day, and welcome to the Maharashtra Seamless Limited, Q1 FY '25 Earnings Conference Call 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. Singh.

Good afternoon, everyone. Welcome to Maharashtra Seamless 1Q FY '25 con call. From management side, we have with us Mr. Kaushal Bengani, Deputy General Manager, Investor Relationship and Finance. Without taking much time, I give the dais to Kaushal for the -- his opening remarks. Kaushal, over to you.

Thank you, Vikash. Good afternoon, shareholders, and thank you for joining our earnings call. In Q1, FY '25, whilst dispatches were slightly lower than previous quarter, our earnings was significantly impacted both on quarter-on-quarter and year-on-year basis. This is attributed to 3 key reasons: The first reason is a fall in sales realization, which has been on account of increased competition, lower raw material prices and some dumping from Chinese manufacturers in certain segments. We are in discussion with relevant authorities to address the issue of Chinese dumping, but that is a long drawn process. Secondly, we have taken preventive maintenance shutdown in one of our mills. Based on the prevailing order book, most of the manufacturing of existing high-value orders and oil and gas sector orders were to be manufactured in this particular mill. However, due to the preventive maintenance shutdown, these orders were not executed, thereby impacting the earnings profile for the quarter. This mill has since resumed production at the start of Q2 FY '25 and normalization of dispatches is expected in the second quarter. The third reason was the dispatch of high-value orders, which was in limited quantity. As fewer high-value orders were dispatched in Q1, entire high-value inventory, which was purchased against the remaining high-value orders had to be marked down when raw material prices fell during the quarter. This was done in order to comply with accounting standards. When these high-value orders are dispatched in subsequent quarters, the impact of marking down inventory will be nullified. I will now briefly summarize key financial indicators. On reviewing our Q1 FY '25 performance versus Q4 FY '24, despite a revenue decline of only 4%, EBITDA fell by 54% to INR 126 crores. PAT and EPS fell by 40% to INR 136 crores and INR 10 per share, respectively. A comparison of Q1 FY '25 performance with Q1 FY '24 gives similar percentages for all parameters. The reason for the percentages being where they are has already been explained earlier. Apart from financials, there are 5 key points, which I would like to draw attention to. The first is our treasury. The treasury is at INR 2,203 crores as on 30th June, 2024. It has improved more than anticipated and is generating good returns for us. In fact, in Q1 FY '25, more than 1/3 of total earnings was from Treasury segment. The second point is the order book. Our order book has increased from INR 1,754 crores to INR 1,812 crores. The order book remains good as demand environment is conducive for manufacturing industry and oil and gas sector. The third point is regarding ICDs and corporate guarantees. In line with the commitment made to shareholders 2 years ago, there are no ICDs to unrelated entities or corporate guarantees outstanding. We have come a long way from the time when this used to be the main cause of concern, and that has been fully and completely resolved. The fourth point is regarding dividend. Dividend for FY '24 has been quadrupled from what was distributed for FY '22. Whilst the specific dividend distribution plan has not been announced yet. We remain mindful to the points raised by shareholders. Finally, I wish to reiterate that capital goods and infrastructure in general and oil and gas, specifically continue to witness strong demand for medium term. This directly impacts the seamless pipes market, which remains buoyant, driven by capital expenditure and spending in oil and gas sector, as we are seeing our order book being replenished and improved at good levels. I would now request Vikash to kindly open for questions.

[Operator Instructions] The first question is from the line of [Pratika] from Aequitas Investments.

I just wanted to understand what is the markdown on inventory that you mentioned. Can you just elaborate on that a little bit? I didn't understand why was there a markdown.

At the start of the quarter, we had high-value orders, which was backed by inventory purchased for those high-value orders. During the quarter, raw material prices fell. At the end of the quarter, the inventory which was not dispatched, which primarily comprised inventory, which was purchased for high-value orders because of the specific mill in which these high-value orders were to be manufactured. That mill was under preventive maintenance shutdown and so those orders could not be dispatched. The inventory that we had for those orders that had to be marked down. And that is the main reason why the performance is where it is right now.

Okay. So this is basically inventory loss in the quarter because of raw material price that fell down -- fell. So how -- would this quarter, we would have similar situation of inventory loss?

So it is not inventory loss in the sense that people perceive it because when you say inventory loss, one imagines a speculative position, which has been taken and loss has been incurred on account of that speculative activity. In our case, we had earmarked the order with inventory. However, raw material prices fell against that order. And that order was not dispatched in that quarter because the mill was under shutdown. So when these orders -- now when the mill has resumed operations in the first week of July and when these orders will be dispatched during the current quarter and the next quarter, the inventory markdown will be nullified.

Okay. And would we have a similar situation for the raw material that must be procured for the current order book?

It depends. If raw material prices fall further, then we will have same situation. If they don't, then we'll have the reverse situation.

So that was -- so while there is a possibility of reversal for the existing dispatches that were delayed, we could also have a situation on the current order book where a similar situation of raw material price can come across, right?

I don't know because it depends on whether raw material prices will fall or not because all of our orders are backed by raw material purchases.

Understood, this shutdown that we had, what was the production loss because of the shutdown?

Production loss in terms of production facility would be around 15,000 tonnes. However, what we had done was, there was quite a bit of WIP, which was with us, which we managed to finish in dispatch.

All right. And in terms of order book, what would be the execution period for the drilling pipe that we have, order book of drilling pipes?

Very long execution period.

Okay. And when it comes to cylinder pipes, the order book has risen significantly. Is the margin profile any better for this segment relative to the other products...

The margin profile for all high-value addition pipes are better than regular pipes. So cylinder pipes are a high-value addition product that we manufacture. We are the -- we are one of 2 manufacturers of cylinder size. And we want to increase the contribution of the value addition pipes as a percentage of total dispatches. We've communicated this many times earlier as well. And it is encouraging that what has been communicated is transpiring into reality.

Okay. And in terms of the segment where you mentioned that the Chinese imports are affecting us. Can you just elaborate what are -- what areas of the business or sectors we are seeing maximum impact?

I don't want to do that right now.

The next question is from the line of Radha from B&K Securities.

Sir, my first question was, you mentioned that there is some pressure on the pricing. So how -- do you expect the pricing to remain stable for the rest half of the year? Rest part of the year? Or we expect realizations for the seamless pipe.

The raw material pricing is something which I will not be able to comment about. But I don't think selling price is expected to fall significantly from where it is right now.

Sir, you mentioned that we are seeing more imports from China, and we are taking some measures but that would take some time to pan out. So on the basis of that, could there be more fall in realizations in subsequent quarters? Considering raw material prices remain similar.

It is difficult to comment because what is under process is not controlled in a manner in which a reasonable forecast can be made. So we will just have to wait and watch as to how things pan out. Since a lot of various entities and a lot of various processes are involved.

Sir, secondly, a few quarters back when we had a discussion, at that time, it was mentioned that a percentage of order book is actually hedged. And some portion is kept open. So could you specify broadly what percentage of order book is usually hedged with raw materials?

Almost the entire order book is hedged with raw material and insignificant portion is kept open.

Okay. Sir, just last, in the export front, so U.S. and Canada remains a key market. So out of the 10 million tonne global demand, could you specify or give us some highlights as to what would be the market size in U.S. and Canada? And any increase in opportunities are we seeing in the Saudi regions as well.

We don't export to the Middle East. Exports have not revived. Exports have been slow for more than a year. Market size in U.S. and Canada is very big. But they have not revived for us.

U.S. Canada will be 20% of the global 10 million tonne demand?

I don't know. I think you had asked this question in the earlier call. And I said that you have access to more databases than I do. So exact percentages is difficult for me to communicate without having seen specific data.

Sir, last question. What is the quantum of import happening from China to India for the seamless pipe and tonnage terms?

It is impacting us, which is why our realizations have fallen. So significant.

The next question is from the line of Pradeep Rawat from Yogya Capital.

So I would like to know about like you mentioned 3 reasons why our EBITDA dropped. So can you broadly give weightage to all the 3 reasons why our EBITDA fell drastically this quarter?

Equal weightage. For all 3 factors.

Okay. And where are we in terms of making seamless pipe for hydrogen market? And how big the opportunity could be?

We are not supplying pipes for the hydrogen segment. I think those pipes are not being manufactured in the seamless segment in India.

Okay. And what was the production from the Telangana unit for this quarter?

The Telangana unit is a part of Maharashtra Seamless. Specific mill-wise production details are not given out.

And when could we expect the Telangana unit CapEx to be finished? Like when it could be commissioned and also for the hot mill upgrade in our mean facility.

The Telangana finishing line was expected to be completed by March 2025. But I don't think that will happen. In all probability, it will get deferred by at least 9 months because we've recently placed order for some equipment. Those orders have been -- the finalized purchase order has been issued. However, the gestation period for that order is 12 months. So I think reasonably speaking, the Telangana unit expansion should get completed by December '25. However, we will update you as and when material developments take place. So please do not consider December '25 to be a hard stop. But rather outcome of where things stand right now. It can also be sooner. It depends on how the suppliers act because we also -- we've incentivized at least 1 supplier to deliver quickly.

Yes. Understood. And for the hot mill upgrade?

Hot mill upgrade will only happen once the Telangana finishing line is in place because we will have a loss of production whenever we take the hot mill upgrade. So in order to compensate that loss, we need the Telangana unit to be active in full capacity.

Yes. And my last question...

The sense which I'm getting from your question is when will volume growth come in. So I don't think there'll be volume growth in FY '25. And in FY '26, volume growth will only happen once the Telangana finishing line has been completed and is open for commercial production.

The next question is from the line of Jatin Damania from Swan Investments.

Sir, carrying on the further participant questions in terms of the CapEx. So as you indicated that the Telangana plant has been likely be postponed to FY '26 commencement. So is it fair to assume that of INR 852 crores of the CapEx that we are going to spend, major portion of the CapEx will be spent in FY '26 and it will be a marginal in FY'25.

Yes, that is correct.

So if you can quantify the numbers that we are likely to spend in FY '25 and FY '26?

I don't want to do that right now because quite a significant period in the year is still remaining. Maybe in the earnings call for the next quarter, I will give you a definitive figure.

Yes, because what I was -- sir, of the INR 852 crores, which as for our presentation decided from FY '24 to '26, but the CapEx in FY '24 was very minimum. So that's why I wanted to check, how the cash flow or the CWIP will flow from '25 to '26.

You are right. I will update you in the next earnings call.

Sure. And secondly, in your opening remarks you indicated because the inventory write-downs, there was a hit in the operating performance. So assuming that your capacity, which was under the preventive maintenance shutdown, is back into operation in the first week of July. So as soon as we start executing that order, is it possible to reverse the entire inventory write-down that we had taken?

Yes. Definitely. That is what will happen, but whether it will happen entirely in the September quarter or in the December quarter depending on when the order is executed. Some of the actions will definitely happen in September quarter, and we would want all of it to happen in September quarter. So that's a normalized level of EBITDA per tonne is reflected going forward.

That's helpful because if you look in the first quarter other than the high-value order -- execution of the high-value order, our performance got impacted because of the [execution] of the low margins, because the preventive maintenance shutdown. So I was just wondering that if this some portion of the high-value order we get in Q2, there could be a normalized margin, you can probably start getting hit in the month of September or the October onwards. So just wanted to clarify on that.

Okay. So in my assessment of where things stand right now, as and when the high-value orders get dispatched, the impact of the inventory markdown will get nullified. I hope it happens in the second quarter itself, but we'll just have to wait and see.

The next question is from the line of Vinay Nadkarni from Hathway Investments.

Just wanted to know what is the average drop in raw material prices this quarter? If you can quantify percentage?

It is significant. So significant that our EBITDA per tonne fell from INR 22,000 a ton to INR 9,000 a ton.

Because of drop in raw material prices because your top line would have gone at the lower raw material prices. Is it?

No, no, no.

Because of pass-through?

No, no, absolutely not. There were 3 factors which impacted EBITDA per tonne, which I have already communicated earlier. One of those factors was the write-down in the inventory that we had taken in order to comply with the accounting standards.

I understand that.

I don't want to clarify a number. It is irrelevant to what you want to calculate. What is relevant is that the entire inventory write-down will get reversed when this order is dispatched.

Then my worry that 1,500 tonnes loss that you are saying you have incurred because of the shutdown, that will impact the quarter 2 performance because your WIP carried you in the quarter 1. In quarter 2, will it be impacting? Because I don't see any impact on quarter 1.

Mill has started in first week of operation -- first week of July.

So where does that INR 1,500 go, because your production in quarter 1 has not been impacted at all because of the shutdown.

No, no, one second. We would earlier manufacture -- for [ INR 110,000 ] we would have earlier manufactured and dispatched anywhere between 100,000 tonnes to 115,000 tonnes per quarter. In March quarter, we dispatched around 95,000 tonnes. The reason for lower dispatches in the March quarter was the delay in an order which was expected in the month of March, but it was received in the second week of April. That was for the March quarter. For the June quarter, we had taken maintenance shutdown in one of our units. That maintenance shutdown caused to a loss of production of around 15,000 tonnes.

Okay. Then the only question I had was on -- but that you have answered already, the de-bottlenecking of units.

The next question is from the line of Satyan Wadhwa from Profusion Investment Advisors LLP.

Kaushal, what was the actual inventory loss or inventory markdown on the high-value order, just for -- amount in rupees if you could clarify?

There was no inventory loss in the traditional sense of the term. I will have to just reiterate what I said earlier. There has been no inventory loss as is traditionally understood. All of our orders are hedged with raw materials. Most of those orders were high-value orders that we had. And they were manufactured in a mill which was under preventive maintenance shutdown because those orders could not be dispatched. The inventory remained with us. During this period, what also happened was that raw material prices fell. Therefore, in order to comply with accounting standards, we had to mark down the inventory to what the raw material prices were at the end of the quarter. This will reverse itself once the raw material -- sorry, once the order is executed.

Correct. That's fine. And we're still checking what is the actual mark-to-market loss. That will reverse next quarter or the quarter after once you ship anyway?

I am not quantifying that. There were 3 factors. All 3 factors had equal weightage. And that impacted our earnings profile.

The next question is from the line of [ Deepak Mandana ] from [indiscernible] Investments.