BMW Industries Ltd (Steel Service center)

vjignesh · October 20, 2023, 8:15am

Introduction: BMW Industries Ltd (BMWIL) is one of the leading Steel Service Centres (SSC) for large primary steel companies like Tata Steel Ltd (TSL), JSW Steel , SAIL etc.
Major names in the SSC space are Mahindra Accelco, Tata Downstream Products Ltd, JSW MI Steel Service Centre etc.
BMWIL is mostly dedicated to TSL’s product services in the steel downstream sector in various processes for which it derives service revenue and the named players are not competitors of it. As the primary steel players’ focus gradually shifts from selling semis to higher value-added products, the need for the SSCs in the Steel ecosystem is set to rise like in Western countries, because a primary steel player can’t convert all hot metals into value-added products directly, which would ask for humongous inventory space and logistic issues to address different territories. However, a primary steel player can convert a fraction of hot metal, and indirectly transform the majority of semis (hot-metal production in the form of HR Coil/Billets) to value-added products and markets across territories and customers having varied purchasing powers through SSC like BMWIL.

BMWIL-TSL unique SSC arrangement: BMWIL undertakes various steel engineering services through its 7 dedicated manufacturing setups in Jamshedpur (5nos) and Howrah (2nos). The service contracts are renewed periodically (3-5years) considering the factor of production cost trends aligning with inflation. No raw material is part of its Cost of Goods Sold, and all logistics costs are borne by TSL, thereby yielding a decent margin irrespective of volatility in the metal sector. Furthermore, BMWIL has 100+ fleets of heavy-duty trailers which are deployed in the logistics operations of BMWIL-TSL agreements which cost is also borne by TSL. In contrast, in Western countries, SSCs like Ryerson Holding (RYI: NYSE), Olympic Steel (ZEUS: Nasdaq), Reliance Steel (RS: NYSE) etc. buy raw materials like HRC, Billets, etc and process them to sell independently to end industrial customers. BMWIL has three decades of SSC relationship with TSL, which itself is a great strength. The service rates for different operations are negotiated in such a fashion to yield decent margins and cash flows at the hands of BMWIL.

Manufacturing Services delivered: BMWIL undertakes several services to TSL like Slitting & Cut to Length of HRC, Hot Roll Coil (HRC) Pickling & Oiling, Annealing and Galvanizing of Cold Roll Coils, Galvanised Plain & Corrugated (GP/GC) Sheet manufacturing (sole manufacture of Tata Shaktee GC sheet for TSL), Structural Pipes (Tata Structura), Water and Oil & Gas ERW Pipes, Galvanised Water Pipes, Tata Tiscon Rebars. All the facilities are TSL audited for complying to quality/safety standards. BMWIL does not carry any marketing rights or risks, but only derives service income from TSL which have been stable over the years. Prior to FY21, BMWIL had ventured into its own manufacturing into steel profile manufacturing etc, but post FY21 it has strategized to focus on servicing TSL to ride on growth opportunities TSL is going to offer till FY2030. Currently, BMWIL is deriving major revenue from TSL.

BMWIL bracing for the next level of growth The Company has reduced its debts from a peak level of Rs569cr (FY16) to Rs238cr in FY23. While most parts of the loans of the past capex are repaid, BMWIL is now bracing for the next round of growth, mostly from the Pipe and Tubes segment. BMWIL enjoys A- debt rating from the top rating agency Fitch (India Ratings). Renowned Lodha & Co are the statutory auditors. Detailed report - India Ratings and Research: Most Respected Credit Rating and Research Agency India.

BMWIL generates strong cash flow, EBIDTA to CFO 93% historically: BMW has derived strong cash flows which has helped it grow organically and help deleverage its balance sheet. The current leg of expansion in Pipes and Tubes of Rs170cr over FY24-25 can be easily funded through internal accruals by estimating EBIDTA of ~Rs.130-150cr for current year. The new capacity is expected to be margin accretive and the bottom line is expected to record strong growth.

BMWIL’s activity level set to grow ~3-4x from current level on the back of TSL’s massive expansion plans: In recent years TSL has gone on a massive expansion spree to double steel capacity in India by 2030. One of the expansions of 5 MTPA at Kalinganagar (flat 3mnTPA at present) will come on stream by Mar 24, which will be further raised to ~12mnTPA by FY30. Furthermore, TSL also is undertaking plans to do phase expansion Neelachal Ispat (long 1mnTPA) which it acquired in 2022 to 4.5mnTPA by FY26 and thereupon to 10mnTPA by FY30. It’s expected that BMWIL’s service volume is expected to double in 2-3 years and even 2x from there by 2030.

Experienced Promoter: The founding promoter Mr. Ram Gopal Bansal has nearly 50yrs of experience in steel trading, manufacturing etc. He has successfully led Joint Venture with SAIL and collaborated with Tata Steel for the development of the Steel Service Center Industry. Under his vision and leadership strategy, the Company is now one of the leading manufacturers/Service providers in the Iron & Steel sector. He is now ably supported by two well-educated sons, Mr. Harsh Bansal and Mr. Vivek Bansal acting as Joint MDs looking after Strategy/Finance & Operations respectively.

Creeping acquisition by promoters Promoters have been on a creeping acquisition spree in recent years: Promoter group has been buying for the last 3 years (~4% stake) to raise stake at 74% (threshold 75%). No part of the shareholding is pledged.

Financials:
Stable EBITDA margins in last 3 years after reducing focus on own brand and working as SSC of TSL. One off loss in FY21 due to under insurance of assets/receivables affected due to Amphan cyclone. Like many old Indian corporates, the company had been insuring assets based on historic value rather than on market value and suffered in FY21.

Debt repayment of more than 400 cr over the years

Risks:

In case of low GDP growth and low growth of steel sector, TSL plans might be impacted which will impact BMWIL directly.
Growth in existing rate of services or future rates tied up for services need to be beating inflation.

Disc: Invested. This is not a stock recommendation to buy or sell. Please do your due diligence. I am not SEBI registered analyst.

dm88 · October 20, 2023, 8:59am

Really good write up on BMW!

I have few questions and it would be great if you can help me with it.

Sales have been on a downward trajectory post 2018. It peaked out at 948 Crs and then it’s been going down. Is there a cyclicity to this business like th entire Steel industry ? If not then what is the reason for sales going down ?
Dependency on Tata steel for majority of their revenues is a big risk. There is almost 100% client concentration here. Does Tata steel have any other vendor for servicing ? Usually bigger companies tend to have multiple vendors to diversify the risk of depending on just one.
Are 23-24% EBITDA margins sustainable on a long term basis. If not then what are the sustainable margins.
Company still has some debt on the books. Why is it giving out dividends? Most of the dividends go to the promoters since they have 74% holding. Do they not have any plans of going debt free ?
What is the estimated topline for the next 3-5 years ?
Are they planning to reduce their dependency on Tata steel and add other clients ?

Thanks in advance !

vjignesh · October 22, 2023, 5:01am

Please find herewith revert to your questions as per my understanding:

The management has reduced their own proprietary business, which was though adding to topline but not that margin accretive. Post FY21, their arrangement with TSL have improved and they seemed to have concentrated more on TSL services. Recently, the increment in Rebar manufacturing mandate and Steel & Tubes could further see boosting margins, where profit pace outpacing revenue, which is service revenue
TSL and BMWIL are inter-dependent. Though there could be some other minor SSC players, but BMWIL is one of the largest in the country having a basket of services from Flat as well as long side. In future (FY26-27) another CRM complex may come near TSL’s Kalinganagar unit, if the Odisha Govt’s land allotment to BMWIL was to be believed.
Past article which I could find: https://indianexpress.com/article/india/india-news-india/odisha-approves-investment-of-over-rs-1000-crore-bmw-industries-limited-bmwil-2867047/
EBIDTA Margin likely to improve on higher value addition from tube and pipe segment, which is being ramped up.
Majority of debts is working capital. I think that even if the company is undergoing its Rs170cr expansion plan, minimal long-term debt would come, as CFO is sufficient to take care of. I believe the company has made a dividend payout policy after considering its limited capex requirements.
I think with the new capacity coming up , the company can achieve Revenue/ EBITDA/PAT of around 850/225/125 cr FY26 onwards considering optimum capacity uilisation.
I think their relation with TSL would rise as a growth partner. Hence, it should be viewed on a positive spirit rather dependency. Looking at the developments at TSL end, the TSL-BMWIL bonding could cement further. The 3 decade relationship is expected to continue to grow in future. SAIL’s Bokaro unit could offer opportunities, if the management would consider the JV worth pursing for in its scheme of things.
Disc: Invested. The projected numbers are as my understanding. Please do your due diligence. I am not SEBI registered analyst.

Saiyam_Jain · November 10, 2023, 7:01am

1)Sir just one ques about the business model, do they source steel ( RM) from Tata Steel and convert them into final product and they charge for it.You mean to say contract manufacturers like pharma and electronic device industry?
2)If yes, how do they have such exorbitant margins is this normal for this industry? Like
contract manufacturing other industry ie electronics they have margins of 2%-3%
3) when the price of production rises, do they have the power to re- negotiate or they suffer margin contractions?
Thanking you Sir

Darshan_Gala · November 10, 2023, 2:43pm

BMW INDUSTRIES Q2 :(First ever concall)

Bmw industries limited specializes in adding value to semi finished steel products a strategic approach that ensures they’re ability to maintain stable profit margins and offers a safe guard against the volatility against steel market.
This approach allows them to sustain a reliable cash flow by mitigating the impacts of demand and pricing fluctuations
They have an enduring association of over 30 years with tata steel limited.
THEIR USP derives from providing comprehensive suite of services to their customers covering every aspect of the value chain from manufacturing to logistic support a key driver of their success is their advantageous geographical proximity to their clients

In addition company has strategically assembled a fleet of long haul trailers further Enhancing their capability to deliver end to end solutions to their customers

Qoq margins are down due to product mix change however Gross margins remains same
For future growth:
1.planned an expansion in pipes and tubes over the next two years due to the high demand potential in the sector in the phase one which is already under one they will be Operationalized by march 2024 increasing capacity from the existing 204000 metric tonns to close to 53400 metric tons
While in the 2nd phase it should get Operationali by end of fy25 this capacity will be little over One million metric tonnes per annum
The agreement of Gpgc Sheets through the CRM complex is due for renewal by April 2024
This renewal is anticipated to yield about 2000 crs in rev over a span of the following 5 years with annual revenue projection atleast 350cr per year
An agreement of the production of TNT rebars scheduled to continue untill November 2025 is anticipated to generate revenues close to 250crs over the contract period

Their strategy of establishing their own brand involves several key steps including adopting an asset light model developing a robust distribution network expanding their presence in under serviced areas building in-house logistics capabilities and actively working on strengthening our brand value

For reducing carbon emissions company is setting up roof top expansions
The first project is already awarded and should be commercialized in the next three qtrs (cost 21cr)
They’re dedicated to improve their conversion biz by tapping into potential of their existing facility where available and setting up new plant if needed
Looking for brownfield expansions in response to the changing market dynamics.
They want to capitalize their brand value for the upcoming opportunities in B2C sector .

50-50%
50% from internal accruals
50%debt for the expansions
Have already spent 50cr out of the 70cr for the first phse 21crs being sourced from debt and remaining from internal accruals

2nd phase will require approximately 100crs
With rs 50cr funded through debt and balance from internal accruals

The entire capacity is exclusively for tata steel
They’ve already been doing this from past 10years
They are looking at renewing it again by April 2024
Other than gpcp their into conversion of TMT bars as well as pipes and tubes galvanizing for tata steel and
Generally in these types of ebita per tonne?
Their numbers are pretty sustainable numbers as volumes increase and as you know they get the advantage of scale these are very very sustainable numbers.
What competitive advantages do wee have against the fully integrated players?
They’re nothing but a convertor player they take the steel and convert it into billets, and they’re converting into finished steel or pipes or tubes so generally in this
They can only to them based how many billets they give to me as they don’t make billets

The whole capex is exclusive with tata steel
Their USP is their plant is in 5km radius away from the Customer
Lot looking at burning cash.
They’re serving a completely different set of market than tata steel they’re actually In rural undeserved areas that’s a part of their strategy they are supplying a lot of the smaller order lots etc which is completely different from tata tiscon that is s high end branded product. Our product Bansal super is s much more market based standard market product
They try to cover very very sensitive factors that affect their cost
Despite the expansion their net debt will keep going down bcz they’re getting that debt on a fine rate
ON IRR basis their margins will be 17-18%
They’ll be OPERATING LEVERAGE
There is no non compete between them and tata steel
How to plan to grow their own brand?
They’re working with rural part under served areas. It’s a n asset light model they’re getting the production outsourced and not using their facilites to do this and so they basically depending on the monhtly demand they outsource then they brand it and distribute
That helps them to keep asset allocation om this particular vertical very low

Saiyam_Jain · November 10, 2023, 7:24pm

Sir do you know the Bansal TMT how much revenue it is contributing right now and what are their margins?
what is CRM?
What kind of revenues are coming from TMT, Pipes and tubes and Sheets? And their current capicity utilisation?
Thanking you

Arka · November 10, 2023, 7:50pm

Link: https://www.bseindia.com/xml-data/corpfiling/AttachLive/3c06448f-4db6-489f-9012-cddc72c5f353.pdf

Saiyam_Jain · November 10, 2023, 8:00pm

Sir standalone represent which part of their business is this inclusive of their Bansal TMT
Thanking you

vjignesh · November 11, 2023, 6:49am

Reply to your questions

They add value to semi finished steel, their arrangement has been with Tata steel as of now. They charge for for their services as per their various agreements with TSL.
Margins are as per agreements with steel players. I think unlike contract manufacturing in electronics/pharma where asset turn is high, this sector has lower asset turn and therefore high margins. In the end ROE and ROCE matters.
Their contracts are negotiated timely but as per discussion in yesterday’s conference call it looks like gross profits can be sustainable.

Saiyam_Jain · November 11, 2023, 7:16am

Sir what is their CRM segment?
Sir howcokw their margins are high and return ratios low? A
Do TSL has any other SSC?
Thanking you Sir

Sanchit_Narang · November 12, 2023, 4:38am

hi @vjignesh
there is one specific question
the renewal of 5 year 2000 crore contract that is 350+ cr per year in this want to know what is the amount they are currently doing for the same as some revenue they must be getting every year as plant waz built in 2014 and 1 renewal was done in 2019 as per concall
or
is it other way that 350+ cr per year is over and above what they are currently supplying

Prince_AI · November 22, 2023, 5:53am

Would appreciate you view on these ratios…

T_D · November 26, 2023, 4:19pm

you are right .this business like CDMO is steel company where asset turn is low but marigin is high.

T_D · November 26, 2023, 4:23pm

big volume is coming it mean smart money is entering

surajanand29 · April 1, 2024, 5:59am

Here’s the link to Transcript/audio of Q3 concall.

Transcript pdf:

1f72acda-c0cb-43c6-b80a-cbbe7e546e5f.pdf (932.2 KB)

Prince_AI · May 16, 2024, 1:30pm

Anyone has summary of recent con all?

The contract renewal which was due in April has been delayed due to negotiations and existing one has
has been extended till September. Anyone has more information on this.?

surajanand29 · May 25, 2024, 12:37am

Earnings Call Q4 FY24 happened of 16 May 2024

Transcript PDF:
transcript.pdf (1.1 MB)

PPT:
b97e85f1-7374-42fe-a63d-116576f1e3d9.pdf (5.3 MB)

sunit_prasad · November 29, 2024, 7:05am

BMW notes and concerns highlighted as per transcript.
BMW BseIndia
Positives:

Capacity increase: Installed capacity has been increased to 534,000 metric tons per annum as of Q2 FY '25.
Solar projects: Work has begun on rooftop solar projects at Jamshedpur units.
Expansion project: A Rs. 170 crore project is divided into two phases:
* Phase 1 is complete
* Phase 2 (Rs. 100 crores) is planned, funded equally by debt and internal accruals
Contract extensions:
* GP/GC sheets conversion agreement extended to November 2024
* Negotiations for long-term contracts are in final stages
Changes in operations:
* Long-product rolling mill contract has been short-closed and is being decommissioned
* Plans to establish new facilities for infrastructure, solar, and defense sectors with efficient CapEx
Strategic focus:
* Strengthening conversion business using current and potentially new facilities
* Aiming to establish a unique market presence
* Targeting opportunities in the B2B2C segment
* Positioning as a leading comprehensive solutions provider in the Indian market .

Concerns of investor:

Resignation of CFO is personal as indicated by Mr Harsh from the management.
For their previously stated growth guidance of 18%. The response indicates that while the company is maintaining its original growth guidance, they are closely monitoring their performance and are prepared to revise their projections if necessary based on the current quarter’s results.
Management cannot disclose new facility capex but disclosed that it is not back ended by the customer.
*The divergence numbers on asset and liabilities got highlighted. Cash flow is not aligned with numbers here. Management here could not answer and deferred the reply with positive statement to correct it if required.*
November contract extension for the conversion of GP/GC sheet as indicated above has full agreement but paper work is pending. It is a 5 year period contract.
HRC falling rate is not a concern because tata steel provides HRC and hence no impact to BMW. They are agnostic to steel price as well.
The pipes and tubes is running at 35% utilization but the management conveyed that they are are targeting 60-70% by FY’25-FY’26.