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Stabilisation of 1500te Forge press and other recent capital investments coupled with a healthy order booking, particularly from space sector, has enabled Midhani to achieve topline of Rs 2.1bn, up 35% YoY. EBITDA margins, due to ramp up in supply to space sector has also moved up to 27% (from 11% YoY). EBITDA has increased nearly 234% YoY and PBT has increased ~ 155% YoY. Orderbook has seen accretion of Rs 2.1bn during the quarter and stays strong at Rs 17.8bn. Rampup in supply of maraging steel to the space sector will drive execution and margins for Midhani. We maintain BUY with a target of Rs 242/share.
* What is driving topline and margin performance. Given the strategic nature of the products used for ISRO, reluctance for imports and lack of global tender-based procurement for these products, Midhani enjoys a remarkable competitive advantage. Maraging steel contributed nearly 23% of the volume and ~ 55% value of Midhani's FY19 topline (currently mostly consumed by VSSC). The pricing is not tender based but on bilateral negotiations post nomination-based ordering -- for products that has been jointly developed with ISRO over the last 40 years. In 9MFY20, there has been a further increase in ISRO's share in the execution pie for Midhani which has driven the remarkable topline and margin performance.
* Supplies to ISRO helps working capital and return ratios as well. While defense business share in execution has reduced, shift in product mix towards space is allowing higher realization and better working capital for Midhani. What we like is that RoIC is ahead of its global peers (Aperam & Carpenter). Continued increase in ISRO budget is also helping Midhani's execution -- FY21 further witnessed nearly 33% YoY increase in allocation (budgeted to budgeted). Midhani's execution is directly linked to ISRO's capital budget increase and it has been increasing wallet share of the same.
* Maintain BUY. Low current utilisation and higher value blend through supplies to ISRO can help increase topline meaningfully over the next two to three years. We expect RoCE to cross 20% as topline accretion takes shape. Capex remains limited -- only material capex witnessed in Midhani is being undertaken by defence customers (BDL/HAL) wherein the output of the plate mill will be used by customers. With ISRO's share increasing in Midhani's execution, improvement in working capital and moderate capex will also help generate FCF.
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