IGI Logo

Strong uptick and targets

RHI Magnesita (RHIM), erstwhile Orient Refractories, reported strong Q2FY22 sales growth of 25% YoY (7% above estimate), outperforming the steel industry (18% YoY) led by healthy volume growth and underlying price increases. EBITDA expanded 33% YoY (7% ahead of estimate) led by operating leverage as EBITDA margin rose 95bps YoY though down 213bps QoQ, with inflationary cost pressures.

Market share gains should continue as steel production picks up. RHI’s capacity expansion, a robust portfolio of products across the value chain and strong exportsshould drive strong growth. Management has set a sales target of EUR200mn for FY22 and EUR450mn for FY25. Maintain ‘BUY’ with a revised TP of INR438, valuing it at 35x FY23E EPS.

Robust revenue growth with capacity expansion on track

Q2FY22 revenue grew ~25% YoY for consolidated entity with domestic steel production jumping 18% YoY. This was led by volume growth of 19% and 6% price hike. Capacity expanded at RHI Clasil (Vizag plant) by 10–15% to 72,000MT. Furthermore, the Cuttack plant’s capacity will expand to 18,000MT from 12,000MT. With its R&D fully functional, RHI is working on new specialist flow control product lines at Bhiwadi such as taphole clay with trials underway along with conversion of specific product lines to newer generation models, also aiming to reduce lead times. Consequently, management estimates EUR200mn in sales for FY22 and a 30% CAGR over FY22–25 (organic plus inorganic) with a target of EUR450mn by FY25.

Strong EBITDA growth led by price hikes and operating leverage

For Q2FY22, RHIM’s gross margin stood at 37%, up 166bps YoY but down 53bps QoQ. EBITDA margin expanded 95bps YoY, but down 213bps QoQ to 15.2%. Hence, EBITDA rose 33% YoY, but dipped 11% QoQ. This was owing to higher freight costs in the wake of container shortage and higher raw material costs. RHIM has hiked prices to mitigate the supply chain headwinds, but it anticipates margin pressure. It has also taken further price hikes October onwards to lessen the cost pressure.

Outlook and valuation: More gains anticipated; maintain ‘BUY’

With capacity expansion (underway) aimed at capturing strong domestic and exports opportunity, we estimate RHIM would log CAGRs of 19% in sales and 21% in PAT over FY21-23 with RoCE expansion of 310bps to 26.5%. Retain ‘BUY’, valuing RHIM at 35x FY23E EPS, 10% discount to upper band, yielding a TP of INR438 (INR424 earlier).

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.edelweiss.in/disclaimer
SEBI Registration No. INH000000172

Above views are of the author and not of the website kindly read disclaimer