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Higher RM, product mix impact margins

Mishra Dhatu Nigam’s (Midhani) management highlighted 9MFY22 Value of production (VoP) growth of 27% YoY. Margins have witnessed pressures from increased RM costs; management expects 2-3% margin moderation. Plate mill and the armour facility at Rohtak is commissioned and expected to contribute Rs3bn to order inflow/execution in FY23E, albeit at lower margins as significant part of the orders is now being won through competitive bidding. Margin tailwinds are i) significantly lower other expenses and higher capacity unlocking as in-house rolling commences, ii) rampup in super specialty alloys as 8te VIM is getting commissioned and iii) better productivity and efficiency. Management has guided for 15% revenue growth in FY22E and 15-20% revenue growth in FY23E. We maintain BUY with a revised target price of Rs251/share.

Guidance. Q4FY22 is expected to be the highest revenue quarter in FY22E. Management expects revenue growth of 15% YoY in FY22E. FY23E revenue growth expected at ~15-20% YoY. Space as a proportion of revenue will come down and defence will pick up. Order inflow for Q4FY22 (from current order book position of Rs14.4bn) is Rs3bn. Management expects Rs9.5-9.6bn of order inflow in FY22E. Management expects FY23E order inflow to be higher than FY22E. Super alloys production will increase YoY in FY23E as Midhani is adding an 8te VIM which will aid order inflow and execution. Titanium production will start from Q2/Q3 FY23E. Also incremental Rs3bn of execution /order inflow is expected from wide plate mill and armour plate mill in FY23E.

Margin guidance muted. Management expects margin to moderate by 2-3%. Depending on the product mix and the type of orders (competitive bidding), margins are expected to moderate. Better efficiency and better productivity would help to partly offset the same. Midhani is also seeing very low margins in export segments. Commissioning of wider plate mill will significantly reduce outsourcing expenses (currently Midhani pays Rs0.5mn/te to SAIL for wide plate rolling). Turnaround time will also increase leading to unlocking capacity. Management is also planning to let out the spare capacity to other companies and get conversion margins.

Pressure from RM and increase in power and fuel costs. RM price increases seen in Nickel, Cobalt, Molybdenum, Chromium. Highest value of imports for Midhani is in Cobalt, followed by Nickel, Chromium, Molybdenum. Q3FY22 has seen (certain strategic orders from VSSC) increased usage of virgin material than scrap which led to increase in RM cost. Most of the RM is imported as domestic sources are not available. The company is trying for indigenisation of Cobalt. Nickel sourcing is also possible from Vedanta. Current sourcing of Titanium sponge is being done from Kazaksthan (not Ukraine). Some imports are scheduled from Ukraine (Rs150mn) in 8 months.

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