Mishra Dhatu Nigam (Midhani) highlighted that despite the slowdown in space launches, and space revenue mix falling to 40% in FY21E, it does not expect any material change in margins. This is mainly due to the high-margin maraging steel comprising of 70-80% of revenue mix in FY21E (similar to FY20) and titanium alloys also increasing their revenue contribution. Management expects to cross FY20 revenues in FY21; all the melt shops are running at full utilisation to achieve the same. With the current utilisation stretched through the year, Rs10bn revenue target for FY22 appears realistic. Also, as focus on indigenisation grows, the management expects to substitute high-value super alloy imports of ~Rs7bn p.a. (current revenue contribution from the same at Rs500mn-600mn p.a.). Super alloys yield higher realisations compared even to maraging steels. Maintain BUY with a target price of Rs280/share.
- Orderbook and order inflow. Current orderbook is at Rs16.9bn against Rs17.3bn QoQ. Q2FY21 saw Rs1.6bn of order booking. Midhani has previously guided for FY21 order inflow at Rs7.5bn, 70% of which would be from defence. A large part of the inflow may accrue from Akash (allotted to BDL), the future expected order of Tejas (titanium alloys - another high-value order, which can help maintain margins similar to space orders), etc. Of the total orderbook of Rs16.9bn, 60% is from space, 30% from defence and 10% from other sectors.
- Space to constitute 40% of FY21E revenues; Midhani aims at commercial and defence aerospace as the next prospective area of supply. Space launches planned for CY20 have been deferred. Midhani expects some deferments of orders and volumes by one year. Presence in multiple sectors is expected to overcome this decline; defence ordering has picked pace. More importantly, the proportion of maraging steel in the mix is not decreasing with the shift, implying limited impact on margins.
- JV with NALCO. The JV has completed land acquisition and applied for environmental clearances. Company has been finalising the mode of funding - given longer gestation period, equity participation will be initially infused by JV parties or financial investors. Requirement of aluminium alloy can be met with this JV, which will take care of demand from aerospace, defence, transportation, and electrical vehicles in future. It will take one more year to place orders with equipment manufacturers, and another three years to commission.
- Capex guidance. Company has maintained its capex guidance of Rs2bn p.a. for FY21/FY22. Rohtak plant (~Rs600mn), spring plant (Rs270mn), wide plate mill and core capacity debottlenecking remain the key areas of capex.
- Bhabha Kavach: There has been considerable requirement of bullet-proof jackets from CRPF and their performance has been good. With many varieties available in the market, there is no consensus on bullet proof jackets among the buyers, which has dampened the expected 100,000 units p.a. demand. Also, with the cost on higher side, buyers are not able to push the product for procurement. Midhani has received an order for 400-500 units, which has been fulfilled. Company also stated it is not in a position to supply 100,000 jackets p.a. Midhani will start a new plant in Rohtak from FY22 at a total capex of Rs600mn, through which it will be able to manufacture 30k-40k bullet proof jackets p.a. with a probable pricing of Rs100,000-120,000/jacket.
Valuation methodology and key risks
We maintain BUY on Midhani with a target price of Rs280/share (22x FY22E P/E). Effectively, we have assumed a postponement of Rs2bn worth of revenues on account of Covid pandemic.
Sensitivity: If Midhani can reclaim ~Rs1bn of postponed revenues, FY22E EBITDA and PAT would increase by 10% and so would our target price.
Shares of Mishra Dhatu Nigam Ltd was last trading in BSE at Rs.191.6 as compared to the previous close of Rs. 193.3. The total number of shares traded during the day was 17537 in over 527 trades.
The stock hit an intraday high of Rs. 196.1 and intraday low of 191. The net turnover during the day was Rs. 3392547.