Mishra Dhatu Nigam: Adding value

With expectations of increase in defence expenditure by the Centre and the government’s thrust to ‘Make In India’ products, the prospects for Mishra Dhatu Nigam (Midhani) — a public sector enterprise catering to the segment — look good.

The Mishra Dhatu Nigam caters to the needs of India’s strategic sectors such as Defence, space, atomic energy and aeronautics by supplying critical materials and alloys.

The niche segment that the entity operates in, visible demand for its products, expansion plans and focus on high-value products are positives for the company.

The government, in March 2018, had divested 26 per cent of its holding in the company by way of an initial public offering. The stock has moved up by about 43 per cent from the time of its IPO — we had recommended an invest in it.

At the current market price of ₹129, the stock is still quite reasonably valued at about 18 times the FY18 earnings.

At this level, it is a buying opportunity for high-risk investors with a two- to three-year horizon.

As the company is a Central Public Sector Enterprises (CPSE), the dividend pay-out has generally been attractive.

The dividend yield for FY17-18 was about 1.5 per cent.

Demand visibility

The products produced by the company are usually import substitutes. The prominence given to ‘Make in India’ products and the Centre’s focus on becoming self-reliant in Defence production can translate to steady order flows for the company in the future.

A report by Frost and Sullivan (F&S Report) in December 2017 suggests that India is expected to emerge as the third-largest country in terms of Defence-related expenditure from its current position (eighth), by 2020.

Also, the report states that the cumulative demand for high-value specialty steel, super alloy and titanium is expected to witness a minimum annual growth of around 6.5 per cent during 2016-21.

Further, titanium and its alloys are value-added products with high margins and the company aims to focus more on this segment, going ahead.

The share of titanium alloys in the sales volume has increased to 17 per cent in FY18 from 12 per cent in FY17.

The company, for the first time in FY18, entered the export market. It also seeks to enter segments such as oil and gas, mining, power, railways, chemicals and fertilisers. This will reduce the concentration risk for the company.

As of December 2018, the company has an order book of about ₹1,300 crore, more than twice the revenue recorded in FY18. The management expects the order book to remain robust in the coming years.

Expansion in the pipeline

The current capacity of Midhani in terms of turnover is around ₹800 crore. Currently, it has only one manufacturing unit at Hyderabad, Telangana and is in the process of setting up two more facilities — an armour plant at Rohtak, Haryana, and a tungsten plant at Nellore, Andhra Pradesh.

Products from these projects would be an addition to the current product portfolio of the company.

The management expects these plants to start operations in the last quarter of FY20 and would probably contribute to revenues a year later.

As a result, revenues are expected to increase by 10-15 per cent and boost margins considerably.

Currently, the company has negligible debt. Despite taking debt for capex requirements, its debt-equity ratio is expected to remain healthy at 0.5 times.

Good financials

A maintenance shutdown was completed and operations were resumed in the initial part of this fiscal.

The company’s half-yearly performance in FY19 has been healthy with sales (5 per cent Y-o-Y) and operational profit (10 per cent Y-o-Y) of ₹217 crore and ₹63 crore, respectively.

However, low cash flows from operational activities due to delays from customers will remain a concern for the company.

Given the steep rally in the stock, investors would be better off not expecting quick returns; the company is trying to still make up for the dip in revenues last year.

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