Technical Analysis

Mishra Dhatu Nigam: a niche play

Satya Sontanam BL Research Bureau | Updated on March 22, 2018 Published on March 21, 2018

Fair price, low leverage and growth prospects makes it a good bet for long-term

Mishra Dhatu Nigam (Midhani), a public sector enterprise, is approaching the primary market with an offer-for-sale of 4.87 crore equity shares in the price band of ₹87-90. The Government of India is divesting 26 per cent share in the company through this offer. Retail investors and employees get to buy the shares at a discount of ₹3 a piece.

This 45-year-old company since inception manufactures products that can withstand high stress, temperature and corrosion and are mostly used in aerospace, defence and nuclear power plants.

The niche segment that the company operates in, coupled with captive demand from the government departments lend visibility to the company’s earnings. Future expansion plans and focus on high-value products will aid profitability in the future. Strong financials, low leverage and strong dividend payouts are other positives.

 

 

 

The offer is not too pricey either. At the upper end of the price band of ₹90, the stock is valued at 13.3 times FY17 earnings. Given its steady growth prospects, investors with a long-term horizon can consider investing in this offer.

Healthy demand

The company currently derives almost 80 per cent of its revenue from speciality steel products that include ultra-high strength steel and armour grade plates. Revenue from high-margin products such as titanium alloys and super alloys constitute nearly 15 per cent and 5 per cent, respectively.

According to Frost and Sullivan, demand for speciality steel, titanium alloys and super alloys in India is expected to grow at a compounded average of 4, 5 and 9 per cent, respectively, between 2016 and 2021.

This is owing to increasing demand and investments in auto, energy, defence, aerospace and nuclear power plants. Also, growing emphasis on ‘Make in India’ can spur demand for these products.

The company is the only manufacturer of titanium alloys in India and it derived more than 90 per cent of its FY17 revenue from defence and aerospace segments. As on January 31, it had an order book of ₹517 crore with ₹283 crore coming from defence, ₹168 crore from space and ₹66 crore from other sectors. The Centre’s focus on becoming self-reliant in defence production can translate into steady order flow in the future. According to the management, 90 per cent of Midhani’s products do not have any competition in India.

The company is now trying to enter into new segments such as oil and gas, mining, power, railways and chemicals, in order to reduce concentration risk.

Expansion in progress

Currently, Midhani has only one manufacturing unit at Hyderabad, Telangana. It is now in the process of setting up two new manufacturing facilities — an armour plant at Rohtek, Haryana, and a tungsten plant at Nellore, Andhra Pradesh, at a capital cost between ₹100 and ₹200 crore, which will be funded through internal accruals.

The company has also entered into a memorandum of understanding to set up a joint venture with Nalco to produce aluminium alloys.

Strong financials

Revenue and profits have been growing steadily while profit margins are fairly robust. The revenue from operations in FY17 was about ₹809 crore, an increase of over 6 per cent over the previous year. Between FY15 and FY17, total revenue grew at a CAGR of 10.81 per cent.

Operating profit margin also grew to 23 per cent in FY17 from 20 per cent in FY15. Unlike other commodity companies, Midhani’s margins may not be impacted by volatility in raw material prices, as it constitutes only up to 30 per cent of the sales value.

The half-yearly performance of the company in FY18 has been impacted due to shutdown of one of its forging furnaces for maintenance. It recorded sales of nearly ₹200 crore and an operating profit of ₹56 crore for the period ending September 2017. However, the operating margin was a healthy 27 per cent in this period, due to increasing share of titanium alloys in the product mix. With the furnace set to resume production in April, growth in FY18 revenue and profitability is likely to be muted.

Being a CPSE, the company is required to pay a minimum annual dividend of 30 per cent of profit after tax or 5 per cent of the networth, whichever is higher. So, investors can expect a steady dividend payout from this stock.

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