Established in the year 1990, Tata Metaliks began its commercial
operations in 1994. Growing from strength to strength over the last two
decades, the Company today has emerged as one of the biggest pig iron
manufacturing and selling companies of India, with an annual production
capacity of 345,000 tonnes.
Technicals: Excellent monthly
breakout on the long term charts
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
WHY IT'S
BUY
1
High Management Efficiency with a high ROCE of 30.26%
2
Strong ability to service debt as the company has a low Debt to EBITDA
ratio of 0.98 times
PBT LESS OI(Q) At Rs 88.00 cr has Grown at 409.26 %
OPERATING PROFIT TO INTEREST(Q) Highest at 21.72 times
PAT(Q) Highest at Rs 82.20 cr.
3
Stock is technically in a Bullish range
The technical trend has improved from Mildly Bullish on 27-Nov-20 and
has generated 61.08% returns since then
Multiple factors for the stock are Bullish like MACD, Bollinger Band,
KST and OBV
4
Rising Promoter Confidence
Promoters have increased their stake in the company by 4.97% over the
previous quarter and currently hold 60.03% of the company
Promoters increasing their stake is a sign of high confidence in the
future of the business
5
Market Beating Performance
The stock has generated a return of 30.45% in the last 1 year, much
higher than market (BSE 500) returns of 18.45%
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