Hold Tata Metaliks Ltd For Target Rs.975 - ICICI Direct
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EBITDA margins impacted by higher raw material cost
About the stock: Tata Metaliks (TML) is a subsidiary of Tata Steel, which was established in 1990. TML has manufacturing facilities in Kharagpur, West Bengal, which produces pig iron and ductile iron (DI) pipes.
* By H2FY23, TML would double its DI pipe capacity to 4 lakh tonnes
* TML has healthy cash flows and a strong balance-sheet. It is one of the few players in the steel pipe sector having net cash position on its balance sheet
Q3FY22 Results: TML’s EBITDA and EBITDA margin declined both QoQ and YoY on higher raw material costs.
* TML reported revenue of | 690 crore, up 31% YoY and 7% QoQ
* TML’s EBITDA was at of | 68 crore, down 46% YoY and 32% QoQ. EBITDA margin were at 9.8% compared to 24% in Q3FY21 and 15.5% in Q2FY22
* During the quarter, EBITDA and EBITDA margin came in muted on the back of higher domestic coke/coking coal costs and also due to high cost inventories of iron ore, which attracted higher royalties
* Ensuing PAT was at | 36 crore (down 52% YoY and 35% QoQ)
What should investors do? TML’s share price has given a return of ~152% over the last five years (from ~| 344 in January 2017 to ~| 866 levels in January 2022).
* We downgrade to stock from BUY to HOLD
Target Price and Valuation: We value TML at | 975 i.e. 6.5x FY23E EV/EBITDA
Key triggers for future price performance:
* The first phase of DI pipe capacity expansion (~1 lakh tonne) is likely to be commissioned in Q4FY22. The second phase is likely to be commissioned in H2FY23 (~1 lakh tonne). Post commissioning of both phases, TML would double its DI capacity from 2 lakh tonnes currently to 4 lakh tonnes
* One of the key beneficiaries of Jal Jeevan mission
Alternate Stock Idea: In our steel pipes sector coverage we like Ratnamani Metals and Tubes (RMTL).
* Leadership position in stainless steel pipes and tubes segment, differentiates RMTL from its peer group
* BUY with a target price of | 2450
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