Tata Metalliks....deleveraging and changing product mix

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Tata Metaliks (TML), a subsidiary of Tata Steel, is one of the leading manufacturers of Pig Iron and Ductile Iron Pipes.
Tata Metaliks has a capacity of 4 lakh tons of Pig Iron and nearly 2 lakh tons capacity for DI Pipes.
Since last 3 years, the process of merging Tata Metaliks with Tata Steel was going on; however, on 17 May16, it was finally decided by the board of both companies to cancel the merger of Tata Metaliks into Tata Steel. This led to a meteorological rise in the stock price of Tata Metaliks from Rs. 130 to current levels of Rs. 355

Investment arguments

From pure Pig Iron to DI Pipe Player: Prior to FY10, TML was primarily involved in manufacturing of Pig Iron. Since FY11, as a part of forward integration, TML started using its own Pig Iron to manufacture DI Pipe. It has been able to consistently increase its share from DI Pipes from 2% to 49% in FY16.

Strong Industry Trends in DI Pipes: The DI Pipes industry is witnessing a strong growth of 10-15% annually over last 5 years. The domestic market for DI Pipes increased by 18% YoY in FY16 to 13 lakh tons.

DI Pipe Capacity to double in FY17 (this year): TML has a DI Pipe capacity of 1.1 lakh tons; however, considering a strong demand, TML was able to run its plant at 120% capacity utilisation producing nearly 1.33 lakhs tons of DI Pipes in FY16. TML has undergone a capex that will double its capacity in DI Pipes from 1.1 lakh tons to 2.0 lakh tons in FY17.

Margins Improvement through Increasing Efficiency and Better Product Mix: TML’s consolidated operating margins have consistently increased from -2% (negative) in FY12 to 14% in FY16.

Improving Balance Sheet supported by solid Cash Flows: : TML had done a large expansion between 2007 and 2009 for setting up the DI pipe plant. However, before it reached proper utilisation levels, the mining ban in India led to severe strain on availability of raw materials which led to a huge loss of Rs. 113 crores in FY12. TML had to close its Redi, Maharashtra plant and was impacted further due to the one-time VRS scheme offered to its employees in Redi plant. In FY12, TMLs debt stood at Rs. 581 crores having a debt to equity of 7 times. TML has brought down this debt from 581 crores to 351 crores in FY16 with the help of massive improvement in working capital and cash generated from sale of Redi plant. Currently the debt equity ratio has fallen from 7 times to 1.8 times. A point to note is that this reduction of leverage is after TML has spent nearly Rs 250 crore on the capital expenditure projects to improve efficiencies and production capacities that will show its results from FY17. Now that a majority of capital expenditure is completed, TML should see large debt reduction over the next 2 years and move towards a debt free balance sheet.

Valuation: At current market price of Rs.355 trading at market capital of Rs.895 crs having a net profit of Rs.123 crores in FY16 with very strong operating cash flows of around 150 crores. This indicates that Tata Metaliks is available at a price to earnings ratio of only 7.3 times.

Looks like a buy at the current levels

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This analysis is copied from some blog. Isn’t it?

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If you are doing copy paste at least mention the source name.

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I think the source is http://prosperotree.com/investment-ideas/293-tata-metaliks-piping-india.html

Enjoy :slight_smile:

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This is called actual scuttlebutt., my dear ValuePick’ers.

:slight_smile:

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Excerpts from AR 2016

TATA METALIKS LTD.

  1. pig iron industry was adversely impacted by the global slowdown leading to 60% drop in export and oversupply in domestic market. Lower demand of castings from OEMs and substitution of foundry grade pig iron with cheaper steel grade pig iron led to price pressure on Company’s primary product, foundry grade pig iron. The Company also faced the challenge of sourcing iron ore at competitive costs during fi rst half of the year as supplies were irregular due to regulatory issues.
  2. Ductile iron pipe business of the Company’s subsidiary, Tata Metaliks DI Pipes Limited, enhanced Company’s performance further with 20% increase in production and sales along with significant operational improvement.
  3. As part of the long term strategy, the company has been focusing on the value added portfolio of ductile iron pipes and is currently expanding its capacity of DI pipes in Kharagpur. Further, for long-term sustainability and asset reliability, the Company is investing in modernising its blast furnace no. 1 and taking up other efficiency-related projects to produce hot metal at competitive costs.
  4. While the three way merger has been withdrawn, it is important to merge the wholly owned subsidiary with itself and therefore the Board has decided to file a fresh scheme for amalgamation of its wholly owned subsidiary, Tata Metaliks DI Pipes Limited with itself. The merger will enable an integrated supply chain with enhanced synergies through operational and cost effi ciencies, simplifi ed corporate structure and supply chain integration.
  5. Pig iron export from India dropped 60% during the year leading to surplus availability in the domestic market. On the demand side, the foundry industry, except some segments of the automobile sector, remained subdued due to low construction activities and delay in implementation of projects on ground. As a result, due to this demand supply imbalance, there was pressure on pig iron prices which continued to fall for the first three quarters of the year.
  6. Sinter plant productivity increased further during the year from 1.48 t/m2/day to 1.68 t/m2/day and availability improved from 90% to 94%. Consistent availability of high quality sinter and emphasis on daily management at blast furnace increased the hot metal production from 4.08 lakh tonnes to 4.33 lakh tonnes, and reduced coke rate from 678 kg/thm to 667 kg/thm as compared to the previous year.
  7. DI pipe business continued to show improvement in operational and cost-related parameters. Production of DI pipes increased 20% from 109,883 tonnes in 2014-15 to 133,210 tonnes in 2015-16.
    The projects of coke ovens and power plant of TML and DI pipe expansion project of TMDIPL are under implementation and would be completed in Q1 2016-17.
  8. Sales performance was also satisfactory as all pig iron produced was sold despite depressed market conditions. However, the Company witnessed a steep drop of 16% in foundry grade sales price during first three quarters of the year. There was an improvement of 8% in prices in the last quarter of the year due to general increase in steel prices as a result of imposition of minimum import price by Government of India.
  9. Pig iron is an intermediate product with low value addition over raw materials. Its demand drivers are performance of the user industries like castings, pipe and steel making.
  10. DI pipe domestic market size has increased from 1.1 mtpa in 2014-15 to 1.3 mtpa in 2015-16, an increase of 18%. TMDIPL’s DI pipe volume has grown at a faster rate of 30% during the last year which has taken its market share to 10%. Further expansion of capacity to 200,000 tpa in 2016-17 will increase the DI pipe market share to 12%.
  11. Production of DI pipes in 2016-17 will be significantly higher as a result of capacity enhancement project which is expected to be commissioned in the first quarter of the year. TMDIPL’s current order book is healthy which will support sale of enhanced production of DI pipes.
  12. As far as DI pipe business is concerned, due to its high potential, there is a likelihood of capacity addition by the competition (the number of manufacturers has increased during 2015-16) which may affect the price realisations, if the demand does not grow as projected. Further, continuation of anti-dumping duty on Indian DI pipes in European Union (EU) will limit to some extent the potential export market size.
  13. Further, indications of international coal and coke prices firming up in the near future along with the likelihood of imposition of anti-dumping duty on Chinese coke may put pressure on margins for pig iron manufacturers. However, the coke oven plant, which is scheduled for commissioning in the first quarter of 2016-17, which will partially insulate the Company when the coke prices rise in future.
  14. Offtake of molten metal by the Company’s wholly owned subsidiary, Tata Metaliks DI Pipes Limited (TMDIPL) showed signifi cant increase of 21% in 2015-16 to 131,391 tonnes from 108,374 tonnes in the previous year.
  15. Sale of pig iron and molten metal in 2015-16 was commensurate with production at 423,299 tonnes, an increase of 5% as compared to 402,770 tonnes in 2014-15.

Excerpts from AR2016 of TMDIPL

  1. Your company is currently in the process of expanding its production capacity to 1.8 LTPA with an estimated project cost of ` 65.00 crores. This expansion project is going on as per schedule. The project, once completed will enable your company to capture higher market share of DI pipes in different segments, resulting in likely higher generation of revenue during FY 2016-17.
  2. TMDIPL enjoys status of a preferred supplier to EPC constructors and various Government authorities across the country. The company is in the process of increasing size mix by adding DN125, DN750 and subsequently DN900 Pipe. The Company in order to add value to the customers has initiated franchise arrangement for DI fittings also.
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A good in-depth report on the company - http://www.moneycontrol.com/news/recommendations/buy-tata-metaliks-targetrs-570-centrum_8469821.html

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Notes from Concall: Q4FY17

Successfully commissioned 3 projects.

  • Enhancing DI pipe capacity (added new line). Almost doubled the capacity from 120,000 to 200,000 tonne. Happened around August-September.
    Did 182,840 tonne sales this year. 55,640 tonnes in last quarter.
  • Commissioned 2 factories of coke oven on BOT basis. Added 10000 tonne per month capacity. 40% of our requirement. Happened around October to December.
    Producing around 12,000 tonne.
  • Scrapped one old blast furnace (was 22 years old). We had two mini blast furnaces. Put up a new blast furnace in 90 days flat. Came in stream in March this year. This was the biggest project last year.

Huge volatility in coal and coke prices. This has been pressurising the cost. Might be same in this quarter too. But with structural changes last year, the future should be sustainable.

Capacity utilisation and further expansion:

  • Logically we should expand though no forward looking statements.

Current demand:
DI business has been growing at 12-14% over last few years driven by urbanisation. Don’t see this coming down.
Entering rural market for irrigation through DI pipes.
Growth CAGR should continue if not more.
Pig iron growing at 5%. Foundries use our pig iron which is a niche. Demand should be reasonable if not too exciting.

Margin volatility in Pig iron segment:
In last 2 quarters, 2 things have happened:

  • Volatility in coal and coke market which is key material for conversion. Significant volatility atlas 2 times. This was unprecedented. Domestic market has not been robust enough to take through these volatility.
  • We had put down our blast furnace in one of the last two quarters. This should reduce coal consumption going forward. We will be able to pass on coal price volatility.

DI Pipes market - competition:
Some of the competition that exist is not doing 100% capacity. Don’t see any other player coming in or expanding.
Will take 2 years before capacity can come on stream.

Net debt is 383 Crores plus 100 crore preference shares.

Order book: It is robust. Can’t give the number.

Higher coke prices:
There is overhang of higher coke prices in current quarter as well.

We will be running 100% capacity in DI pipes.

One time line item in quarter due to blast furnace:
Interest capitalisation of around 10 Cr in last quarter.

Drivers in DI business:

  • Demand evenly distributed across country. Last year Rajasthan, then Telangana.
  • Irrigation not picking up. Odisha and Madhya Pradesh are key states now. UP should also pick up.

DI Pipes contracts:
Contracts are fixed price contracts of 12 months. Price risks is on manufactures.

Pig Iron, last quarter was weak due to coal prices. This quarter is better and we should be able to pass on price fluctuations.

New player for DI pipes, can one buy pig iron and make:

  • Technically yes, possible to buy pig iron and make. Commercially no.
  • If purchase and melt to make DI, the cost will be too high.

Margins would be under pressure in coming quarter as coke prices higher and fixed price contracts. Demand is picking up. Done plenty of work to reduce costs. Our key lever for sustainability will our cost cutting measures.

New blast furnace is 25% more capacity than old one and more efficient. Key raw material used, Coke (55-60% of hot metal cost). We should reduce consumption of this coke by 10%.

We keep max 1 month stock of coking-coal. We keep around 10-15 days stock.

In April, again there was a peak of coal prices. Now prices coming back again.
Difference in coal price in Q1 and Q4: Rs. 3000-4000 a tonne.

Total hot metal capacity: 5,00,000 tonne (383,000 produced this year)
DI pipes: 200,000 tonne.
We try 100% capacity.

Broad strategy:

  • Reduce debt.
  • Would like to improve value added.

CAPEX to increase to 300k or 350k:
Cost of 300 crore for additional 200k capacity. Brownfield.
Not explored expansion plans.

Lot of efficiencies have been added. These are the IPR. We have been able to bring down the DI pipe manufacturing cost to better than world class levels. Thus other expenses reduced.
Power cost has also gone down to due our own plant (10 mw) coming into operation (7 Cr in quarter. More than 4x will be in full year next year).

Sales tax incentive of 3.2 crores in other operating income in last quarter.

Our effort is to reduce coke prices impact in Q1 than in Q4 last year. Hopeful to do this.

Sri Kalahasti Pipes comparison (25% margins):

  • Our hot metal capacity is much larger than DI capacity. Pig iron is less profitable. Thus blended margin.
  • 3 major brownfield additions last year. One blast furnace down for 90 days. This subdued our potential of volumes.
  • Inspite of all this we did best ever. And next year should be much better than this.
  • Sri Kalahasti does only DI pipes.
  • DI margins should go even better (from 22%).

In results we publish, hot metal comes at transfer price of market prices. For SK their raw material is coke and iron ore. We take in hot metal in segment result which is based on transfer price i.e. market price. Thus there is a slight shift in segment in profitability.
Pig iron has been a drag. As we move more towards DI, the profitability should improve.
DI is more sustainable that Pig iron. Lesser cyclicality. It is higher in value chain.

Transportation advantage to SK: Transportation cost does make a difference. But we have our market around our plant as well. Where we sell, there SK might incur higher costs of transportation. SK benefitted from Telangana. As Odisha and Madhya Pradesh scale up, our profitability will be higher.

Over 100% utilisation: Utilisation is a function of order size we get. We got higher segment order where productivity is higher. Thus we produced more than the capacity. This should continue in future.

Can do 240k?: Wont multiply last quarter by 4. But it is an indication of capacity.

Cost of debt less than 9%. Last year CAPEX of 125 Cr.

Rejection rate: Operational parameter can’t say much. But one of the best in the world.

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Thanks @pratyushmittal for the report. Very helpful in taking a decision to enter today

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Sharing my notes from AR 2017 below.

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Pleasingly, management has a strong undertone in discussing about the outlook for years to come. Sharing the clip from MD&A, AR 2017 below.

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Regards,
Yogansh Jeswani
Disclosure: Invested

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on a broader and philosophical scale though, how would this segment of Iron Pipes shield itself from the onslaught of PVC pipes? What makes DI Pipes so uniqe that it cant be replaced by a CPVC/HDPE Pipe?

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Xinxing pipes - world’s largest manufacturer of DI pipes video.

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So basically any and every foundry in India that makes Pig Iron has forward integrated into the DI pipe segment. A quick google search of DI Pipe makers in India threw up several names like Jai Balaji, Electrosteel, Jindal Saw, Electrotherm,Sri Kalahasti and ofcourse Tata Metalliks. Even Vedanta plans to enter this space in coming times…hence, the one who controls cost would take the pie here.

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Can anyone throw light on why was profit down by 11% of q1 2018… Even though revenue rose to 418 crores compared to last year’s 334 crores…expenses went upto 379crores compared to last years 289 crores…

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Because
a) the prices of coking coal doubled
b) Cost of raw mat for pig iron increased but the rise in sale price did not match.
3. Extra 6 crore net cost due to repairs.

Next quarter will be sluggish due to GST

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Also as some one commented on twitter that they had to pay significantly higher excise duty than expected.

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Yes, excise duty has significantly increased.

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Source: Moneycontrol

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Thanks for clarifying