Orient Refractories (NSE:ORIENTABRA,
Mcap 470crs) â High risk bet
ORL is amongst one of the top
refractory manufactures in India.
Investment theme: Speculation cum special
situation
This investment is more based on market
rumours that RHI AG, an Austria listed company is planning to acquire Orient
Refractories. Please read this http://www.katalystwealth.com/special-situation-opportunity-for-may12
and this http://investingvalues.blogspot.in/2012/12/orient-refractories-heat-is-on_12.html?showComment=1355390934654.
I am satisfied that there is more than 50% probability of this deal going
through based on analysis put by Katalyst wealth and Ninad Kumar. The most convincing argument to me is that acquisition in
India is part of their three pillar strategy for expansion into emerging
market. Currently it derives only 12% of its revenue from Asia pacific. Orient
Refractories can add another 2% to its emerging market kitty.
Valuation
INR in
crores
Period
Sales
EBITDA
%
EBITA %
EV/EBITA
EV
Orient
Refractories
TTM
340
18.4%
17.4%
8.1x
479
Vesuvius
India *
TTM
555
16.8%
13.9%
8.9x
682
IFGL
Refractories #
TTM
593
12.1%
9.7%
4.3x
251
RFI
(INR @ 70)
TTM
12,929
12.6%
9.6%
7.9x
9,765
Acquisition multiple
Tata
Refractories
FY 2011
868
11.5%
9.1%
14.3
14.3x
*
Vesuvius India is trading at a
EV/EBITA multiple of 8x (TTM). [Angel broking expect revenue CAGR of 6% over
CY11-13E.]
*
Krosaki Harima Corporation acquired 51%
stake in Tata refractories in April 2011 at an EV/EBITA valuation of around
13-14x. Tata refractories EBITA margin average was around 9% (2006-11) compared
to 18% for Orient Refractories.
Krosaki
Harima Corporation acquired 51% stake in Tata refractories in April 2011
at an EV/EBITA valuation of around 13-14x. Tata refractories EBITA margin average
was around 9% (2006-11) compared to 18% for Orient Refractories.
*
RHI itself is
trading at a EV/EBITA multiple of 8x (TTM). Orient margin and return ratios are
much better than peers.
*
IFGL can be taken
as exception, as the company indulge in too many global acquisitions, many of
which failed to generate any meaningful return.
I expect the deal
to happen at aleast 11-12x EBITA multiple, implying upside of upto 50%.
Peer Analysis
Going through
historical ratios of Vesuvius India and Tata Refractories, it appears that
Orient Refractories (standalone only for refractories) EBITA margin and ROCE is
much higher than its other players. Of course sales growth was muted, as it was
very slow in capacity expansion. But because of that in FY2011, its capacity
utilisation was more than 98%. This is also reflected in EBITA margin of
Vesuvius India which is sharply lower than EBITDA margin of Orient
refractories. I am attaching the excel sheet containing historical ratios of
Orient and its peers.
Risk
*
In case the deal does not happen I expect the price may decline
back to INR 25, a downside of around 40%. But I think now that the company is
in play, if not RHI some other company should acquire it sooner or later.
This is my first investment and analysis of any special situation.
Disc:
Taken nominal position of 2%. Will increase if price falls back to around 35 or
more clarity on acquisition.
the promoters of this company are RHI AG a MNC based out in Austria. It specializes in producing heat resistant refractory products for cement , steel ,glass and metal industries. It has 7,900 employees, 250 sales offices and 10,000 customers from the above industries across the world. It produces 1.5 mn tons of refractory products each year. It acquired a 70 percent stake in Orient in 2013 for Rs. 398 cr to strengthen its position in the Emerging Markets.
Per capita consumption in India is very less compared to the other countries like US, Europe ,China. RHI AG plans to increase share of steel segment revenues from 57 percent to 64 percent uptill the year 2020. It also wants to improve its flow control revenues from 320 million euro to 400 million euro. Bulk of this incremental growth is expected to come from Orient. Orient at present has 62 million euro sales from this segment. Hence RHI aims to double Orients Revenue by 2020 to meet its targets.
Orient has 20 percent CAGR growth over the last 5 years, which is expected to continue. RHI sales network is a great thing for the company. It has 50 percent of its export sales from this network. RHI is also starting to source ISO Products from Orient which will be a huge export booster to the company.
ROCE ratios of Orient are pretty high compared to its peers. Orients is - 27 percent , while IFGL is at 10 percent and Vesuvius at 15 percent. This is due to lower cost of land ( of which 48 percent is underutilized) , and use of local technology. Orient plans to increase its capex by 50 percent in the next 3 years, but still we can expect ROCE ratios to remain high on the back of change revenue mix ( more exports).
Orient also has the highest gross margins among peers due to lower RM cost as 80 percent is sourced locally and rest 20 percent imported from China.
the company is generating healthy cash flow and margins over the years in a cyclical business, this signifies a moat in the business. it looks a good bet to ride in the reviving infrastructure and steel business .
Good analysis. I am watching this company, but not invested so far. The
doubt in my mind being - what if the steel as a commodity goes back down in
prices and demand. In my mind the best time to invest in this company was
when the commodities were in recession 12 - 18 months ago. I am doubtful
now whether there is upside or downside for the steel cycle. And today’s
news that China believes that even achieving a 6.5% GDP growth itself is
tough further increases the doubt. On the other hand, Trump’s declared
infra push is a positive ( though he had only spoken till now with no
action ) What is your view on the steel cycle.
Bulk of this incremental growth is expected to come from Orient. Orient at present has 62 million euro sales from this segment. Hence RHI aims to double Orients Revenue by 2020 to meet its targets.
48 percent of land is underutilized
Orient plans to increase its capex by 50 percent in the next 3 years
hi rvetri,
i think the good part of the company is how its margins have remained insulated from the steel cycle. also the infrastructure and steel industry is in the recovery mode i think. If the commodities were in recession 12 months ago , it means they havent hit the peak yet , infact there is a long time for them to rise and then hit the peak. Hence i find this story interesting to be a part of the recovery cycle.
With China cutting down unprofitable Steel Production, Refractory demand is going to rise. We need to be patient. Refractory has major consumption in Coke Ovens, rather places where heat is extremely high and one needs to change the refractory lining periodically too.
Isn’t below are the good things happening at this counter:
Dividend has been increased hugely @2.5 per share compared 1.45 rs. per share last year. Dividend payout stands at ~44% on a net profit of Rs. 68 cr for FY 16-17.
Zero debt
Huge cash of around 110 cr in balance sheet. They are giving back to share holders in the form of increased dividend payouts.
Increasing the capacity of isostaic products from 9300 to 11700 tons per year. (with cost of 17crs. which is from internal accruals)
Actually looking at the numbers tells a different story. There is a fall in important ratios but are still at a healthy rate currently. How should we take on that? ROA at around 20% for a manufacturing firm is extremely good, isn’t it?
I want to learn how to use Screener custom data management feature and tried with Orient refractories.That was an excellent feature. Thanks to @ayushmit & others whoever involved in developing the great tool. Thanks to @Donald for his work Ajanta excel sheet which I used as a reference (I have got this from Art of Valuation thread).
From the data it looks like important Ratios are declining y-o-y.
Net margins are not improving much. Cost is not efficiently managed.
Sales are on a slower growth but are increasing y-o-y.
Sales per unit of assets is continuously reducing, that means they are not increasing the sales at the same rate as assets,
Debt is reduced zero and are paying tax close to ~33% every year, which is a good thing.
ROCE & ROIC are declining y-o-y but are still at healthier rate.
Now, I have the custom sheet available I will go ahead and try to compare with competitors to see how are they performing as a next step ( I think Vesuvius & IFGL are competitors).
Note: I still have doubts on how to calculate ROIC and difference b/w Capital employed and Invested Capital. The formula might be wrong. Data shown in Ajanta vs how Screener shows data now is changed a little bit. Still trying to get more understanding details. Please excuse if there are mistakes. You are welcome to correct them.
Disclosure: Invested(4% of very small pf) and not interested in buying until all the learning is complete.
