April 23, 2020 S__tock___ TALES Stock Tales are concise, holistic stock reports across wider spectrum of sectors. Updates will not be periodical but based on significant events or change in price. Mishra Dhatu Nigam (MISDHA) CMP: | 209 Target: | 256 (22%) Target Period: 12 -18 months BUY April 23, 2020 On strong footing.... Mishra Dhatu Nigam (Midhani), a Mini Ratna (Category – I) company, is a leading manufacturer of special steel, super alloys & titanium alloys catering v to niche end-user segment like space, defence, energy, etc. Within the overall steel market, Midhani’s area of focus is on speciality steel (nickel Particulars based alloys and speciality alloys). These alloys are used across end user Particulars Amount applications that require reduced weight, high strength & toughness and high corrosion & oxidation resistance. Despite high cost when compared to Market Capitalisation (in | crore) 3,970.8 Debt in | crore (FY19) 106.7 conventional steel & alloy grades, the select products are preferred for high- Stock Tales end applications (space, defence, etc) where efficiency and precision is of Cash & Cash Eq. in | crore (FY19) 198.0 prime importance. Midhani is in the business of manufacturing these high- EV (in | crore) 3,879.5 value added products wherein majority of orders executed are import 52 Week H / L (|) |278/|109 substitute. Over the years, Midhani has acquired competence to develop and manufacture customised alloys tailor-made to suit the specific Equity Capital (| crore) 187.3 Face Value (|) 10.0 requirements of customers for their critical applications. Healthy traction in Isro budget augurs well for Midhani…. Price Performance During FY11-20, the government’s budget allocation to Isro has increased at a healthy pace of 13% to | 13139 crore (Revised Budget of FY20). Of this, a 270 12000 240 majority of increase is driven by a rise in Isro’s capital expenditure, which 10000 210 has augured well for speciality steel supplier like Midhani. Over the last few 180 8000 years, space segment has emerged as a key user industry that has aided the 150 6000 company’s overall financial performance. Midhani’s space sector order book 120 has increased from | 108 crore in FY12 to | 1280 crore in FY19. 90 4000 60 2000 EBITDA margins on uptrend on higher space sector orders…. 30 0 0 Typically, for Midhani, space sector orders are higher margin orders (at Jul-19 Jul-18 Oct-18 Oct-19 Apr-18 Apr-19 Apr-20 Jan-20 EBITDA level space sector margin are 2x defence). Higher proportion of Jan-19 space sector orders being executed has aided Midhani’s margin expansion. The space sector contribution in aggregate topline has steadily increased Midhani NSE500 Index (RHS) from 5% in FY16 to 55% in H1FY20. Generally, as the space sector Key Highlights Research Equity Retail commands higher operating margins, the higher contribution by the same has aided in margin expansion (from 25.8% in FY19 to 29.2% in 9MFY20). – Healthy outstanding order book of | Valuation & Outlook 1776 crore as on January 2020, On account of its high-end speciality product basket, Midhani distinguishes driven by strong traction witnessed itself from a normal steel producer. Hence, unlike a commodity company, in space sector vertical Midhani has not witnessed cyclicality in earnings wherein (since FY15) the Recommend BUY on stock with company has been able to consistently report 21%+ EBITDA margins and target price of | 256 17%+ RoCE. With a healthy proportion of space sector orders in the overall Securities ICICI order book, we expect overall EBITDA margins to remain firm in the ~30% Research Analyst range for the next couple of years. Going forward, in FY19-22E, we expect Dewang Sanghavi topline, EBITDA and PAT to grow at a CAGR of 12%, 18% and 19%, [email protected] respectively. We value the stock at 20x FY22E EPS and arrive at a target price of | 256. We assign a BUY rating to the stock. Key risk to our call is any notable slowdown in space contract order inflow/execution. Key Financial Summary (| crore) FY18 FY19 FY20E FY21E FY22E FY19-22E CAGR ( in %) Total Operating incme 661.7 710.8 711.4 808.7 1,004.0 12 EBITDA 190.9 183.7 209.9 240.6 301.2 18 EBITDA Margin (%) 28.8 25.8 29.5 29.8 30.0 Net Profit 131.3 130.6 156.9 178.3 217.9 19 Diluted EPS (|) 7.0 7.0 8.4 9.5 11.6 P/E 30.3 30.4 25.3 22.3 18.2 RoE (%) 16.6 15.6 17.3 17.8 19.2 RoCE (%) 19.4 17.1 18.0 19.0 21.1 s Source: Company, ICICI Direct Research Stock Tales | Mishra Dhatu Nigam ICICI Direct Research Company Background Mishra Dhatu Nigam (Midhani) was established in 1973, with the aim of achieving self-reliance in research, development and supply of critical alloys and products of national security and strategic importance. Midhani is engaged in manufacturing a wide range of special metals and alloys. The company’s products have superior mechanical properties and better workability, which are essential for special applications in aerospace, power generation, nuclear, defence and other general engineering. In 2009, Midhani was accorded Mini Ratna (Category – I) status by the Ministry of Defence (MoD). The company manufactures special steel like martensitic steel, ultra-high strength steel, austenitic steel and precipitation hardening steel. The super alloys division manufactures three kinds of super alloys – nickel based, iron based and cobalt based. Midhani is also the sole manufacturer of titanium alloys in India. The company has competence in developing and manufacturing customised alloys tailor-made to suit the specific requirements of customers for their critical applications. Midhani has several certifications including ISO 9001:2008 – quality management system and AS9001 C for manufacturing and supply of metals & alloy products. The company’s research & development (R&D) laboratory is also accredited to the National Accreditation Board for Testing and Calibration Laboratories. Exhibit 1: Trend in revenue (| crore) & EBITDA margin (%) 1250 30.0 28.8 25.8 25.0 1000 24.0 20.8 21.1 20.0 750 15.0 (%) 500 (in | crore) | (in 10.0 250 5.0 647 717 773 662 711 0 0.0 FY15 FY16 FY17 FY18 FY19 Source: Company, ICICI Direct Research Exhibit 2: Trend in sales volume (in tonnes) Exhibit 3: Trend in blended realisations (in | lakh/tonne) 7000 6150 25.0 6000 19.3 5205 20.0 4732 4477 5000 14.6 14.9 3685 13.9 13.2 4000 15.0 3000 10.0 (in tonnes) (in 2000 (in | lakhs per tonne) per lakhs | (in 5.0 1000 0 0.0 FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19 Source: Company, ICICI Direct Research, Source: Company, ICICI Direct Research ICICI Securities | Retail Research 2 Stock Tales | Mishra Dhatu Nigam ICICI Direct Research Investment Rationale Healthy traction in Isro budget augurs well for Midhani…. During FY11-20, the government’s budget allocation to Isro increased at a healthy pace of 13% to | 13139 crore (Revised Budget of FY20). Of this, a majority of the increase is driven by a rise in Isro’s capital expenditure (as depicted in Exhibit 4), auguring well for speciality steel supplier like Midhani. Over the last few years, the space segment has emerged as a key user industry, which has aided the company’s overall financial performance. Midhani’s space sector order book has increased from | 108 crore in FY12 to | 1280 crore in FY19. Exhibit 4: Budget allocation towards Isro on uptrend… Main components of maraging steel are a) pure iron (with nitrogen and oxygen concentration of less than 14000 20 ppm) mainly imported, b) nickel 18%, c) cobalt 12% and d) Molybdenum ~5%. 12000 10000 8000 6000 (| crore) (| 4000 2000 0 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 REFY20 Source: Company, ICICI Direct Research Generally, as the space sector commands higher operating margins, the higher contribution by the same has aided in margin expansion (from 25.8% in FY19 to 29.2% in 9MFY20). Majority of Midhani’s supplies to Isro within the space sector are maraging steel (a nickel heavy alloy steel). Typically, the orders for maraging steel are received on a nomination basis while pricing is done by bilateral negotiation on a cost-plus basis. Generally, Midhani commands healthy margin (above the blended average) in maraging steel as there is a lengthy time period for joint development of product with Isro. Hence, a higher share of maraging steel in aggregate orders is likely to result in healthier operating margins. Going forward, India Space Research Organisation (Isro) has slated 36 missions for the next two years. These will include milestone missions like Chandrayaan-3 (moon lander mission) and an uncrewed mission for Gaganyaan (human flight mission). During 2020-21, Isro has scheduled the launch of several satellites including 10 earth observation satellites, three communication satellites, two navigation satellites and three space science satellites. Among rocket launches, Isro has scheduled launches of 10 PSLVs, three GSLV MK II, and one GLSV MK III. In addition, two small satellite launch vehicles are also planned for 2020-21. For 2019 and 2020, Isro has successfully completed 11 out of the total targeted missions—four Earth observation satellites, Chandrayaan-2, four PSLVs and one communications and one space science satellite. One of the most anticipated upcoming missions of the space agency, Gaganyaan, is scheduled for launch in 2022. However, before that, Isro is likely to send two uncrewed missions — one by the end of 2020 and another by mid-2021. The precursor missions are supposed to carry a humanoid robot that will study the environment and perform all tasks designated for humans to be conducted in orbit.