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Maithan Alloys is India’s largest producer & exporter of Mn Alloys with over two decades of experience. Manganese alloys are critical for steel manufacturing translating into a large globally addressable market for Maithan. Co’s customers include marquee domestic/global steel majors, with most of them being repeat customers. Co produces ~1% of total global Mn alloy supply, which means there is little offtake risk. This, coupled with the fact that Maithan is amongst the lowest cost producers in the world, makes them amongst the last men standing in case of any global commodity downturn, esp steel. It is also noteworthy that China discourages export of Mn alloys (seen as energy intensive). We initiate coverage on Maithan Alloys with a BUY rating and a TP of Rs 900 (base case) based on conservative assumptions. Our upside (and downside) cases yield TPs of Rs 1,500 (and 375).
* Manganese alloys are critical input for steel manufacturing:
Steel production requires Mn alloys as a raw material input. Mn enhances the strength of steel and also acts as a de-oxidizing, alloying agent. Global Mn Alloy production is ~20 mn t with CIS, Africa, Oceania, Asia being major exporters.
* Last man standing:
Maithan’s cost of production is amongst the lowest in the world, learnt over years of optimizing production process. In the event of a global economic downturn, Maithan will be amongst the last men standing. Co is net cash surplus with Rs 6.7bn (~40% of current Mcap) in C&CE at end-FY19E, which adds to its ability to withstand downturns.
* Capital discipline:
Maithan’s management has diligently resisted temptation to deviate from its core competence, despite sitting on huge cash reserves. After careful consideration, Maithan is setting up a 120ktpa (~50% of existing capacity) green-field ferro alloys plant at an outlay of Rs 2.75bn, using a part of the incremental accruals over the next 2 years.
* Strong FCF generation:
A large addressable market, superior product quality, low cash costs, capital discipline enable Maithan to generate significant FCF (Rs 7.7bn over FY16-19, ~40% of current Mcap).
* Pessimistic valuation provides entry point:
We believe global commodity market pessimism is priced into Maithan stock price, despite good fundamentals. Maithan currently trades at 2.4x FY21E EV/EBITDA which in our view provides an attractive entry point for investors.
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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475
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