Mishra Dhatu Nigam - Margin surprise offsets weak execution - ICICI Securities

Mishra Dhatu Nigam (Midhani) reported much lower topline than expected at Rs1,901mn (I-Sec Rs 2,200mn). However, a sharp increase in gross margins (87% in Q3FY21 from 77% QoQ) along with other expenses reducing to 25% of topline (from 30% QoQ and 37% YoY) helped in a meaningful EBITDA beat. Q3FY21 reported EBITDA was Rs864mn (I-Sec Rs714mn) with EBITDA margins at 45.5%. EBITDA margins are at all time high (since recorded history) and highlights the pricing strength Midhani enjoys with some of its customers. The increase in margins also bears testimony to the proactive raw material procurement that management has engaged into over past many years, thereby allowing such margins in a period witnessing steepest commodity price inflation in recent history. Book to bill stands at 2.4x (on TTM revenues). Maintain BUY.

- Order book of Rs 16bn at Q3FY21 end; order inflow of ~Rs1bn in Q3FY21; 9MFY21 order inflows at Rs 3,783mn. Execution of space orders may slip in FY21 given ~ 42% reduction in Space capital expenditure (FY21BE to FY21RE) seen in FY21 budget. FY22BE for ministry of space has been revived to FY20 levels, while budgeted expenditure for Defence stays elevated (up ~ 19% over budgeted FY21). Increased defence expenditure ( FY22BE over FY21BE is prospective for Midhani)

- Significant margin uptick in Q3FY21 is on account of i) booked Cobalt prices being lower, thereby reducing raw material prices ii) Increased usage of scrap through internal generation - lot of process improvement and RnD has gone into the same. Management expects that higher raw material prices can be a potential headwind, yet as Q3FY21 shows proactive process improvements planned can help Midhani look for maintaining margins despite raw material headwinds.

- Defence orders improve visibility. LCA order to Hindustan Aeronautics (HAL), Akash order to BDL and start of delivery of MBT Arjun tanks (from ordinance factory) to Army are all prospective orders for Midhani. Management did mention that of Rs 450bn of HAL LCA order, ~ 10-15% can be cost of cobalt and nickel based alloys. Also, management witnesses maximum export opportunity for platforms like Akash which can also increase opportunity for Midhani. Exports for Midhani are also ramping up - from ~ 0% couple of years back to ~ 2.5% in FY21E.

- Maintain BUY. Low current utilisation and higher value blend through supplies to ISRO and defence can help increase Midhani's topline meaningfully over the next 2-3 years. We expect RoCE to cross 20% as topline accretion takes shape. Capex remains limited with ISRO's share increasing in Midhani's execution; improvement in working capital and moderate capex will also help generate FCF.

Shares of Mishra Dhatu Nigam Ltd was last trading in BSE at Rs.184.55 as compared to the previous close of Rs. 187.6. The total number of shares traded during the day was 104498 in over 2143 trades.

The stock hit an intraday high of Rs. 190 and intraday low of 183.65. The net turnover during the day was Rs. 19440070.

Source : Equity Bulls

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