We upgrade our rating to BUY and raise TP to Rs2,360 due to upward revision in FY22/FY23 estimates and multiple. Higher multiple is attributed to expectation of rise in Stainless steel (SS) pipe order book as refineries restart their capex program on the back of favourable crude price and demand recovery after lifting countrywide lockdown. RMT reported decade high EBITDA margins of 22.8% (+744bps yoy) in Q4FY21 on the back of favourable product mix from the Carbon Steel (CS) pipe segment. We expect margins to revert back to 17-18% levels but Rev/EBITDA/PAT is expected to grow at 24%/23%/27% CAGR over FY21-23E on the back of hike in CS and SS pipe realisations and robust demand drivers
Decade high EBITDA margins driven by value added CS pipe orders: While the SS/CS pipe ratio turned unfavourable this quarter to 30%/65%, RMT reported decade high EBITDA margins of 22.8%(+744bps yoy) in Q4FY21 on the back of very favourable product mix from the CS pipe segment consisting of value added coated ERW and LSAW pipes. CS pipe realisation saw 8% yoy hikes at Rs72,187/tonne on the back of higher raw material cost. We expect these price hikes to sustain and also reflect in SS pipe realisations going forward. This aided in ~10% yoy price hike in total revenue at Rs6.96bn in Q4FY21. Effectively, RMT reported strong rise in PAT at Rs1bn (+63% yoy) in Q4FY21. However, FY21 revenues dropped 11% yoy to Rs22.9bn and PAT dropped 10% yoy to Rs2.7bn due to muted business in 1QFY21 on the outbreak of the pandemic.
CS pipe order book strengthens; new capacities ready for the show: The order book of CS pipes improved to Rs11.7bn (Rs10bn in Feb’21) on receiving line pipe and project piping orders in 1QFY22. RMT is booked for its ERW pipe dispatches from CGD application until December’21. The total order book now stands at Rs14.9bn (Rs3.3bn – SS pipes/Rs11.7bn – CS pipes) as of 1st May’21. The new SS pipe hot extrusion plant has some pending approvals (customer specific) but is expected to scale up to 15-20% utilisation in FY22E. The new ERW and LSAW capacity has already been commissioned and is utilised in 1QFY22
SS pipe order book recovery to drive the next leg of rally: We believe Q4FY21 margin levels are not sustainable and will revert to 17-18% levels in FY22E due to uncertainty over product mix in the new order bookings. SS pipe order book has added small orders but the refineries are reluctant to add new orders due to high raw material cost and Covid related disruption in business. With crude price rising to comfortable levels and once the countrywide lockdown is lifted, the SS pipe order book will see faster recovery which will drive the next leg of rally in the share price. With higher realisation for CS & SS pipes, we expect 24%/23%/27% CAGR growth in Rev/EBITDA/PAT over FY21-23E with upside risk to margins in case of robust SS pipe order inflow.
Valuation and rating: We value RMT at an average of 26x FY23 PE and 16x FY23 EV/EBITDA to arrive at TP of Rs2,360 and upgrade rating to BUY. Higher multiple and rating upgrade is attributed to expectation of rise in Stainless steel (SS) pipe order book as refineries restart their capex program on the back of favourable crude price and demand recovery after lifting countrywide lockdown. This along with continuous ramp up in CS pipe order book will drive the next leg of re-rating for the stock. We also raise our FY22/FY23 estimates due to higher CS and SS pipe realisations (due to higher raw material cost) and favourable product mix continuing in FY22E.
To Read Complete Report & Disclaimer Click Here
Please refer disclaimer at https://www.mnclgroup.com/disclaimer
SEBI Registration Number : INZ000043833
Views express by all participants are for information & academic purpose only. Kindly read disclaimer before referring below views. Click Here For Disclaimer