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May 8, 2015

Ratnamani Metals & Tubes Ltd-Edelweiss

. (RMTL) has reported muted Q4FY15 results, below our and consensus estimates. Net sales for the quarter de-grew 6.5% YoY. The drag on the topline was due to delay in order dispatches on certain orders and lower share of Stainless Steel (44.5% vs 60%YoY) segment in the revenue mix. EBITDA & PAT margin for Q4FY15 were below our expectations of 18.6% and 9.4% respectively. Management is targeting INR 2000 cr revenues in FY16E with annual capex for capacity expansion in the stainless steel (seamless) segment of INR 100 – 150 cr for the next 4 years through internal accruals. The order backlog of INR 830 cr is executable over the next 6 - 8 months. Going forward, RMTL expects incremental orders from the Greenfield refineries being put up in Malaysia and Kuwait.
 
Muted numbers due to lesser contribution of Stainless Steel segment in the revenues
The company’s net sales de-grew by 6.5% YoY to INR 376 cr, which was well below our estimate of INR 435 cr. The de-growth was primarily because of lesser share of Stainless steel segment (44.5%) versus 60% in Q4FY14.  The revenues were also subdued because of delay in dispatches of products to the clients. The delays were due to requests from clients to dispatch at a later date.  Volume growth in carbon steel pipes (22.2% YoY) was driven by the orders the company had picked up under the SAUNI scheme.
 
Margins below our estimates; Guidance of 18%-20% EBITDA margins for next two years
Q4FY15 EBITDA & PAT margin at 14.9% and 8.7% were below our estimates of 18.6% and 9.4% respectively. EBITDA margins reduced by 650 bps led by unfavorable sales mix, stainless tubes contribution to sales has reduced from 60% to 44.5% YoY. The falling commodity prices also impacted margins as realization levels for stainless steel reduced to INR 3,34,522 per ton from INR 3,84,085 per ton in Q4FY14. However, the management has guided that it will maintain EBITDA margins at 18-20% for next two years.
 
Order book at INR 835 cr; Additional capacity of 20000 MT in Seamless Stainless Steel segment
Ratnamani is sensing a huge demand will come in because of the planned implementation of Euro VI standards in India. PSU refineries are expected to do a capex of INR 80000 cr till FY2020 for the same - providing a market opportunity to Ratnamani of INR 8000 cr (Pipes and Tubes will make up 10% of the total capex). The current order backlog (as on May 1, 2015) of INR 830 cr, where carbon pipes contribute 54.46% and Exports contribute 10.6% provides visibility for the next 6-8 months.  Although RMTL is experiencing a bit of a slowdown in order inflow from Gulf countries, the company expects additional orders from Greenfield refineries being put up in Malaysia and Kuwait. Management is targeting INR 2000 cr revenues in FY16E with annual capex for capacity expansion in the Stainless Steel (Seamless) segment of INR 100 – 150 cr for the next 4 years.
 
Valuations
Based on the strong execution and expected improvement in capex environment, we retain our Buy rating on the stock.
Year to March (INR Cr)
Q4FY15
Q4FY14
%Change
Q3FY15
%Change
FY15
FY16E
FY17E
Net Revenue (INR. Crs.)
375
401
 (6.5)
500
 (24.9)
1,676
1,892
2,199
EBITDA (INR Crs.)
56
85
 (34.4)
95
 (40.9)
300
352
428
Adj. Net Profit (INR Crs.)
32
51
 (36.1)
53
 (38.2)
173
207
254
Adj. Diluted EPS (INR)
7.0
10.9
 (36.1)
11.3
 (38.2)
37.0
44.3
54.4
Diluted P/E (x)
17.0
14.2
11.6
EV/EBITDA (x)
 
 
 
 
 
9.5
8.1
6.6
RoCE (%)
 
 
 
 
 
26.2
27.0
28.3



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