RHI Magnesita India Limited ( Orient Refractories ) – Speculation cum special situation

Company has achieved fairly fast integration of the large acquisitions, and new growth drivers have begun to emerge. Volumes have grown, margins have improved, debt has reduced, and management is talking about selective expansion and modernization in the months ahead. Overall, a steady quarter for RHI Magnesita.

Highlights from the Q2 FY24 concall:

1. On sequential basis versus previous quarter, revenue grew by 6% on the back of 8% rise in shipments. EBITDA margin improved by 70 basis points to 15.3%. Capacity utilization improved 67% overall in the current quarter, up from 64% in previous quarter on a consolidated basis.

2. Traded volumes are 30% of revenue this quarter. Last year it used to be 50%. Ultimate target is to reduce it year by year.

3. Margins – Standalone RHIM, we will be maintaining the margins at 15% – 15.5%. Flow control products margins will be 18 to 20 %. Flow control historically is above 25 % of total market size in the country. In the coming quarters, there will be pressure on selling price as the RM prices have corrected, but if we talked about margin in percentage term, we would like to keep this margin intact.

4. Exports – Are around 10% to 11% of revenues currently. All of that comes from RHIM standalone plants. We want to double exports in the next five years’ time.

5. Iron making division – We announced a special vertical, independent vertical for iron making division. Head by one of our original leaders, Sanat Ganguli and a dedicated team for that. So that will be the focus area in coming days for us. This diversification should not only reduce our dependence on steel sector but also help broaden our market share globally. This comes from Seven Refractory, which was joint venture and which we in July acquired 100%. Almost 70 million tons of steel is produced through blast furnace. So, this is a big market which we were not representing and now we have focused, and we will be pursuing this very seriously. That is a big step forward. We think we can grow exponentially over there. That will be a game changer.

6. RHIMIR (i.e. Dalmia) – The volume growth should go up by more than 10% in the coming quarters. Margins are now above 13 % and they would be maintained. With this acquisition, the product mix base has changed dramatically. We have some products which is having a low selling price, low margin, which in percentage wise impact our bottom line. But if you talk about absolute value contribution, it is phenomenal. The company will be spending some Rs. 200 crores, Rs. 300 crores over two years at the plant for renovation and refurbishment. With this, capacity will not increase, but we will replace 10 presses with two new presses state of the art. So that will help us to reduce our fixed cost absorption and improve productivity, improve consistency of quality of product and reduce the scrap rate. Margins will also improve. Reaching 85 % – 90 % capacity utilization will take four – five years’ time here.

7. Jamshedpur – This is a flow control plant. So, there we are operating at 50% capacity level. There we will increase our capacity, our sales, and that will help us to mitigate a lower margin of IR plants. With Hi-Tech, we have made inroads in Tata Steel and Nilachal Ispat. Jamshedpur margin should be around 20% to 21%. Our colleagues from other regions, like East-Asia and Europe have visited this plant. Maybe next six months is a trial period and then probably we’ll start getting commercial orders for export.

8. Magnesia bricks (Cuttack plant) – We are having a capacity of above 30,000 ton in India, which we will be producing and selling. Still, about 50,000 tons to 60,000 tons is coming from abroad. And we have a plan to enhance the capacity of our Cuttack plant from 30,000 tons to 45,000 tons to 50,000 tons. And in coming days, if the market remains like that, we would like to have one more plant or one more line in the existing plant. And maybe on the West coast also. These are import substitution products.

9. Growth – Post the acquisitions, we are focusing on increasing our share of industrial and other non-steel segments through product diversification. Some of these products along with higher flow control products would also fetch better profit margins. Low to mid-teens kind of growth rate as a trend growth rate is absolutely possible. We are aiming at growing at about 8% by volume. So, in the next four years or five years’ time we would like to have at least 35 % to 40 % market share. Also, I would not rule out the possibility of inorganic growth as well in coming day, said Mr. Sagar. One analyst pointed out that in the next two to three years, 30-million-ton steel capacity is coming up in India. Another analyst pointed out that if we look at the quarterly numbers of the steel companies, volume growth has not been more than 6 % – 8 %, whereas the industry, all the large refractory players have reported strong volume growth across all the players. Management said this is because import substitution is picking up.

10. Bigger customers coming up with new plants are asking for total solution, including robotics, automation etc. Company is working on that and talking to two to three customers on these lines.

11. Rajgangpur plant – will be modernized in the next two to three years. Delivery lead time for equipment is 8 to 14 months, so it will happen in 2025.

(Disc.: Invested)