Sir,
Tata metalliks is making 150cr+ profits every year. Their capex on Oxygen plant is almost done. They are expecting to end FY19 with 400 crore of debt and with just maintainence capex required to be done every year. I am not able to understand why the company should dilute equity to raise money despite having such strong cash flows?
Even if we assume no profit growth for next 3 years company can generate cumulated FCF of 450+ crore which won’t deteriorate their balance sheet. Can you explain a little?
Agree. The dilutions looks to be on a much higher side. Maybe, they are still on for acquisition? Or maybe they find the returns very lucrative and hence want more equity
I personally feel this is not a shareholder friendly move from the Tata group. We know for a long time that They are trying to merge this entity with their group. This is an obvious effort to shake out the minority shareholders.
I am doing some research in the DI Pipes Industry. I have a query related to the future industry supply. Tata Metalliks, SriKalahasthi Pipes are doubling capacities, KIOCL setting up the capacity.
With demand is growing at 13-14%, will this not create supply glut in the industry in next 1-2 years? Are the big players Jindal Saw, Electrosteel losing capacity which will prevent supply glut?
Requesting views from people who are monitoring the industry for long time.
Domestically, Tata Metaliks has ~19%
market share in the pig iron segment and ~12% market share in the ductile
iron segment. In the last Budget, the government had constituted the Jal
Shakti Mantralaya whose primary objective is to work with states to ensure
Har Ghar Jal (piped water supply) to all rural households by 2024 under the
Jal Jeevan Mission. In FY19, ~18% of rural households had piped water
supply. The target to reach 100% level by 2024 would entail notable
investment. As DI pipes are used in potable water distribution, Tata Metaliks
is well placed to cater to this rising demand.
Pig iron is still the majority of the business for tata metaliks. You are right DI segment is doing very well for them. With the DI segment capacity increase the mix would be tilted towards DI segment which has more pricing power given the large opportunity size and very limited competition.
I think this is a good time to look at this business from a 5 year view.
Business Overview and key attributes
Efficient business for a commodity producer.
Company level ROCEs of 20% consistently over the last few years. Partly due to it being a low cost leader (efficient operations, backward integration with Tata Steel for RM) and partly because products command small premium in the market for relaibility.
Able to sub-contract some capital intensive back end processes to third parties (similar to operating leases); so actual ROCEs might adjusted might be tad lower but still easily high teens consistently.
Good management and Tata pedigree. Detailed reporting and disclosures with con calls. Zero corp governance risk.
Business mix changes from pig iron manufacturer to a ductile pipes manufacturer (both brands and profitable making decent ROCEs). However DI pipes is higher margin a large opportunity due to gradual share gain in applications.
DI pipes will be a major beneficiary from governments push to upgrade and build water infrastructure in the country.
DI pipes market has few players and Tata Metalliks gaining share over the last 2-3 years; now in high single digits and should increase further.
Company is doubling capacity in DI pipes over the next 3-4 years.
Competitive advantages
Reliable RM supplies from Tata Steel (related party transactions but nothing foul).
Access to Tata Steels S&M network and knowledge
Operate brands in both the business - Tata Efee and Ductura in pipes - both sell at a premium to competition due to higher quality and customer servicing.
DI pipes business has high barriers to entry - high capex and gestation, RM availability and diseconomies of scale for a new player. Process is also value add based relative to basic steel manufacturing.
Pig Iron is a key RM input for DI pipes; do a DI pipe player also has to set up a pig iron plant for captive use at competitive cost and availability
Srikalahasthi pipes (owned by elctrosteel) is the market leader in DI pipes but the group is in trouble (30% pledged); may benefit a stronger player like Tata Metalliks
Valuation
Company has traded between 6x and 15x PE over the last five years; currently trades at 9x.
As share of DI pipes in sales and profits continue to rise with better overall margins and ROCE; stock can rerate towards 15x over the next 5 years.
5% IRR can be driven by just PE expansion; another 10-12% should easily accrue from earnings.
Sales growth should be volume led with minimal price erosion risk - commodity cycle is weak right now and DI business is less susceptible to price erosion
Yesterday Tata Metaliks/ Tata Steel Long broke the 1.2x ratio that was recommended during erstwhile merger plans. Not sure if that denotes likely call off or a refresh on valuation.
Latter was certainly needed given that merger remained unapproved for over a year now, and the robust turnaround in B/S of TSLP (as most debt related to Usha Martin acquisition is paid off).
Dont know, as no confirmation. Only reading from px action and logic.
Still not out of the woods for TSLP as 1) the issue on royalty on iron ore bought from parent remains. 2) It has reportedly bid for Nilanchal Ispat.
