Down 40Percent from its peak, this growth stock could look like a bargain in a few years

Despite the decline, the company’s robust presence across key sectors—such as oil and gas, agriculture, and chemicals—offers a foundation for potential recovery. With a significant order book valued at ₹17 billion as of October 2024 and strategic expansions in the pipeline, the company remains a critical player in supplying high-performance piping solutions across vital industries.

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Market stronghold

With a commanding 55% share in India’s seamless pipe market, Maharashtra Seamless has solidified its role as a top supplier of high-quality pipes across industries, from oil and gas exploration to chemical processing and agriculture.

The company’s diversification into renewable energy is also bolstering its revenue, aligning it with the global shift toward sustainability. The flagship seamless pipes remain essential for oil and gas exploration, a sector seeing rising demand as production activities ramp up worldwide.

Additionally, strong demand from industries like sugar and chemicals adds resilience against the cyclicality of oil markets.

Over the last five years, Maharashtra Seamless has achieved a compound annual growth rate (CAGR) of 12.1% in revenue and a remarkable 36.4% in net profit.

These numbers reflect the company’s ability to manage growth through both volatile and favourable market conditions. Even with recent challenges, Maharashtra Seamless has maintained a healthy return on capital employed (ROCE) of 21.5% and a return on equity (ROE) of 16.6%.

A bump in the road

Maharashtra Seamless’ stock has dipped amid market pressures, despite a promising long-term outlook. Volatile steel prices, a key input for seamless pipes, have squeezed margins, impacting profitability.

Additionally, a pullback in oil and gas exploration budgets, as companies adjust to fluctuating crude prices, has softened demand in this key sector.

Broader concerns over a global economic slowdown have also dampened investor sentiment in cyclical sectors like steel and energy, sparking caution and profit-booking after Maharashtra Seamless’ recent growth run pushed valuations high.

Finally, increased competition, particularly from Chinese manufacturers despite anti-dumping duties, has added pricing pressure.

However, with a solid market share and diversified portfolio, the company still holds long-term potential for investors.

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Policy boost and growth outlook

Recent policy measures and regulatory actions have created a favourable environment for domestic seamless pipe manufacturers, with Maharashtra Seamless well-positioned to benefit significantly going forward.

The Ministry of Finance has extended anti-dumping duties on Chinese seamless pipes until 2026, providing a protective measure that allows local manufacturers like Maharashtra Seamless to compete without the pressure of cheaper imports.

This aligns with the "Atma Nirbhar Bharat" initiative, pushing public sector undertakings (PSUs) to procure pipes with no less than 35% local value addition. This policy effectively restricts purchases under ₹2 billion to domestic tenders, excluding foreign competitors from smaller-scale projects.

Demand for seamless pipes in India is ramping up as ONGC, Oil India, and offshore rigs expand their drilling activities. This growth is part of a broader trend that sees India’s oil consumption projected to reach 7.2 million barrels per day by 2030.

Additionally, with plans to double refining capacity, Maharashtra Seamless stands to gain from the increased domestic energy infrastructure and the essential seamless pipes required for these projects.

The chemical and sugar industries, which also rely heavily on seamless pipes, are expected to grow, further bolstering the company’s order book and revenue potential.

Together, these regulations position Maharashtra Seamless to capture a larger market share, providing a competitive edge in government and PSU contracts while promoting import substitution across various industries reliant on seamless pipes.

The global outlook for seamless pipes is equally optimistic. As oil and gas companies resume exploration and production activities, demand for high-grade pipes is likely to rise.

Organization of the Petroleum Exporting Countries (OPEC) has raised its 2024 global oil demand forecast to 104.4 million barrels per day, up from 102 million barrels, driven by increased travel and infrastructure growth, with supply largely coming from non-OPEC countries. Meanwhile, the US Strategic Petroleum Reserve is at multi-decade lows and is being refilled, potentially setting a price floor for crude oil.

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Strategic expansion

In a strategic move to enhance its market presence, Maharashtra Seamless recently merged with its wholly owned subsidiary, United Seamless Tubulaar Pvt. Ltd. (USTPL).

This consolidation boosts the company’s seamless pipe production capacity by over 40%, reinforcing its competitive edge both domestically and internationally.

Cost optimisation and operational synergies from this merger are expected to improve margins and enhance overall profitability.

Further diversifying its portfolio, Maharashtra Seamless has expanded into renewable power generation, reflecting its commitment to sustainable growth.

This move aligns with the broader industry trend of reducing carbon footprint and leveraging renewable energy sources.

The renewable energy segment, though smaller in scale, provides the company with a potential long-term growth avenue, particularly as the demand for green energy continues to rise.

Challenges on the horizon

While the company has a positive long-term outlook, it’s essential to consider some near-term risks. Volatility in raw material prices, particularly steel, could impact margins.

Any slowdown in the oil and gas sector, driven by geopolitical tensions or volatile crude prices, could impact demand in Maharashtra Seamless' core business segment. However, its diverse customer base and foothold across multiple industries—including renewables—provide a buffer against sector-specific challenges.

Valuation

Since the start of the year, the stock has declined from ₹911 to ₹624, representing a substantial underperformance compared to the broader market, which has risen by 10%. This equates to a drop of 31.5% and the stock is down 43% from its 52-week high of ₹1,097.

Currently, it is trading at a price-to-earnings ratio of 10 times, which is in line with its three-year median PE. At its peak in December 2023, the stock's PE ratio was 13.8.

Final thoughts

For investors with a long-term perspective, Maharashtra Seamless offers an interesting mix of stability and growth.

Despite the recent pullback in stock price, the company’s strong fundamentals, diversified product range, and strategic initiatives position it well for the future.

Despite existing challenges, the seamless pipes leader is building a strong foundation for long-term growth, positioning itself as a promising investment by leveraging favourable market trends and government support.

In the near term, Maharashtra Seamless may face some bumps on the road, but for patient investors, the stock presents a compelling case for potential gains in the coming years.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com