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Performance improves; Order book at healthy position

We maintain BUY rating and lower TP to Rs2,500 (previously Rs2550) as a result of downward revision in FY22/FY23 estimates mainly driven by impact of reduction in sales volume for both divisions partially offset by higher realisations. 1QFY22 performance reflected improved order execution but margins remained subdued due to adverse product mix. We expect margins to turn favourable starting 3QFY22 on the back of hikes in realisations and healthy order booking in SS pipe segment which will only improve due to full scale commissioning of the new hot extrusion plant and modification of SS pipe plant for high value applications.

* Sales improve; realisations tracing upward trajectory: In 2QFY22, RMT reported improvement in both sales and realisations as compared to last quarter on better order execution. As compared to 1QFY22, SS pipe sales grew 30% to 4,722tonnes and realisation was flat resulting into 28% growth in revenue at Rs1.8bn. Although CS pipe sales grew 9% qoq to 53,042tonnes, its performance was spearheaded by 16% qoq; 39% yoy hike in realisation as a pass on of higher raw material cost. Effectively, total revenue surged 23% yoy; 35% qoq to Rs7.1bn. We expect further hike in realisation for both SS pipe and CS pipe which will be key driver in 2HFY22 performance.

* Adverse product mix and high employee cost impacts margins: Although CS pipe segment executed orders at higher realization; margins remained muted in 2QFY22 at 15.6% due to adverse product mix of 26%/66% for SS pipe/ CS pipe respectively. Rise in employee benefit expenses (+26% yoy; +33% qoq) due to provision for director commission and increments further led to dent in EBITDA at Rs1.1bn (33% yoy; 32% qoq). We expect the margins to improve starting next quarter on the back of higher despatches of SS pipes booked at higher realization. Effectively, PAT grew by 26% yoy; 42% qoq to Rs715mn.

* Strong order bookings in last 2months; SS pipe order execution to pickup: RMT booked Rs3.9bn worth of orders in last 2months incl. Rs480mn order for SS pipe, implying recovery in demand for pipes from refineries. Total order book has moved to a healthy position of Rs17.4bn (Rs5.3/Rs12.1 – SS/CS mix). Further full scale commissioning of the hot extrusion plant (for orders upto 10’ NPS pipes) by end of 3QFY22 will lead to new avenues for SS pipe order inflow. Modification of the SS pipe plant for high value applications in nuclear and aerospace industry will further strengthen order inflow. We believe higher SS pipe order execution along with support from hike in realisations will drive performance for the next 1 year.

* Valuation and rating: We value RMT at an average of 26x Sept’23 PE and 16x Sept’23 EV/EBITDA to arrive at TP of Rs2,500 (Rs2,550 previously) and maintain BUY rating. Decrease in TP is due to downward revision of FY22/FY23 estimates. We have lowered both SS pipe and CS pipe sales estimates for FY22/FY23E, assumed higher realisation in 2HFY22 and also accounted the capital expenditure for modification of SS pipe plant. Key risks: disruption in sales due to pandemic, further delay in spending by refineries.

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