Maithan Alloys: inexpensive, unleveraged, expanding

Steel has been stealing the show these days. Iron ore prices have already hit a seven-year high and Strong signs of revival in China bode well for steel.

Tata Steel, JSW Steel, SAIL, NMDC, and the like, have witnessed almost vertical rallies over the last couple of months. Some experts believe, steel prices have run ahead of their fundamentals but others believe there’s more steam left.

Steel prices: In the midst of a strong rebound…

Data as on December 14, 2020
(Source: Bloomberg)

Instead of getting into predicting which camp may prove right, we decided to scout for companies that aren’t much affected by the price volatility in steel but may benefit if the sector does well.

We came across one such company, Kolkata-based Maithan Alloys. It is one of India’s largest and lowest cost manufacturers and exporters of niche value-added manganese alloys. It exports to more than 35 countries of the world.

As you must be aware, manganese is a critical component in steel making.

The World Steel Association defines steel as an iron alloy that contains less than 2% carbon and 1% manganese and has silicon, phosphorus, sulphur and oxygen in small amounts.

The company has product offerings across three bulk ferro alloys—ferro manganese, silico manganese and ferro silicon alloys. These alloys help increase the performance and life of steel by offering it strength, purity and rigidity.

What’s the steel demand outlook?

According to the World Steel Association, the global demand for finished steel is likely to rebound to 1,795.1 million tonnes in 2021 as compared to 1,725.1million tonnes in 2020—a rise of 4.1% on a Y-o-Y basis. With this, the global demand is likely to surpass even 2019 levels. Although China is expected to report a flat volume growth, the rest of the world excluding China may witness a 9.4% volume growth.

In other words, experts may differ with one another on the price trend but there seems to be a consensus that steel demand may grow in 2021.

Growing steel demand across the globe can help Maithan Alloys further strengthen its position in the export markets.

And how’s the domestic market placed?

National Steel Policy 2017 predicted that per capita steel consumption in India would grow to 158 Kgs by 2030. Against the global average of 208 Kgs India’s steel consumption at 61 Kgs was abysmally low in 2015. As per the data published by the ministry of steel, per capita steel consumption in India rose to 74 Kgs in FY19. Between 2017 and 2030, domestic crude steel production is expected to go up 3 times to 300 million tonnes.

The policy envisages meeting the entire demand for high grade automotive steel, special steel and alloy for strategic application through domestic production by 2030. Construction and infrastructure, engineering, and automotive are the three biggest steel consuming sectors.

Global demand outlook and policy directions in the domestic market leave Maithan Alloys in a sweet spot.

Will it be able to capitalize on opportunities?

Maithan Alloys has a manufacturing facility each at Visakhapatnam (Andhra Pradesh), Kalyaneshwari (West Bengal) and Byrnihat (Meghalaya), with a total installed capacity of 2,35,000 tonnes p.a. Such geographical diversification of production facilities offers logistical advantages to the company.

Maithan Alloys has positioned itself as a margin-driven company rather than a volume-driven player.  

Maithan Alloys enjoys ~6% market share in the domestic market and a little over a percent of market share in the international markets. Maithan Alloys derives close to 53% of its revenues from the domestic markets and the rest come from the exports. Its single-client exposure is less than 10% of its exports.

Asia, Oceania, and Middle East regions account for 75% of the global demand. Interestingly, Maithan has a strong foothold in this region with no exposure to China.

Stable financials and cautious expansion

The company meets 85%-90% of its manganese ore demand through imports but its exports being valued at more than imports, the company enjoys a natural hedge against currency fluctuations. Raw material cost accounts for ~45%-50% of the company’s revenue, while power cost, another significant cost overhead, makes up ~18%-20% of the top line. The fixed cost element constitutes close to 5% of the revenue.

Maithan Alloys: Financial performance

(Company records)

Interestingly, maintaining the average EBITDA margin of 15% across the market cycles remains one of the stated objectives of the company. The company is virtually debt-free. Crisil has assigned the credit rating of “AA/stable”, which reflects the strong positioning of the company, better operating efficiencies and a healthy financial profile.

The company extends its conservative approach even to expansion. It prefers to expand only when the utilization levels are high and there’s a reasonable demand visibility.

After reaching a capacity utilization level of ~95% each year between FY17 and FY19, the company decided to enhance its capacity, keeping in mind future growth plans. In Q4FY19, the management of Maithan Alloys guided that it would invest Rs 600 crore through internal accruals to double its production capacity through organic as well as inorganic routes, over the next 4 years from then.  

In phase one, the company has already undertaken a Greenfield manufacturing project in West Bengal and has formed a wholly owned subsidiary, Maithan Ferrous Private Limited. The new manufacturing facility will enjoy the lower tax rates applicable for the new manufacturing units.

How does the road ahead look?

The management of Maithan Alloys opines that the envisaged objectives of the National Steel Policy 2017 are realistic and rather conservative. In other words, the company is upbeat about the prospects of the domestic steel industry. Hence, its capex might prove to be well-time and augur well for the company’s future growth.

Since the company doesn’t believe in making inventory gains and focuses only on converting resources into quality products at competitive rates, its earnings may have better predictability. A high exposure to export markets offers a cushion against any unforeseen rise in manganese ore prices.

As on December 16, 2020, Maithan’s market cap was Rs 1,642 crore and on FY20 earnings, the stock quoted at a multiple of 7.4 times. A potential pick up in the steel industry, planned expansion, strong domestic tie-ups and the company’s focus on margin protection leave scope for re-rating, going forward.

Concluding thoughts…

Companies engaged in commodity oriented businesses rarely become popular with fund managers as their performance is often inconsistent. Yes, indeed! Commodity stocks are cyclical in nature and thus are extremely volatile. That said, if bought after doing meticulous evaluation of a commodity cycle, they can turn out to be good bets.

Please Note (read as a disclaimer): None of the stocks discussed in the article are recommendations to buy, hold or sell. This could just be the starting point for deeper analysis that you might want to carry out on your own. You may also take professional help as you feel appropriate.

If you are investing in any family run company, besides governance, you may also want to take stock of significant developments in the lives of the promoters. Sometimes, their personal life can overshadow market sentiments. Also pay attention to issues such as pledging of shares by the promoter group and the working capital.

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Disclaimer

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

Consult your financial advisor before taking any investment decision.

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflicts of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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