MIDHANI : Niche high valued added domestic alloy company

Stock Opportunities Untested - but worth a good look
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Thank you @yourraj for the detailed opening post. I, too, have been reading about MIDHANI and came across these important points from the latest Annual Report & May’19 Concall-
FY19 Annual Report Notes:

  • R&D expenditure of 30cr in FY19- Substantive investments have been made in R&D, according to the management, to enhance the productivity and to be at par with the global technological progress.

  • Exports of 8.05cr in FY19. Target of 40cr in FY20

  • Orders booked during the year- 1844cr. The composition of which is- Space- 1280cr, Defence- 184cr, Energy- 314cr, & Others- 65cr.

  • Outstanding order book at the end of FY19- 1660cr.

  • The important point to note is, and as mentioned in the first post too, that MIDHANI collaborates with its customers and its customers take part in the product development process. The result of which is that 90% of the orders are on nomination basis; only about 176cr of the total 1844cr orders booked during the year were through open competition. Since MIDHANI operates in a very niche segment and has little domestic competition, going ahead, this number becomes important to keep a track of.

  • Cost minimization efforts- We have successfully indigenized various grades of steels and also indigenously developed Automatic Billet Grinder, Mobile Grinder and LPG fired Furnaces. These initiatives have helped prevent outflow of foreign exchange. By using alternate input materials (i.e. scrap, plant reverts) MIDHANI could substitute ₹ 27.62 Cr. of imported raw material

  • Awarded two patents for the first time-

    • one for manufacturing “Fine grained Cobalt based alloy” and another for an invention entitled “Newly designed Air Hardening Alloy Steel”.

  • The company’s focus on Technology & R&D is highlighted by two key points in the AR:

    • MIDHANI signed MoU with M/s TUBACEX, a multinational group with headquarters in Alava, Spain on 17th January, 2019. The MoU would allow joint development of advanced materials
    • a dedicated team has been constituted to develop roadmap for Artificial Intelligence (AI) for alloy development and process optimization in your company.

  • Market for existing product basket:

    • HIGH VALUE SPECIALITY STEEL - Addressable market for MIDHANI is ~0.4 to 0.5 Lakh tons, coming from Defence, Power and Niche Engineering sectors.
    • TITANIUM ALLOY PRODUCTS- Titanium demand is dominated by Defence in India. The Titanium market size in India for FY18 is 3098 TPA and is expected to increase to 5231 TPA in the FY 25. MIDHANI is the only Titanium Alloy manufacturer in India.
    • Super Alloy- MIDHANI is one of the few players in India, rest all is imported. MIDHANI only has 1% of the existing market share.

  • Risk-

    • RM is volatile. Technology is constantly changing

    • Currently, majority of MIDHANI’s business (4/5th of volumes) comes from High performance steel. Going forward, this market segment is expected to witness high competition from private companies with similar/substitute products.

    • Lack of additional primary melting facilities like Vacuum Induction Melting Furnace, Vacuum Arc Melting Furnace and compacting press may prove to be bottleneck in the long run.

    • High debtor days- High accumulation of Debtors is primarily on account of higher sales in the fourth quarter and the budgets getting exhausted at customers’ end, which are primarily Government Departments / agencies.

Q4FY19 Concall Notes
Disc- I couldn’t find the transcript and might have misheard certain things.

  • The management indicated that for the first time they executed such a large percent of the existing order book. The lead time of order delivery which was around 3 years before has come down to 6-14 months now. Some orders get executed within 6 months also.

  • The company started FY18 & FY19 with a very low order book of 532cr and 539cr, respectively. Yet, FY18 revenue was 662cr & FY19 revenue was 711cr. They are starting FY20 order book with 1660cr and are confident to touch 850cr in FY20.

  • MIDHANI is a Tier-3 supplier. They supply to components manufacturers of ISRO, DRDO, and other agencies.

  • RM situation- RM is booked on Fixed Price Contract (FPC). He mentioned that they have FPC for almost all RM required for existing order book

    • RM prices were high in the first 9-months of FY19. They started softening starting Jan’19.
    • Very little dependence on China & no dependence on Rare Earth materials
    • No dependency on one particular country
    • Whenever order is received, RM is booked immediately
    • Generally, forex does not have significant impact of RM pricing

  • Inventory rose sharply at the end of FY19 because orders worth100cr were not dispatched as clearances from customers were not received. Rest is RM stockpile.

  • Major Customer- ISRO

    • ISRO’s employees work with MIDHANI & know their entire processes & capabilities. Working for over 4 decades with ISRO now
    • Previous orders are set as benchmark for pricing
    • Negotiation does happen. ISRO mostly knows their cost structure.
    • ISRO has ambitious programs lined up. Each flight has 25-30cr of MIDHANI’s products. Products that MIDHANI suppluy to ISRO is only supplied by them.

  • Competition-

    • Competition is difficult to set in
    • Huge capex requirements and there is a 2 years lag between capex coming online & revenue starts coming in
    • These advantages to sustain in the medium term
    • Margin profile is on case-to-case basis.

  • Capex- 400cr+ capex planned for the next 2 years

    • This 400cr does not include capex in JV with NALCO.

      • 50:50 JV with NALCO called Utkarsha Aluminium Dhatu Nigam Ltd. 4000-4500cr project. Both will infuse 170cr equity. 70% to be funded by debt & the rest by debentures. This project could take up to 4-5 years. MoU signed in Aug’19.
      • seeks to cater to electric vehicle and defence manufacturers through value-added manufacturing

    • Wide Plate Mill- To get commissioned by Q1FY21. This is a customer funded capex. Investment made by customer of around 500cr.

      • There is no pricing or volume obligation. They are allowed to supply to other customers as well
      • They are trying to sub-contract this capacity to an outside vendor to run and maintain this plant.

    • Construction of Spring Manufacturing Plant in the existing facility- Q3FY20 plant is expected to commssion. 30-35cr annual sales.

    • Development of Armour unit at Rohtak- End of FY20

    • We only take projects that have an IRR of 20%+

    • Carbon Fiber Plant- No details on this

    • Tungsten Powder Plant with NMDC-

      • Taken a backseat currently
      • NMDC was putting equity stake and MIDHANI was a small partner
      • Now they are planning to set up a plant somewhere outside India and import Tungsten powder to India from that plant as Tungsten is not available in India

News Articles & Management Interview:

  • Revenues to be around 850-900cr. H1 300cr revenues booked. March is the best quarter

  • Margin profile and order profile to be same as last year

  • Liquidity issues- no significant improvement. The company is in regular talks with the govt. & govt. agencies but there is a liquidity crunch with the govt. currently.

    • Debtor days to remain around 180cr

  • Current order book of 1850cr, around 70% is ISRO

  • New order to the tune of 350-400cr are expected to come in H2FY20.

  • Current requirement of Cobalt is there in the inventory, Nickel needs to be sourced, Nickel is at an all-time high. Still the company is confident of maintaining the same margins as FY19.

  • Rohtak plant there is a slight delay. Should commercialise by end of H1FY21. 25-30cr revenues expected initially

Found some articles on how the company has been working in the area of bio­ medical technology for development and manufacture of Titanium bio-implants, using advanced technologies as employed for aerospace applications.

  • They had been commercially testing their products for over 10 years and have entered into a MoU with Hindustan Antibiotics Ltd for marketing these products. They weren’t aggressive in this area as they did not have the marketing capabilities and expertise.
  • Their products are being used by prominent hospitals, like Cancer Institute, Chennai, Apollo Hospital, Hyd, Kamineni Hospital, Hyd, Osmania General Hospital, Hyd, Gandhi Hospital, Hyd, Tata Memorial Centre, Mumbai, BIRRD Hospital, Tirupati, etc.
  • They have developed, manufactured and commercialized about 135 types of implants in more than 1060 variants.
  • Despite having such a large number of products in its line-up, the company’s sales in this segment did not cross even Rs 1 crore mark.
  • But with this agreement, we are hopeful of increasing bio-implant sales to Rs 5 crore in the first year of agreement. Our target is to take this number to Rs 100 crore in five years.

Conclusion- MIDHANI is present in a very niche segment and has a long history with its customers, the major one being ISRO. There is a huge customer concentration risk. It’s revenues are dependent on the projects undertaken by the Space, Defence & Aerospace organisations in India. The company’s order book is robust and is mainly on nomination basis. The company’s efforts to diversify this risk can be seen by the multiple projects coming up by FY22 but there is no clarity on the kind of revenues these capex will bring in. Therefore, fixed asset turns could go down going ahead. The most interesting point to be noted is that a large capex of 500cr is being funded by DRDO and Ordnance Factory Board. MIDHANI is trying to grow its export revenues, too. Key risks to monitor will be debtor days going ahead, RM prices of cobalt and nickle, and new orders coming in from organisations other than ISRO.

Disc: Tracking, not invested.

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