This is important but can be easily missed by a casual observer.
A large part of RHIM’s revenues come from ‘Total Refractory Management Services’ (TRMS).
Under TRMS, the company does not just sell goods but provides comprehensive ‘solution’ to the customer. Revenues from TRMS have grown rapidly in recent years, up from 29 % of revenues in FY19 to more than 40 % in FY23.
But what is TRMS? Refractories are not just homogenous products that are produced on an assembly line and shipped to the customers. They need to be tailored to customers’ end use application, such as depending on the shape and size of the furnace / kiln, quality of ore used, type of the steel to be produced and so on. This is a specialized job, and under TRM Services, RHIM posts its own resource at customer plant who manages the task.
Now comes the interesting part. Revenue from TRMS is recognized not based on quantity of refractory sold but the quantity of steel produced by the customer.
More the steel produced with the same amount of refractory; more will be RHIM’s revenue. This way, RHIM’s interest gets perfectly aligned with the customers’ interest. TRMS earns higher margins and yet the customer is happy to pay more because the entire task is getting outsourced and he is paying for the output rather than the input. Imagine a refinery pricing its fuel based on the milage you get. He has an incentive to produce better & better fuel, and you do not mind paying more since you are driving longer. This is very different from the usual “sale of goods” where the buyer and seller are locked in a perpetual zero-sum game, and one party’s gain becomes another party’s loss.
The parent’s formidable R&D setup helps produce such products, which maximize customer output. Smaller players cannot compete in such a market and are rapidly losing ground. This is where the moat in this business comes from. The latest Annual Report shares several examples of how research and technology is driving business growth.
(Disc: Invested)
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