Maithan Alloys - Expanding to tap export opportunities :: Crisil Research

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Maithan Alloys Ltd Expanding to tap export opportunities Fundamental Grade    3/5 (Good fundamentals) Valuation Grade          5/5 (CMP has strong upside) Industry                       Metals and Mining

Maithan Alloys Ltd (Maithan) is one of India’s largest manufacturers of manganese alloy, a type of ferro alloy used to manufacture steel. The company derives ~45% of revenues through exports mainly to European and Asian countries. CRISIL Equities expects the company to benefit from growth in global steel production. We assign Maithan a fundamental grade of 3/5, indicating that its fundamentals are good relative to other listed securities in India. India is well-placed to tap opportunities in the export markets India accounts for 10% of global ferro alloy production and is competitively placed against other nations due to the high availability of manganese ore, low-cost manpower, and favourable location (access to sea transport) and proximity to major steel producing countries like Japan, Korea and Taiwan. Further, the industry has benefitted from ongoing power issues in South Africa and imposition of 20% export duty in China; it grew ~7% over FY07-10. We expect similar growth in the next two-three years. Nearly doubling capacity primarily to cater to Asian markets Maithan plans to double its capacity in order to cater to export requirements; existing capacities will continue to serve the domestic clients. The move follows the expected increase in demand from Asian markets and India’s ability to competitively address the same. Enjoys higher realisations and high RoE Its ability to customise products as per clients’ requirements with a thrust on quality has enabled Maithan fetch higher realisations from foreign clients. This coupled with low asset cost and higher asset turnover resulted in higher RoE. In a cyclical industry, exposed to input cost fluctuations Ferro alloy is used in steel manufacturing, which is a cyclical industry with demand moving in line with economic activity. Price of manganese ore, the raw material, accounts for 45% of Maithan’s cost. Hence, any adverse movement in steel demand or volatility in raw material prices would affect profitability. We expect three-year revenue CAGR of ~23% We expect Maithan’s revenues to grow at a three-year CAGR of ~23% to Rs 8.9 bn in FY13 largely due to the 14.2% growth in volume and 9.4% growth in realisations. During the same period, we expect EBITDA margin to be 14-15% and PAT to rise at ~18% CAGR to Rs 491 mn. Valuations – the current price has strong upside CRISIL Equities has used the EV/EBITDA method to value Maithan and arrived at a fair value of Rs 195 per share. We have assigned EV/EBITDA multiple of 4x on FY13 earnings.