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Magni-efficient

We initiate coverage on RHI Magnesita India (RHIM), a leading MNC refractory manufacturer with a TP of Rs400 (~19% upside) and BUY. Merger with RHI entities is expected to be highly value accretive due to synergies from a diverse product portfolio and wide customer reach across mini mills, PSUs and private steel plants. Focus on full line contracts, import substitution at Cuttack plant and making Indian entities the manufacturing and R&D hub for Asia and African markets should accelerate its revenue growth. RHIM will continue trading at premium valuation to its peers due to comprehensive product portfolio, strong growth prospects, superior financials and MNC parentage.

* Merger with RHI entities to be highly value accretive: The recently concluded merger with RHI entities is expected to result in significant synergies which will drive the next leg of growth for RHIM. Diverse product portfolios of the entities including basic bricks and specialised refractories will help complete the full basket of products required for full line contracts. RHIM will also benefit from diverse customer profile i.e. mini mills, PSU and large private steel plants of the 3 entities. Benefit of low input cost, recycling of raw materials and a common supply chain for all plants will support margins. Setup of new R&D hub in Bhiwadi and making India the new manufacturing hub for Asia and Africa markets will lead to new product development (reducing imports) and export to new geographies.

* Focus on full line contracts to drive strong growth: RHIM’s revenue growth will be mainly driven by its strategy to expand full line contracts under Total refractory management (TRM) services. This will be possible due to its comprehensive product portfolio and capacity expansions across all products. Completion of expansion at Vizag facility and phased expansion at Cuttack strengthen the bricks portfolio for RHIM. Expansion at Cuttack facility is a clear case of import substitution as 75% of magnesia bricks used in India are imported from China. Addition of value added products at Bhiwadi (via the new Rs4bn capex) which was previously imported, will reduce cost and strengthen the product portfolio. The recently announced plan of Rs4bn capex to double capacities in 3years further implies robust refractory demand due to boom in steel production.

* Best in industry financials to command premium valuations: RHIM is likely to grow at ~17% CAGR over FY21-24E on the back of robust steel demand, comprehensive product portfolio and customer additions. Although margins for the merged entity will be lower than Orient Refractories due to amalgamation with a trading entity and another with lower margins, RHIM will stand tall compared to peers. IFGL’s best in industry return ratios are also expected to continue. Net cash balance sheet status will ensure expansion and acquisitions through internal accruals. Therefore, we expect RHIM to continue trading at premium valuations to its peers but may not warrant further re-rating.

* Valuation & Risks: We value RHIM at peak multiples i.e. average of 18x Sept’23E EV/EBITDA and 29x Sept’23E PER to arrive at a TP of Rs400/share (~19% upside) and BUY rating. At CMP of Rs340, the stock trades at 16.6x FY23E EV/EBITDA and 25.7x FY23E PER. Key risks: Raw material cost inflation risk, failure to execute TRM strategy.

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