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In search of space glory – Initiating with BUY
Mishra Dhatu Nigam (Midhani) is an super alloy and titanium alloy manufacturer, catering to the very niche segment of maraging/super alloy steel segment in India. Increase in Indian space expenditure budget has been one of the key tailwinds for Midhani. Significant expenditure budget CAGR towards space (15.8% CAGR over the past six years), joint product development with Indian Space Research Organisation (ISRO) for strategically important materials, relatively small scale of operations, all tilt the risk reward in favour of Midhani. We initiate coverage on the stock with a BUY rating and a target price of Rs 242/share, at 22x FY22E P/E, implying 56% upside over the current price of Rs159/share. Sudden drop in space contract inflow/execution is the key risk to our call.
* Space has seen a 12% CAGR increase in budget over FY11-20. Majority of the increase is driven by rise in capital expenditure. The capability of Vikram Sarabhai Space Centre (VSSC) has allowed the expenditure to trickle down to domestic players like Midhani, who has also seen its space orderbook inflate to Rs3.1bn in FY19. The increase in space orderbook and execution has improved Midhani’s profitability metric and has helped working capital as well. The story of Midhani, atleast for the next 2-3 years, is that of achieving moderate scale fanned by the tailwind of space budget expenditure.
* The increase is not without risks. We have seen significant increase in launches by global players – data is clearly highlighting the increase in launches by Chinese State-owned enterprises (SoEs) and a potential capture of the Small Satellite Launch Vehicle (SSLV) launch space by them. There are concerns on obsolescence of rocket technology for ISRO, making the capturing of foreign launches more and more difficult. Yet, it’s the launches which are scheduled for ISRO (to meet Indian demand) over the next two years and the extent of joint product development of Midhani with ISRO which can allow the company to ramp up its wallet share in the space expenditure budget. Our assumptions are not extraordinary and valuations are supportive.
* Value vs volume – ISRO has been a game changer for Midhani. As space contributed ~55% of H1FY20 topline, margins expanded to 29.9%. Table 1 highlights the change in realisation and margin/te as deliveries to ISRO has ramped up. Despite FY17-19 seeing a decline in volumes, value triumphs as Midhani reshapes its deliveries towards maraging steel – a Ni heavy alloy steel.
* Tilt towards ISRO has not only enriched value, it can help better utilisation as well. Midhani’s facilities are under-utilised, given the batch production process and niche product segments it caters to. As ISRO fulfills its potential of probable launches, higher volumes to Midhani can help reverse some losses on account of current underutilization of the company’s facilities.
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