Mishra Dhatu Nigam - Lot many levers left to capture - ICICI Securities

Space continues to be major driver for Mishra Dhatu Nigam (Midhani) orderbook and execution. Space contributed ~80% of FY20 end orderbook, ~ 55% of FY20 execution and 64% of order inflows. This is the major reason for increase in Gross Margins that we have witnessed in FY20. Higher value addition, import substitution by ISRO, limited/no domestic competition have helped realisation and EBITDA profile to such peaks (Table 1). However, the process doesn't seem to have achieved full economies of scale with only 39% asset turn for FY20 and conversion costs increasingly significantly. Ex of grants for customer financed projects, Midhani continues to be largely debt free - net debt of Rs 227mn in FY20. Customer advances (mainly ISRO) has increased ~ 60% YoY to Rs 5.3bn in FY20 - the benefit of having a well-funded government department like ISRO as a customer. Maintain BUY.

- Volumes declined 8% YoY; realisation and EBITDA/te increase signifies higher value addition and the benefits of being the sole supplier of critical material to ISRO. Realisation/te increased 9%, while EBITDA/te increased 17% YoY in FY20. The nature of the business reflects in realisation/EBITDA profile i.e technology absorption from a customer (ISRO) determined for import substitution, limited/no domestic competition, favourable raw material trajectory ( Nickel expectantly to be in surplus given substantial investment in Nickel Pig iron in Indonesia).

- Key capex projects - focus still on increasing capacity/debottlenecking. Despite production declining 8% YoY (indicative of higher and higher value addition) and asset turn declining from 51% to 39% YoY, focus still remains on debottlenecking/adding capacity. Also, significantly higher conversion costs also signify that perhaps higher capex is required to reduce operating costs/sustain value addition. The key capex projects completed, undertaken or under commissioning include

i) A Vacuum Induction Melting Furnace is being added in Melt area, for capacity enhancement and for accommodating future demands of special steels and super alloys. Order for equipment has been placed and commissioning is expected in Q4FY21.

ii) High capacity casting facility for Titanium alloys is being set up. Procurement action has been initiated and the equipment delivery has commenced. Commissioning is expected in Q3FY21.

iii) Wide plate mill equipment erection is under progress and testing and commissioning will commence thereafter. This is a customer funded project.

iv) Development of Armour unit at Rohtak (Haryana). Major construction activities of Phase-I has been completed. Procurement action has been taken for major line equipments. Procurement of electrical and utilities are under progress.

- Nalco Midhani JV. Named as Utkarsha Aluminum Dhatu Nigam - the JV company has been allotted around 110 acre of land in Andhra Pradesh and it yet to commence the commercial operation. The manufacturing plant involves an estimated capital expenditure of Rs45bn. MIDHANI and NALCO have subscribed 20mn equity shares of Rs. 10/- each of JV Company (by way of initial share capital and by way of rights issue; investment of Rs 200mn).

- Other observations. GST/customs duty receivable has gone up significantly to Rs1769mn from Rs 864mn YoY. We also witness a reduction in R&D expenses from Rs 146mn to Rs 33mn YoY. Midhani remains one of the very few defence/space companies in India who is not paying any liquidated damages but earning in liquidated damages from suppliers.

Shares of Mishra Dhatu Nigam Ltd was last trading in BSE at Rs.201.05 as compared to the previous close of Rs. 204.3. The total number of shares traded during the day was 26533 in over 737 trades.

The stock hit an intraday high of Rs. 205.05 and intraday low of 198. The net turnover during the day was Rs. 5380410.

Source : Equity Bulls

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