Mishra Dhatu Nigam

Verdict: Healthy LT prospects, but not for ST

IPO Snapshot:

Mishra Dhatu Nigam is entering the primary market on Wednesday 21^st March 2018 with an offer for sale of up to 4.87 crore equity shares of Rs. 10 each, by the Govt. of India, in the price band of Rs. 87 to Rs. 90 per share, with Rs. 3 per share retail discount. Representing 26% of the post issue paid-up share capital, total issue size is Rs. 433 crore at the upper end of the price band. Issue is closing on Friday 23^rd March and listing is likely on 4^th April.

Company Overview:

Mishra Dhatu Nigam (Midhani), a wholly owned subsidiary of the Govt. of India, is India’s leading manufacturer of special steels and super alloys and the country’s sole manufacturer of titanium alloys, used in three critical sectors such as defence, space and nuclear energy, as well as in non-strategic sectors such as railways, oil and gas among others. Company has a manufacturing facility at Hyderabad and is undertaking greenfield expansion at two locations (i) Rohtak: operations to commence in FY19, to cater to needs of bullet proof jacket for the army and (ii) Nellore: plant will be operational in two phases – first part to commence in FY19-end, while second phase is under JV with NALCO will come on stream by FY21/22.

Financial Performance:

Company’s historic performance has been mediocre with past 4 years revenue CAGR in single digit, at 9%, rising from Rs.565 crore in FY13 to Rs. 810 crore in FY17, while net profit growth was a tad lower at 8%, during the same period, jumping from Rs. 94 crore in FY13 to Rs. 126 crore in FY17. Despite being a commodity play, company’s margins are extremely healthy - 25% EBITDA margin in FY17 and net margin of 16%, due to product being very niche. EPS for FY17 stood at Rs. 6.74, on an equity of Rs.187.34 crore, translating into healthy RoNW of 18%. Company’s net margins have consistently remained above 15% in the past 4 years, despite the cyclical nature of commodity industry, which makes one conclude that Midhani must be viewed as a value-add / technology play catering to defence and space sectors, immune from the price fluctuations (which can be easily passed on) and not as a mere alloy maker.

Due to maintenance shut-down of part facility for nearly 9 months in FY18 (which will recur may be after 10 years), H1FY18 financial performance was impacted, wherein revenue came in at Rs. 208 crore and PAT at Rs. 27 crore, leading to an EPS of Rs. 1.46. Thus, full year FY18 may also be subdued, but company should be able to regain lost ground in FY19, when the facility resumes operations and also new plants get operational.

As of 30-9-17, company’s net worth stood at Rs. 733 crore, implying BVPS of Rs. 39. Gross debt on the balance sheet is Rs. 66 crore, while cash balance is at Rs. 261 crore, translating into net cash per share of Rs. 10.40. Since issue is 100% OFS, no proceeds will flow into this cash-rich company and it will fund capex through internal accruals. GoI’s stake will decline to 74% post listing.

Valuation:

At Rs. 90 per share, company’s m cap will stand at Rs. 1,686 crore, which discounts FY17 EPS by PE of 13x while based on FY19E earnings, PE stands at about 10x, which is in-line. Company can not be compared with vanilla steel makers, who are ruling at high single digit PE multiples and grappling with mounting debt levels. Its slight premium to them is justified as Midhani, although a metallurgy company, enjoys monopoly position in titanium alloys manufacturing in the country and also meets the needs of defence / space sectors, with some of its products not available for import from other countries, due to national security concerns. Retail discount of Rs. 3 per share is also an attraction.

Going forward, company aims to increase its R&D spend to 5% of sales, from current 2%. It has also been recently allowed exports, which should augment topline further. However, given current subdued secondary market conditions, expecting listing gains on this stock will be too far-fetched. This stock can however be a quality mid-cap play delivering consistent returns, over the long term.

Conclusion:

Dent in FY18 performance on account of maintenance shut-down as well as weak market conditions may constrain listing gains. However, given its unique story and sound fundamentals, company can be a good portfolio play, strictly with a medium to long term view.

Disclosure: No interest.