IPO Note | Metal

Mar 19, 2018

MISHRA DHATU NIGAM Ltd.

NEUTRAL

sue Open: Mar 21, 2018

Issue Close: Mar 23, 2018

Incorporated in 1973, with an aim of achieving self-reliance in research and

development, and supply of critical alloys and products of national security, Mishra

Issue Details

Dhatu Nigam Ltd. (MIDHANI) is one of the leading manufacturers of special steels,

super alloys and the only manufacturer of titanium alloys in India. These are high

Face Value: `10

value products which cater to niche end user segments such as defence, space and

Present Eq. Paid up Capital: `187.3cr

power.

Positives: (a) Modern and integrated metallurgical plant for manufacturing a wide

Fresh issue: Nil

spectrum of critical alloys in variety of forms for defence, space and thermal power

Post Eq. Paid up Capital: `187.3cr

(b) Strong long-term customer relationships (c) In-house R&D team aimed at latest

development and improvement of product quality and processes innovation (d)

Issue size (amount): `438cr

Experienced Promoters supported by professionally qualified, experienced and

entrepreneurial management team.

Price Band: `87-90

Investment concerns: (a) MIDHANI reported low top-line and bottom-line CAGR of

Lot Size: 150 shares and in multiple

11% & 10% respectively over FY15-17 (b) Company has an order book of `517cr

thereafter

which works out to 0.64x compared to FY2017 revenue, reflecting low revenue

Post-issue implied mkt. cap: *`1630cr -

visibility (c) During 1HFY18, the company has reported very low operating margin

**`1686cr

and profitability.

Promoters holding Pre-Issue: 100.0%

Outlook & Valuation: In terms of valuations, the pre-issue P/E works out to 30.9x

Promoters holding Post-Issue: 74.0%

1HFY2018 annualized earnings (at the upper end of the issue price band), which is

*Calculated on lower price band

high considering MIDHANI’s historical two year CAGR top-line & bottom-line

growth. Further, MIDHANI has an undersized order book which lacks revenue

** Calculated on upper price band

visibility, coupled with lower return ratios. Considering the above factors, we

Book Building

recommend NEUTRAL rating on the issue.

QIBs

50% of issue

Key Financials

Non-Institutional

15% of issue

Y/E March (` cr)

FY2015

FY2016

FY2017

1HFY18

Net Sales

656

761

810

208

Retail

35% of issue

% chg

16.1

6.3

Net Profit

104

119

126

Post Issue Shareholding Patter

% chg

15.2

5.8

Promoters

74.0%

OPM (%)

20.6

19.8

22.9

21.7

EPS (`)

5.5

6.4

6.7

1.5

Others

26.0%

P/E (x)

16.3

14.1

13.3

P/BV (x)

3.1

2.7

2.4

RoE (%)

19.2

19.3

17.9

RoCE (%)

21.0

21.8

23.3

EV/Sales (x)

2.5

2.0

1.8

EV/EBITDA (x)

12.2

9.9

8.0

Angel Research; Note: Valuation ratios based on pre-issue outstanding shares and at upper end

of the price band

Amarjeet S Maurya

+022 39357600, Extn: 6831

[email protected]

Please refer to important disclosures at the end of this report

MIDHANI | IPO Note

Company background

Incorporated in 1973, with an aim of achieving self-reliance in research and

development, and supply of critical alloys and products of national security,

MIDHANI is one of the leading manufacturers of special steels, super alloys and

the only manufacturer of titanium alloys in India. These are high value products

which cater to niche end user segments such as defence, space and power.

It has emerged as a ‘National Centre for Excellence’ in advanced metallurgical

production of special metals and super alloys in India. MIDHANI has the

technological ability to manufacture a wide range of advanced metals and alloys

under one roof. With the growth of MIDHANI business and operations, it has

achieved the status of a Mini Ratna, Category-I company in 2009.

Exhibit 1: Product Portfolio

Source: Company, Angel Research

Mar 19, 2018

MIDHANI | IPO Note

Issue details

MIDHANI is raising ~`438cr through offer for sale of equity shares in the price

band of `87-`90. The company will dilute 26.0% (at upper price band) of its post-

offer paid-up equity share capital.

Exhibit 2: Pre and Post IPO shareholding pattern

N o of share s (Pre-issue)

% No of shares (Post-issue)

Promoters

18,73,40,000

100.0%

13,86,31,600

74.0%

Others

4,87,08,400

26.0%

18,73,40,000

100.0%

18,73,40,000

100.0%

Source: Source: RHP, Note: Calculated on upper price band

Note: A discount of `3 per equity share is offered to Retail Investors & Employees.

Objectives of the Offer

Company’s objectives of the offer are:

 To achieve the benefits of listing the Equity Shares on the Stock Exchanges

 Raising funds for general corporate purposes

Outlook & Valuation

In terms of valuations, the pre-issue P/E works out to 30.9x 1HFY2018

annualized earnings (at the upper end of the issue price band), which is high

considering MIDHANI’s historical two year CAGR top-line & bottom-line

growth. Further, MIDHANI has an undersized order book which lacks revenue

visibility, coupled with lower return ratios. Considering the above factors, we

recommend NEUTRAL rating on the issue.

Key Risks

 Strong order inflow and improvement in execution cycle of current order

book could improve the company’s profitability. It will pose an upside risk

to our view.

 Increase in competition from other players can impact the business of

MIDHANI.

Mar 19, 2018

MIDHANI | IPO Note

Income Statement

Y/E March (`cr)

FY2015

FY2016

FY2017

1HFY18

Total operating income

656

761

810

208

% chg

16.1

6.3

Total Expenditure

521

610

624

163

Raw Material

228

328

308

Personnel

109

Others Expenses

194

192

207

EBITDA

135

151

185

% chg

12.0

22.6

(% of Net Sales)

20.6

19.8

22.9

21.7

Depreciation& Amortisation

EBIT

125

137

168

% chg

9.5

22.3

(% of Net Sales)

19.1

18.0

20.7

17.2

Interest & other Charges

Other Income

(% of PBT)

16.1

17.9

12.5

26.8

Share in profit of Associ ates

Recurring PBT

141

162

186

% chg

15.0

15.1

Tax

(% of PBT)

26.4

26.2

32.2

41.9

PAT (reported)

104

119

126

% chg

15.2

5.8

(% of Net Sales)

15.8

15.7

15.6

13.1

Basic EPS (`)

5.5

6.4

6.7

1.5

Fully Diluted EPS (`)

5.5

6.4

6.7

1.5

% chg

15.2

5.8

Source: Company, Angel Research

Mar 19, 2018

MIDHANI | IPO Note

Exhibit 3: Balance Sheet

Y/E March (` cr)

FY2015

FY2016

FY2017

1HFY18

SOURCES OF FUNDS

Equity Share Capital

187

Reserves& Surplus

353

432

517

546

Shareholders’ Funds

540

620

704

733

Total Loans

Deferred Tax Liability

Total Liabilities

608

651

739

823

APPLICATION OF FUNDS

Net Block

298

327

357

363

Capital Work-in-Progress

Investments

Current Assets

854

785

736

810

Inventories

423

289

206

251

Sundry De btors

220

209

289

222

Cash

196

208

261

Loans & Advances

Other Assets

121

Current liabilities

555

470

362

407

Net Current Assets

298

316

374

404

Deferred Tax Asset

Total Assets

608

651

739

823

Source: Company, Angel Research

Mar 19, 2018

MIDHANI | IPO Note

Exhibit 4: Cash Flow Statement

Y/E March (`cr)

FY2015

FY2016

FY2017

1HFY18

Profit before tax

143

163

188

Depreciation

Change in Working Capital

(64)

(13)

Interest / Dividend (Net)

Direct taxes paid

(38)

(61)

(26)

Others

(11)

(17)

(9)

C ash Flow from Operati ons

216

119

(Inc.)/ Dec. in Fixed Assets

(20)

(19)

(64)

(45)

(Inc.)/ Dec. in Investments

(87)

(0)

(85)

C ash Flow from Inve sting

(9)

(107)

(65)

(130)

Issue of Equity

Inc./(Dec.) in loans

(46)

Dividend Pai d (Incl. Tax)

(45)

(40)

(43)

Interest / Dividend (Net)

(7)

(4)

(5)

(2)

C ash Flow from Financing

(43)

(90)

(43)

Inc./(Dec.) in Cash

(5)

(32)

Ope ning Cash bal ances

Closing Cash balances

Source: Company, Angel Research

Mar 19, 2018

MIDHANI | IPO Note

Exhibit 5: Key Ratios

Y/E March

FY2015

FY2016

FY2017

Valuati on Ratio (x)

P/E (on FDEPS)

16.3

14.1

13.3

P/CEPS

14.9

12.6

11.7

P/BV

3.1

2.7

2.4

Dividend yield (%)

0.0

EV/Sales

2.5

2.0

1.8

EV/EBITDA

12.2

9.9

8.0

EV / Total Assets

2.7

2.3

2.0

Per Share Data (`)

EPS (Basic)

5.5

6.4

6.7

EPS (fully diluted)

5.5

6.4

6.7

Cash EPS

6.1

7.1

7.7

Book Value

28.8

33.1

37.6

Returns (%)

ROCE

21.0

21.8

23.3

Angel ROIC (Pre-tax)

24.9

31.8

33.0

ROE

19.2

19.3

17.9

Turnover rati os (x)

Inventory / Sales (days)

235

138

Receivables (days)

123

100

130

Payable s (days)

Working capital cycle (ex-cash) (days)

305

213

193

Source: Company, Angel Research

Mar 19, 2018

MIDHANI | IPO Note

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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Mar 19, 2018