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Friday, 16 March 2018
CM RATING 48/100


Mishra Dhatu Nigam

Providing self-reliance in strategic materials
Produces high-value products catering to niche end-user segments such as defence, space and power

Mishra Dhatu Nigam (MIDHANI), a government of India enterprises, was set up in 1973 at Hyderabad with the objective of providing the nation self reliance in strategic materials. Mishra Dhatu Nigam is one of the leading manufacturers of high value speciality steel, superalloys and only manufacturer of titanium alloys in India. These are high value products which cater to niche end user segments such as defence, space and power. It has the technological ability to manufacture a wide range of advanced metals and alloys under one roof. The company has achieved the status of a Mini Ratna, Category-I company in 2009.

 The company manufactures unique combinations of metal and alloys. These special alloys have superior mechanical properties and better workability which are essential for special applications in aerospace, power generation, nuclear, defence and other general engineering industries. Its products are key ingredients for strategic sectors in India, which typically cannot be imported from other countries due to national security related concerns.

 It manufactures special steels like martensitic steel, ultra high strength steel, austenitic steel and precipitation hardening steel. It manufactures three varieties of super alloys: nickel base, iron base and cobalt base. It also manufactures varieties of titanium alloys. Most of the orders executed by the company are in the nature of an import substitute.

 The company has the competence of developing and manufacturing customized alloys tailor-made to suit the specific requirements of customers for their critical applications. Presently, it conducts its operations at its manufacturing facility in Hyderabad. It has several certifications including the ISO 9001:2008–Quality Management System and AS 9100 C for manufacturing and supply of metals and alloy products. The company has its research and development laboratory which is accredited to the National Accreditation Board for Testing and Calibration Laboratories.

 The company has process capabilities across the product manufacturing value chain, including melting, forging, rolling, wire drawing, investment casting, machining and quality testing. It has a modern and integrated metallurgical plant for manufacturing a wide spectrum of critical alloys in variety of forms such as ingots, forged bars, rings hot rolled sheets and bars, cold rolled sheets, strips and foils, wires, castings, fasteners and tubes using state of the art production facilities for defence, space, aeronautics, power and thermal power, electronics, tele-communications and engineering industries and other sectors in India.

 The key cost drivers of the company are raw materials, power, fuel and employee cost.

 The primary raw materials used by the company for manufacturing products are: (a) nickel metal to various specifications; (b) cobalt metal to various specifications; (c) various master alloys; (d) pure iron; (e) titanium sponge of various grades; (f) chromium metal to various specifications; (g) mild steel scrap/stainless steel scrap; (h) high carbon/low carbon ferro chrome; (i) aluminum metal in various forms; (j) manganese metals; and (k) different ferroalloys.

 Fuel is taken from government public sector undertaking through competitive pricing and power is taken from state utility department. To reduce the cost of power, the company has invested in gas based power plant known as Andhra Pradesh Gas Power Corporation and 4-MW solar power plant and has applied for open access systems for starting the power trading to reduce the overall cost.

 Some of its new projects planned in the next three years include: (a) proposal for construction of spring manufacturing plant for manufacture and supply of helical compression springs for supply to the Railways; and (b) development of aero quality carbon fibers. 

The company also aims for its geographical expansion and to operate from multiple locations. At present, it intends to start two new manufacturing units based at Rohtak (in Haryana) and Nellore (in Andhra Pradesh). It has signed a memorandum of understanding for setting up a joint venture with National Aluminum Company (NALCO) for production of high-end value-added products at aluminum alloy plant at Nellore. The manufacturing unit at Rohtak will be set up by the company for manufacturing of armor products. The company is also in the process of upgrading and modernizing its existing manufacturing equipments and facilities.

 The company is also seeking to enter into the new markets of oil and gas, mining, power, railways and chemical and fertilizers. It is also making efforts to enter into export market which it believes will enable it to achieve higher targets.

 The company intends to leverage its design, engineering and manufacturing capabilities to increase its focus on advanced technology products. It has entered into collaborations with Indian and international research institutions and organizations to gain access to the required know-how for developing certain key advanced technology products. It also intend to focus on new process based technologies such as closed–die forgings, investment castings, isothermal forging and using special alloys to further improve its existing products and add new products to its product portfolio. Such new products include carbon fiber, tungsten powders and armors which find use in strategic sectors.

 The company aims for forward and backward integration by manufacturing components and value-added products. In terms of forward integration, it manufactures special electrodes from the wires manufactured by them, as well as special fasteners from the materials manufactured in- house in the company’s manufacturing unit. With respect to backward integration, it has undertaken projects such as production of powder, metal alloys powders and recovery of metals from scrap.

 Defence and space accounted for 71.56% and 22.43%, respectively of its total revenue from operations in FY2017. As on January 31, 2018, it had an order book position of Rs 517 crore comprising of Rs 283 crore for defence, Rs 168 crore for space and Rs 66 crore for other sectors.

 The company achieved a capacity utilization of 6,107 tonnes in FY 2017 compared to 5,244 tonnes in FY 2016 and 4,739 tonnes in FY 2016

 The company has completed its phase 1 modernization at a capital outlay of Rs 400 crore for revamping /upgrading /enhancing production capacities. Phase 2 of modernization pegged at around Rs 1000 crore is underway.

The Offer and the Objects

 The offer comprises offer for sale by the President of India acting through the Ministry of Defence of India of 4,87,08,400 equity shares, which at lower price band of Rs 87 per share, works out to Rs 423.76 crore and at higher price band of Rs 90, the issue size works out to Rs 438.38 crore. The IPO consists of a reservation of up to 18,73,400 equity shares for subscription by eligible employees and the net public offer of 4,68,35,000 equity shares

 The minimum bid lot is 150 equity shares and in multiples of 150 equity shares.

 The objects of the offer are to carry out the disinvestment of 4,87,08,400 equity shares by the selling shareholder constituting 26% of company’s pre-offer paid up equity share capital and to achieve the benefits of listing the equity shares on the stock exchanges. The company will not receive any proceeds from the offer and all proceeds shall go to the selling shareholder.

 Government of India will hold 74% of total paid up equity share capital of the company post listing.

 Strengths

 As per Frost & Sullivan analysis, the demand for the high-value specialty steel, super alloy and titanium alloy is observed to be around 83,500 tonnes in CY 2016. The market for the select products has grown at a steady growth of around 5.8% between CY 2011 and CY2016. The demand for high value speciality steel is expected to witness a positive growth rate of around 4.2% between CY 2016 and CY 2021, mainly due to growth in auto and auto component manufacturing segments in India. The demand for super alloys is expected to grow at around 9.1% to reach 3,000 tonnes between CY 2016 and CY 2021, owing to the planned investments in the aerospace and defence sectors. The demand for titanium alloys is expected to grow at around 5.1% to reach 1,300 tonnes in CY 2021, owing to the investments in aerospace, defence and nuclear power plants

 Capability to manufacture a wide range of advanced products.

 There is metallurgical expertise and experience of over 40 years in operation and maintenance of various high technology equipment and processes.

By CY 2027 the Union government plans to achieve approximately 70% indigenization in defence purchase. Specialty material – high-value specialty steel, super alloys and titanium alloy products – is a vital segment to the defence industry, and is found on almost every application platform.

The market growth for high-value specialty steel, super alloy and titanium alloy products is largely dependent on new project investment and expansion plans of the defence, air force, navy, space segments. The Army’s plans involve indigenization of key components and spares of tanks and other weapons systems. The Indian Air Force has outlined its 10-year modernization plan (2016-2026) that identifies services and technologies which it requires, and aims to share this information with the private sector. About 15% of the projected acquisitions of Rs 3 lakh crore are likely to be sourced from local manufacturers. Also, half of the Indian fighters are due to retire between CY 2015 and CY 2024.

The company s in the process of setting up an armoring solutions plant at Rohtak, Haryana, capable of meeting requirement of defence and other para-military wings in respect of armored products likes BR jackets, morchas and armored vehicles. It is also moving ahead to set up a High strength and low weight aluminum alloy manufacturing facility at Nellore in Andhra Pradesh. For production of carbon fiber, plans are in progress to set up production level plant with involvement of key stakeholders. The company is also entering into special business area such as manufacture of tungsten powder therein facilitating our country to join the select club of only a few countries capable of manufacturing such products.

Weaknesses

 There is limited availability and supply of raw materials such as nickel and cobalt which are used by the company for manufacturing products. Shortage in supply of the raw materials may result in an increase in the price of the products. In past, the prices of nickel and cobalt have fluctuated drastically with the change in their global supply and demand, which impacted its cost of procurement of these raw materials.

The business environment in many of principal operating segments requires extensive research, design and development expenses to keep pace with rapid technological and market changes in the strategic sectors. A major portion of the business is to cater to the upgrading of technology. In any case, research, design and development programmes may not guarantee and produce successful results, and new products may not achieve market acceptance, create additional revenue or become profitable. In addition, the company operates in a business environment subject to rapid technological changes. Thus, products may be rendered less competitive (or, in the worst case, obsolete) if it fails to develop new technologies and products in pace with market demand and industry. 

There is overdependence on orders from the government sector, which always faces budget constraints due to many competing demand for funds.

Valuation

 For FY 2017, net sales were up 8% to Rs 773.28 crore. The OPM stood at 24% up by 290 bps thus improving the OP growth to 23% to Rs 185.31 crore. Other income stood at Rs 23.28 crore down by 19%. Thus, PBIDT was up by 16% to Rs 208.69 crore. Interest cost was up by 12% to Rs 4.68 crore while depreciation was higher by 26% to Rs 17.66 crore. Thus, PBT stood at Rs 186.35 crore up by 15% over a year ago. After paying total tax of Rs 59.86 crore, up 37%, PAT for FY 2017 stood rose 7% to Rs 126.50 crore.

In the half-year ended September 2017, net sales stood at Rs 203.69 crore with OPM of 22.2% resulting in an OP of Rs 45.24 crore. Other income stood at Rs 12.6 crore. Interest cost was at Rs 1.52 crore and depreciation stood at Rs 9.37 crore thus resulting in PBT of Rs 46.95 crore. After providing for total tax of Rs 19.65 crore, PAT stood at Rs 27.30 crore. Figures cannot be annualized due to seasonality in business.

 In FY 2018, the company has signed a MoU with the Union government to achieve an annual gross sales target of Rs 800 crore. This is lower than gross sales of Rs 810 crore in FY 2017. The lower target is due to the proposed revamping of critical and other old equipments and furnaces. The company’s target is to increase revenues to Rs 1000 crore in the short term and Rs 2000 crore by FY 2022.

 At higher price band of Rs 90, the P/E on FY 2017 EPS (on current diluted equity of Rs 187.34 crore) of Rs 6.8 works out to 13.2. There are no listed players engaged in the manufacturing of high value speciality steel, superalloys and titanium alloys in India.

Mishra Dhatu Nigam: Issue highlights

Offer for sale ( in Rs crore)  
- On lower price band 423.76
- On upper price band 438.38
Total Issue size for fresh issue ( in no of shares in crore) 4.87
Price Band (Rs) 87-90*
Bid size ( in no of shares) 150
Post issue share capital (Rs crore) 187.34
Post-issue Promoter & Group shareholding (%) 74.00%
Issue open date 21-03-2018
Issue closed date 23-03-2018
Listing BSE, NSE
Rating 48/100
*Discount of Rs 3 to retail investors and employees  

 

Mishra Dhatu Nigam Limited: Standalone Financials

Particulars 1303 (12) 1403 (12) 1503 (12) 1603 (12) 1703 (12) 1709 (6)
Net sales 553.90 554.62 647.38 716.50 773.28 203.69
OPM (%) 19.8 19.5 19.8 21.1 24.0 22.2
Operating Profits 109.92 108.11 128.13 151.10 185.31 45.24
Other Income 19.86 20.94 22.69 29.00 23.38 12.60
PBIDT 129.78 129.04 150.82 180.10 208.69 57.83
Interest 6.84 4.19 7.04 4.19 4.68 1.52
PBDT 122.94 124.85 143.78 175.91 204.02 56.32
Depreciation 5.16 6.04 9.79 14.07 17.66 9.37
PBT Before EO 117.78 118.810 133.99 161.85 186.35 46.95
EO 0.00 -2.63 0.00 0.00 0.00 0.00
PBT after EO 117.78 121.44 133.99 161.85 186.35 46.95
Provision for Tax 35.26 37.91 34.51 43.81 59.86 19.65
Profit after Tax 82.52 83.52 99.48 118.03 126.50 27.30
PPA 0.00 1.06 0.32 -1.34 0.18 0.00
PAT after PPA 82.52 82.46 99.16 119.37 126.31 27.30
EPS (Rs)* 4.4 4.4 5.3 6.3 6.8 #
*EPS is on post issue equity capital of Rs 187.34 crore of face value of Rs 10 each
Figures in Rs crore #EPS can not be annualised due to seasonality in business
Source: Capitaline Corporate Database