Incorporated in 1973, with an aim of achieving self-reliance in research and development, and supply of critical alloys and products of national security, Mishra Dhatu Nigam Ltd. (MIDHANI) is one of the leading manufacturers of special steels, super alloys and the 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.
Positives: (a) Modern and integrated metallurgical plant for manufacturing a wide spectrum of critical alloys in variety of forms for defence, space and thermal power (b) Strong long-term customer relationships (c) In-house R&D team aimed at latest development and improvement of product quality and processes innovation (d) Experienced Promoters supported by professionally qualified, experienced and entrepreneurial management team.
Investment concerns: (a) MIDHANI reported low top-line and bottom-line CAGR of 11% & 10% respectively over FY15-17 (b) Company has an order book of Rs. 517cr which works out to 0.64x compared to FY2017 revenue, reflecting low revenue visibility (c) During 1HFY18, the company has reported very low operating margin and profitability.
Outlook & Valuation: In terms of valuations, the pre-issue P/E works out to 30.9x 1HFY2018 annualized earnings (at the upper end of the issue price band), which is high considering MIDHANI's historical two year CAGR top-line & bottom-line growth. Further, MIDHANI has an undersized order book which lacks revenue visibility, coupled with lower return ratios. Considering the above factors, we recommend NEUTRAL rating on the issue.