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Midhani: Strategic Supplier to Space program of India
Midhani is only company in India to carry out vacuum based smelting and refining. These advanced melting facilities enables them to provide their customers with high quality products which meet their stringent quality requirements. Company is associated with ISRO for the last four decades. ISRO contributes to around 40% of the revenues and ~60% of its order book. The trust of company’s customers in Midhani’s capabilities is manifested through customer funded capital investments at the company. Strong orderbook gives revenue visibility; growing revenues coupled with margin expansion would ensure 26% cagr in PAT over the next two years. We recommend investors to buy these strategic suppler to India’s space program for superior returns.
Mishra Dhatu Nigam (Midhani), established in 1973, is a Hyderabad based leading manufacturer of special steel, super alloys and titanium alloys catering to niche end-user segment. Mishra Dhatu is a Mini Ratna (Category – I) company promoted by Govt. of India; Govt. holds 74% stake in the company. Midhani manufactures special steel like martensitic steel, ultra-high strength steel, austenitic steel and precipitation hardening steel. The product profile further includes three varieties of super alloys –nickel based, iron based and cobalt based. The company is also a sole manufacturer of varied titanium alloys in India. The company is planning to set up two additional manufacturing plants at Rohtak and Nellore. Midhani was accorded Mini Ratna (Category –I) status in 2009.
* Mini Ratna (category – I) company promoted by Govt.
* Sole manufacturer of varied Titanium alloys in India
* Highest ever value of production at Rs 815cr and highest ever R&D spending in FY19
* Received orders worth Rs 1844cr in FY19 and has outstanding order book of ~Rs 1850cr as on Nov-19
* ISRO is the key customer for the company and contributes to around 40% of the revenues and ~60% of its order book.
* Beneficiary of recent announcement of lower corporate taxes
* Robust Balance sheet with cash of Rs 198cr and Healthy return ratios
* Estimate 16% revenue and 26% EPS CAGR over FY19-21E
View and valuation:
We estimate 16.4% top-line growth over FY19-21E on the back of strong order execution. The order book position as on Nov-19 stood at ~Rs 1850cr, which is executable over the next 18-24 months. In H1 FY20, company witnessed order inflow of ~Rs 450cr and estimate Rs 350-450cr order inflow in H2 FY20. On the operating front, we expect margin to see 340bps expansion owing to operational efficiencies. Strong revenues along with sturdymargin expansion would ensure 26% cagr in PAT over the same period. Healthy order book, sturdy execution with robust operating and net margin, strong balance sheet with cash & equivalents of Rs 198cr support our positive view on the stock. The stock is available at attractive valuations of 14x FY21E earnings. We recommend BUY at CMP of Rs 151 and add on dips to Rs 139with sequential targets of Rs 172 and Rs 195 over the next 4 quarters. We have assigned ~18x FY21E earnings to derive TP of Rs 195.
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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475
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