The Indian Seamless Metal Tubes Limited – Seamless returns?

ISMT an abbreviation for The Indian Seamless Metal Tubes Limited which was promoted in 1977 by a team of technocrats. The company is well managed by Mr. Salil Taneja - Chief Executive Officer (CEO) who has 18 years rich experience in this line of business.

ISMT is the largest integrated specialized seamless tube manufacturer in India.

ISMT is one of the most diversified manufacturers of specialized seamless tubes in the world, producing tubes in the range of 6 to 273 mm OD.

And it’s the one of the most modern alloy Steel plants in India that produces a wide range of alloy steels from 20 to 225 mm diameter.

The company is well represented in the global market place by ISMT America, ISMT Europe, Structo Hydraulics AB, Sweeden . Besides, it has s group company called Taneja Aerospace and Aviation Ltd.[ TAAL ] . TAAL Technologies is a nichè Engineering Services and Technology Solutions company helping global corporations in Aerospace & Defense, Power Generation, Oil & Gas and Industrial Segments.

ISMT has two major manufacturing divisions, one in Ahmednagar and one in Baramati, the Installed Capacities of which are as under :

Installed Cap	Current	Proposed
Steel	250000 TPA	300000 TPA	To be completed by Q IV 2010
Tubes	155000 TPA	475000 TPA	Almost complete

Steel : Carbon Steel, Alloy, Bearing Steel for various industrial applications
Tubes : Hot finished and Cold finished tubes

Seamless pipes are used by the oil and gas exploration, auto components, boilers and mission critical / high pressure functions. Major customers of ISMT are Tata Motors, Bajaj Auto, M&M, ONGC, Oil etc.

Maharashtra Seamless Ltd having 500000 MTPA capacity ranks first and ISMT with 475000 MTPA capacity ranks second.

Backward Integration
A major quantum of high grade alloy steel produced by the company is used for captive consumption in the Tubes section and the balance is sold in the open market. This is a major part of the supply equation and the cost thereof is under management control.

Captive Power Plant
ISMT will soon have in place a 40 MW Captive Power Plant that will commence operations in second half of 2010-11 Thus uninterrupted power supply and cost thereof is totally under management control.

Growing Oil E&P sector
Rising oil prices, “peak oil” theory and massive investments in E&P and oil/gas transport networks has made ISMT move more towards high margin OCTG [ oil country tubular goods ] segment.

Thyssen Krupp Mannex (TKM) and ISMT have signed an agreement whereby TKM will represent ISMT for the sale of OCTG tubes in U.S.A., Canada, Iran, Iraq, Algeria and certain other countries in North Africa and the Middle East. With the addition of a new PQF Mill, ISMT is now well positioned to supply high quality Casings, Tubings and Line Pipe required by the Oil Exploration sector. The addition of TKM to ISMT's marketing network is expected to give a boost to OCTG tube sales and establish ISMT as global supplier of such tubes.

Besides, the robust growth in Oil E&P as evidenced by Baker Hughes “rig count” report seems to auger well for focusing more on Oil Casings and Tubing products.:

As per Baker Hughes Incorporated (NYSE: BHI) the international rig count for June 2010 was 1,099, up 9 from the 1,090 counted in May 2010, and up 132 from the 967 counted in June 2009. The international offshore rig count for June 2010 was 312, up 14 from the 298 counted in May 2010 and up 45 from the 267 counted in June 2009. [www.oilandgasonline.com ]

Growing Power Sector
1 lakh MW capacity addition in the 12th Five Year Plan augers well for the growth of ISMT which supplies Boiler Tubes to the power sector. Currently, the demand for such tubes far exceeds the supply which are met by imports. Besides, there is good replacement demand for boiler tubes.

The Negatives

• Slow down in oil E&P in case the price of oil goes downhill
• Increase in price of billets used for manufacturing seamless tubes
• Forex risks emanating from forex loans and export earnings

Financials

• For last five years topline is above Rs.1000 crores p.a.
• Equity base was rock steady at around Rs. 72.25 crores for last 5 years despite expansion which signifies that growth has not taken place through equity dilution.
• Operating profit has been in the range of 14-23 per cent.

Total Sales and Net Profits for fiscal 2009-10 was Rs.1193 crores and Rs.73 crores respectively. The corresponding figures for previous year was Rs.1300 crs and Rs. 56 crores.and thus profits for 2009-10 have increased by Rs.17 crores despite a 8.9 per cent reduction in sales. This was primarily possible due to better cost control especially that relating to raw material consumption.

The Future
Mr.Taneja, CEO of the company has this to say about the future of ISMT:
“The sectors that we are focused on and which will drive the company's growth are Energy, Construction, Oil & Natural Gas, Bearings, General Engineering and Mining. Fortunately all of these sectors are doing well and will, likely, continue to do so in spite of the general industrial slow down.”

Conclusion
If we consider the following factors, the stock price of ISMT will swiftly move up in the months to come:

• ISMT is an integrated player having a market share of 25 per cent
• The company’s products have wide application in High Pressure Oil & Gas Exploration & Drilling, Boiler, Automobiles, Process, Pipelines and Refineries
• Anti dumping effected by U.S. and China and probe on Chinese dumping by India
• Economies of scale and superior technology compared to its rivals
• Installation of SMS Meer, Mönchengladbach, Germany’s new seamless tube plant employing the PQF® process (Premium Quality Finishing) at Baramati, Maharashtra..
• Commissioning of 40 MW Captive Power Plant resulting in considerable savings in power costs.
• Increased focus on higher margin products like OCTG relating to Oil E&P.

The Market Cap is Rs. 766 crores, the shares are valued at PE of 10.46 and were last traded at 52.30, the 52 week range being Rs. 64.95 – 29.70. Face Value is Rs.5.

Now tell me, can you afford to ignore ISMT, a company which is gifted with a bright future backed by an ultra bright future in the global Oil E&P sector and the electrifying power sector of India!

Yes, and you may ask whether the current share price can give seamless/consistent returns and the answer is : Yes, indeed. Once can buy at the current levels of Rs.52 and on dips – the SIP way as always. ISMT is a good medium/long term bet.

Technically too the stock is in a bullish territory if we consider the fact that ISMT has crossed its 200 DMA of Rs.52 and expect the stock to move up once it crosses Resistance level of Rs. 53.40. The Fibonacci price projections reflects that ISMT has the potential of touching level of Rs.72/ share. Considering the robust and sophisticated business model of ISMT and the future prospects, the downside risk is minimum and yes the share price could slide down to 46 levels but then that’s part of the game and the yo-yo concept applies to all stocks.

Overall, one can expect 50 per cent return over a 6-12 month period which can be considered respectable when we consider the negative returns that we folks get by parking our money in PSU /Private Banks / Co-operative Banks [ the most dangerous of the lot where you may get “NO” returns at all ]. Remember Bank of Karad. By the way, 19 cooperative banks have gone bankrupt/closed operations in 2008-09 !

Kishor S. Khot, [Kishor@hbjcapital.com], Equity Strategist, HBJ Capital Services Pvt Ltd