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JP Morgan Overweight on Maharashtra Seamless

December 10, 2007

Maharashtra Seamless (MHS) has announced the acquisition of a 0.2MT seamless pipe plant in Romania. The company plans to bring the mill to India, although the finer details are still being worked out. The total transaction size is estimated to be Rs2.5B, which would be funded through internal accruals.

MHS was trading at a significant discount to its peers in the Indian pipe sector as the company lacked growth drivers. The acquisition increases the earnings growth visibility and strengthens the company’s position as India’s largest seamless pipe company. After this acquisition the company still has a cash balance of Rs3.1B, giving it flexibility to pursue further organic/inorganic growth.

Expect FY08 to remain challenging, we do believe margins will recover in FY09. Expect the benefit of the acquisition to flow through in FY10. JP Morgan increases EPS estimate by 5% for FY09 (due to higher realizations) and 12% for FY10 (due to the benefit of new mill). The company is expected to report an EPS of Rs 34.2, Rs 45.1 and Rs 56.2 for FY08, 09 and 2010 respectively. JP Morgan is overweighto n the stock and has set a Dec-08 price target of Rs 675 based on 15x FY09E P/E.

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