Buy This Stock With A Potential Bull Case Fair Value Of Rs. 828, High Returns: HDFC Securities

Reputed brokerage firm HDFC Securities suggests buying the stocks of Maharashtra Seamless Ltd (MSL) for high returns.

Valuation and target price: HDFC Securities

A better capital allocation by the management will be able to improve the company's return ratios and promoter image. HDFC Securities commented, "We expect revenue to grow at 10.4% CAGR over FY22-24E mainly on the back of volume growth due to ramp up of USTPL (seamless/ERW volume growth of 12.7%/8% CAGR over FY22-24E). A favorable product mix coupled with positive operating leverage could improve the margins going forward. We expect the company to post EBITDA/PAT CAGR growth of 19.2%/23% over FY22-24E. We think the base case fair value of the stock is Rs. 764 (6.25x FY24E EV/EBITDA; 9x FY24E EPS) and the bull case fair value is Rs 828 (6.75x FY24E EV/EBITDA; 9.7x FY24E EPS) over the next two-three quarters. Investors can buy the stock in the band of Rs 682-696 (5.7x FY24E EV/EBITDA; 8x FY24E EPS) and add more on dips to Rs. 595-605 band (5x FY24E EV/EBITDA; 7x FY24E EPS)."

So, the stock can offer you around 18.9% returns, in short term.

Strong export demand: advantage

The brokerage firm mentioned, "MSL products have a strong export demand given its capabilities to make API certified pipes. Going forward, ~30-40% volumes would cater to export demand. Higher export revenue share coupled with relatively better margin profile would help in improving its EBITDA margins. Given MSL's high share in seamless pipe segment (80%+ of its EBITDA), the company's performance is highly depended on rig counts. Higher energy prices boosts investment (capex) in the sector which results in higher rig counts thereby improving demand outlook. We expect crude prices to remain at elevated levels for the medium term which would translate into healthy volumes for seamless pipes manufacturers."

About the company

Maharashtra Seamless Ltd (MSL) is part of DP Jindal Group, primarily manufactures seamless & ERW (Electrical Resistance Welding) pipes with installed capacities of 650,000 TPA (consolidated) and 125,000 TPA respectively. It enjoys market leadership in the domestic seamless pipes market (55% market share) and has the capacity to manufacture seamless pipes with outside diameter of up to 20 inches. The company has a market share of 25% in the API certified (high realisation) high frequency ERW pipes segment. MSL primarily caters to companies in the Oil & Gas sector (>65%), where it is a registered vendor for major domestic oil producers and refiners.