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Muted quarter; SS pipe order book shows green shoots

We maintain BUY rating and raise TP to Rs2,550 with no revisions in our FY22/FY23 estimates as we expect revenue and margins to improve in subsequent quarters. Increase in TP is due to shift in valuation on Sept’23 basis (Mar’23 previously).The Stainless Steel (SS) pipe order book crossed Rs4.5bn levels after a year which indicates revival in spending by refineries in a non-favourable pricing environment (high raw material cost).

With crude price at comfortable levels driving spending by refineries and strong order inflow from CGD applications, we continue to remain positive on Ratnamani Metal’s (RMT) long term prospects. 1QFY22 was a muted quarter for Ratnamani Metals (RMT) due to weak dispatches and adverse product mix, which is expected to improve in 2QFY22.

* Pandemic impacts sales; Realisations surge as expected:

RMT reported muted results for 1QFY22 in terms of both SS pipe and Carbon Steel (CS) pipe sales, as despatches were hit by pandemic led countrywide lockdown. Total SS pipe sales dipped ~10% yoy to 3.6kt while CS pipe sales dropped ~17% yoy to 48.7kt. Realisations surged (~8% qoq for SS pipe and ~7% qoq for CS pipes) on expected lines due to pass on of high raw material cost. However, total revenues declined by 9% yoy to Rs5.3bn (24% qoq decline) mainly due to muted sales. Now, as the countrywide lockdown is partially lifted in majority states, we expect 2QFY22E revenues to be higher on back of higher despatches and further improvement in realisations.

* Adverse order mix reduces margins:

Along with weak sales, margins also remained muted in 1QFY22 due to adverse product mix of 27%/70% for SS pipe/ CS pipe respectively. RMT reported EBITDA margins of 16% (+300bps yoy; -671bps qoq) which implied an EBITDA of Rs848mn (11% higher yoy due to lower base). We expect the margins to improve starting next quarter on the back of higher despatches of SS pipes. Effectively PAT edged up 1% yoy (due to lower base) to Rs504mn.

* SS pipe order book revival indicates green shoots:

The SS pipe order book finally grew to Rs4.56bn (Rs3.3bn in May’21) due to new orders received from the power and Oil & Gas sectors. While this surely indicates green shoots in spending by the refineries as the order book has crossed the Rs4.5bn levels after almost a year, higher cost of SS pipes (due to pass on of RM cost) has led to delay in full-fledged recovery in demand. Total order book remained stable at Rs15.4bn (Rs4.6/Rs10.8 – SS/CS mix). RMT is also L1 for LSAW orders to be issued by PSU refinery and is booked till Jan’22 for its ERW orders. With crude price at comfortable levels driving spending by refineries and strong order inflow from CGD applications, we continue to remain positive on RMT’s long term prospects and 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 Sept’23 PE and 16x Sept’23 EV/EBITDA to arrive at TP of Rs2,550 and maintain BUY rating. Increase in TP is due to shift in valuation on Sept’23 basis (Mar’23 previously). Despite a muted 1QFY22, we maintain our rating along with no change in FY22E/ FY23E estimates as we expect revenue and margins to improve in subsequent quarters due to higher realisations and improving order book. Key risks: disruption in sales due to pandemic, further delay in spending by refineries.

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