While I’m sure everyone is happy with the decision, I believe NCLT was indeed correct in saying that it benefits the transferor company more than ORL Shareholders.
Both the target companies in the merger have poor economics, but they are being merged at a hefty Valuation, which will lead to a considerable dilution in ORL equity.
You can read the Judgement from last time for complete understanding:
The following two points are enough as a summary. But if you want to understand the issue in detail, reading from Point 29 onwards would help.
At 34% dilution, it is about Rs. 1,000 Crores going by the current Market Cap. Indirectly, this much amount is being paid to merge two companies, one with Book Value of Rs. 65 Crores and another with a Book Value of Rs. 18.40 Crores. As far as I understand, these two companies don’t have the impressive business economics ORL has, so their Valuation would seem very steep as mentioned in the judgement.
Now, what we don’t know is whether ORL will actually dilute the full 34%. Maybe if they’re ready to dilute less, it might make more sense for existing shareholders.
@krishnamraju07 The NCLAT has ordered the NCLT to approve the merger, so yes, technically the merger is not yet approved. But I guess they don’t have a choice now.
@dineshssairam IMHO, the current market cap already discounts the financials of the merged entity, which includes equity dilution as well as the increase in revenues and other benefits. That’s how the markets are, I would be very much surprised if they don’t. So calculating 34% over current market cap is not correct.
When the merger was announced, the market cap of the company was around Rs.2,000 crore. One month after that, it went up to Rs.3,300 crore and during the Covd crash, it fell below Rs.1,500 crore. If one goes comparing market cap for the listed company with static variables like revenues & profits for unlisted merging companies, no merger ratio will ever sound fair.
Let’s forget the Market Cap like you said (I understand the logic and I agree). The current Shareholders must have some view of how much ORL is worth. If that figure is equal to or greater than 3,000 Crores, then that has pretty much the same impact.
34% of Outstanding Shares is considerable dilution. But for now, we don’t exactly know if they’re going utilize the full limit. So I’ll withhold judgement until then.
Yes, but we don’t know what it is and it mostly doesn’t matter. The merged entity is valued at Rs.3,000 crores, that is what we know.
The simple question is: “Is 34% of Pre Merger Orient Refractories Equity worth paying for the two RHI Entities?”
To determine this, we need two things:
An estimate of the “Fair Value” of Pre Merger ORL (Forget Stock Price - your own estimate)
An estimate of the “Fair Value” of the two RHI Entities
If 1 > 2, then you (If you’re an ORL Shareholder) are being diluted at a loss. Of course, you can also try to throw in some Value in 1 for ‘Synnergy Benefits’. Even after all that if 1 > 2, you may have to revisit your Valuation of ORL.
I’m not saying there is scheming involved or a CG issue. But it just means going back to the drawing board on how much you’re willing to pay to buy ORL. This might differ for each person and that much I agree.
My personal opinion happens to coincide with NCLT in saying that 1 is far greater than 2 and most likely this is to benefit RHI Magnestia more than other existing ORL Shareholders.
Results Out for Q4FY21: BSE-Link
Observations:
Interestingly, NP/EPS will go deep south (NP-90 Cr. and EPS: 5.6 …Calculations in the below snapshot) as compared to FY20 if the ‘Inventory Increase - ~64 Cr.’ under the expenses is nullified from the results of FY21.
@phreakv6 : Does this qualify as an example of leveraging inventory to manage P&L?
Disc: Not invested.
company has changed it name
Company has been changed from “Orient Refractories Limited” to “RHI
Magnesita India Limited” w.e.f. 2 July 2021
Amazing Results posted by the company. Increase in QoQ PAT & Sales denotes the strong demand of the products. This looks promising considering the boom in Cement & Steel Sector.
Between FY12 and FY20, steel production in India increased at a CAGR of 5.43% p.a., from 75.70 MT in FY12 to 115.53 MT in FY20. In the same period, Orient Refractories’ revenue from operations increased from Rs.300 crores to Rs.700 crores, a CAGR of 11.15% p.a. By contrast, competitor Vesuvius India grew at 6.33% CAGR in the same period, and IFGL Refractories’ India operations grew 8.67% (from FY17-20, for which numbers are available). ORL thus has grown at double the rate of India’s steel industry, and increased its market share by a significant margin. In 2019, ORL’s market share was estimated at 20%.
When revenues grew 11%, PAT increased faster at 14% and cash flows increased even faster at around 15%. Dividends tripled during this period.
More importantly, all this growth came with minimal capex. Between FY11 and FY19, ORL’s cumulative capex added up to just Rs.90 crores in 9 years. This is much lower than the capex incurred by Vesuvius and IFGL, both of whom have delivered lower growth with higher capex. At the start of FY20, ORL’s Gross Block stood at Rs.189 crore.
And ever since the merger with group companies was announced, ORL has stepped on the accelerator even further.
In FY20, ORL did a capex of Rs.74 crores. It acquired assets of Manishri Refractories for Rs.44 crore and announced Manishri’s capacity would be increased from 10,000 tons to 18,000 tons. Manishri produces magnesia carbon bricks for which there is no other Indian source and is entirely imported. ORL also acquired Intermetal for Rs.10 crores, a small company but which has 300 customers in the steel industry.
In FY21, the merger with group companies finally cleared all hurdles and got consummated. The merged entity RHI Magnesita India (RHIM) is double by revenues, has 75% higher operating profits and 57% higher PAT. An equity dilution to the extent of 34% has also taken place.
For RHIM, the Balance Sheet shows capex of Rs.85 crore for FY21. The management says going ahead, a further capex of Rs.300-400 crore is planned in the next 3-4 years. Even by standards of the merged entity’s size, this capex plan is quite large.
Post the merger, the company’s addressable target market has expanded beyond steel to other sectors like cement, glass, non-ferrous metals etc. An R&D Center is coming up in Rajasthan which will be integrated with the RHI’s global R&D. Some high end products are being introduced in the Indian market which were not produced here until now.
In a recent TV interview in June, the management made several promising points.
By chance or by design, all this is happening at a time when the steel, cement and other consuming sectors are seeing a sharp upswing. Strong growth, far better than what past trends indicate can be expected going ahead.
(Disc.: Invested)
Not directly related to RHI Magnesita India,but related to it’s parent company and business line.
Q2 Results
Invested
In-depth report on the refractories industry by Monarch Networth Capital. Well written. Also covers two companies - RHIM and IFGL.
MonarchNetworth-RefractorySectorReport-InitiatingCoverage_042145_c20c1.pdf (2.4 MB)
(Shared by Monarch itself on their Twitter account, so I presume this does not violate any copyright claims)
Disc- have a tracking position
This is routine. The existing resolution passed in 2017 was for 5 years, hence this is a renewal of that. The company exports products to parent RHI & other group companies. It also imports certain high tech products from parent / group companies which are not manufactured in India for supply to customers. Hence this resolution is required to meet compliance norms.
Deep dive into refractories:
https://niveshaay.wordpress.com/2022/02/15/indian-refractory-industry/
