Maithan Alloys Limited — Q4 FY19 earnings call

Call held 22 May 2019

Management summary

Maithan Alloys reported a strong FY19 performance with 6% revenue growth and robust EBITDA and PAT margins of 16% and 12.8% respectively. The company highlighted its strategic focus on cost efficiency, optimal product mix, and a strong balance sheet with ₹667 crores in cash. Management announced a significant Greenfield expansion of 1.2 lakh tonnes capacity for ₹275 crores, aiming to capitalize on the growing domestic steel demand, while also actively exploring inorganic growth opportunities.

Highlights

  • FY19 Revenue from Operations grew 6% to ₹1,988 crores.

  • FY19 Operating EBITDA stood at ₹322 crores, with margins at 16%.

  • FY19 Profit After Tax (PAT) was ₹255 crores, achieving 12.8% margins.

  • The company maintains a strong net cash position of ₹667 crores in cash and liquid investments.

  • A final dividend of ₹6 per equity share (60%) was recommended for FY19.

  • Current capacity is 2.4 lakh tonnes per annum, with FY19 production at 2.25 lakh tonnes (near full capacity).

  • A new Greenfield Ferro alloy manufacturing unit in West Bengal is planned with 1.2 lakh tonnes capacity, costing ₹275 crores, to be completed within 24 months.

Key financials

  1. Revenue from Operations ₹1,988 Cr +6%YoY
  2. Operating EBITDA ₹322 Cr
  3. EBITDA Margin 16%
  4. PAT ₹255 Cr
  5. PAT Margin 12.8%
  6. Cash & Liquid Investments ₹667 Cr

What they filed

Q1 FY27: revenue down 14.6%, net profit down 26.4% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue464 531 435 632 491 +6%490 −8%559 +29%540 −15%
EBITDA49 29 76 65 32 −35%55 +90%106 +39%91 +40%
Net profit143 90 -58 538 -119 −183%93 +3%-71 −22%396 −26%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Guidance & targets

Margin

  • Long-term EBITDA Margin Margin · long-term · High confidence 15-17%
    We are confident of sustaining a long-term EBITDA margin of 15% to 17% which is what we stated two years ago itself.

    — Subodh Agarwalla, Promoter & CEO

Capacity

  • Greenfield Expansion Capacity Capacity · within 24 months · High confidence 1.2 lakh tonnes per annum
    The board had approved to set up a Greenfield Ferro alloy manufacturing unit in West Bengal with an estimated capacity of 1.2 lakh tonnes per annum.

    — Subodh Agarwalla, Promoter & CEO

Capex

  • Greenfield Expansion Cost Capex · within 24 months · High confidence ₹275 crores
    The unit is proposed to be set up within a period of 24 months with an estimated cost of about 275 crores.

    — Subodh Agarwalla, Promoter & CEO

  • Greenfield CAPEX in FY20 Capex · FY20 · Medium confidence 20%
    So if you were to make a guess I would say about 20% of the CAPEX would be invested in FY20.

    — Subodh Agarwalla, Promoter & CEO

Regulatory

  • Environmental Clearance for Greenfield Plant Regulatory · next 6 months · Medium confidence 6 months
    I would say it could take us maybe about 6 months more.

    — Subodh Agarwalla, Promoter & CEO

Cash Management

  • Retain Surplus Cash Cash Management · another 12 months · Medium confidence 12 months
    we would still want to carry this money for another 12 months because we would hate to lose out on opportunities which come our way.

    — Subodh Agarwalla, Promoter & CEO

Market Outlook

  • Steel Industry Capacity Utilization Market Outlook · next three years · High confidence >80%
    The steel industry's capacity utilization is expected to remain at above 80% in the next three years

    — Subodh Agarwalla, Promoter & CEO

  • Steel Industry Capacity Increase Market Outlook · next three years · High confidence 16 million tonnes
    increase the capacities further by about 16 million tonnes over the next three years.

    — Subodh Agarwalla, Promoter & CEO

  • Steel Industry CAPEX Market Outlook · next three years · High confidence ₹75,000 crores
    industry CAPEX estimate of about Rs. 75,000 crores in the next three years.

    — Subodh Agarwalla, Promoter & CEO

Profitability

  • Bear Case EBITDA Margin Profitability · any 12-month period · Medium confidence 12%
    So, I would assume that the industry can go to that EBITDA margin which means at that particular juncture our margins would be 12%.

    — Subodh Agarwalla, Promoter & CEO

Risks & concerns

  • Delay in Environmental Clearance for Greenfield Project

    medium

    Environmental clearance for the new West Bengal plant is not yet in place, with an estimated 6-month delay due to regulatory processes and elections.

    Management acknowledged

  • Uncertainty in Inorganic Growth Opportunities

    medium

    While actively pursuing inorganic growth, the timing and size of potential acquisitions are uncertain, with some processes delayed by erstwhile promoters and banks.

    Management acknowledged

  • Commodity Price Fluctuations

    medium

    Management acknowledges the inherent volatility of raw material prices (Manganese ore, coke, coal) and power costs, stating 5-10% fluctuations are possible.

    Management acknowledged

  • Competition from Malaysia

    low

    Malaysia ramped up capacity in 2016-17, causing price pressure, but management believes they are now producing at capacity and pose no additional threat, citing higher CAPEX costs in Malaysia.

    Management downplayed

Areas of evasion (3)

  • Exact input-output ratio for Manganese ore to Ferro/Silico manganese (offered to provide indicative figures later)
  • Specific number of inorganic targets being evaluated
  • Bear case realizations per tonne

Q&A highlights

2 direct
Utilization of surplus cash and potential buyback Partial
We totally appreciate that keeping this cash has a negative carry and we have been debt averse, but we would still want to carry this money for another 12 months because we would hate to lose out on opportunities which come our way. And because we have been able to do a good job of expanding and operating, so we have a request to our various stakeholders to just be patient and give us another 9 to 12 months and we are hoping to put that cash to use. If we are unable to put the cash to good use, then we would consider to return the money to the shareholders. But growth is our priority and if we can achieve better returns with the money, we would prefer that only.

Highlights management's dilemma between retaining cash for growth opportunities (especially inorganic) and returning it to shareholders, indicating a potential buyback if suitable growth avenues aren't found within 9-12 months.

Asked by Sarvesh Gupta, Maximal Capital

Delays in environmental clearance for the new Greenfield plant Direct
No, it is not in place. It is in process. We filed for it sometime in July last year, or close to that. Due to the elections, a lot of time has been lost. I would say it could take us maybe about 6 months more. I would say 24 months from today because we are continuing with the designing, layouts and all the engineering and putting of enquiries etc. So we would be ready to go ahead full stream once that comes in.

Reveals a 6-month delay in obtaining environmental clearance for the crucial Greenfield expansion, pushing back the project completion timeline from the initial announcement.

Asked by Pratik Singhania, SageOne Investment Advisors LLP

Strategy for entering the Chinese market and competing with Chinese imports Direct
China is the black box and they are not at all transparent, so we have no intention of trying to enter into China ever. They have their own dynamics. Their political system is much murkier than ours for outsiders. So that is something we don't want to venture into. As far as threats from China is concerned, about 15 years back Chinese government had taken a view that export of alloys is same as export of energy because lot of energy is required for which they have to burn coal. For each ton of alloy that you produce, this is about the Manganese alloy and the Chrome alloys, they would be indirectly burning about 5 tonnes of coal to be producing coke and for producing power to produce the alloy and for Ferro silicon this amount is double. So, they want to produce enough alloys to meet the domestic requirement but they don't want to export because of that they had imposed a export duty of 20% instead of export incentive., So the Chinese are not able to export and they are meeting their own requirements. But we have no intention of selling into the Chinese market.

Provides a clear and firm stance against engaging with the Chinese market due to lack of transparency and historical government policies (export duties), indicating a focus on other Asian markets and domestic growth.

Asked by Sarvesh Gupta, Maximal Capital

2 min read 6 chapters

Detailed narrative

FY19 Financial Performance & Profitability

Maithan Alloys reported a strong financial year for FY19, with Revenue from Operations growing 6% to ₹1,988 crores. The company achieved an Operating EBITDA of ₹322 crores, maintaining a healthy EBITDA margin of 16%. Profit After Tax (PAT) stood at ₹255 crores, translating to a PAT margin of 12.8%. Management expressed confidence in sustaining long-term EBITDA margins between 15% and 17%, citing a 4% headroom over competitors' cash loss scenarios.

Strategic Capacity Expansion & Greenfield Project

To capitalize on growing domestic steel demand, Maithan Alloys announced a Greenfield Ferro alloy manufacturing unit in West Bengal. This plant will have an estimated capacity of 1.2 lakh tonnes per annum, fungible between Manganese and Chrome alloys, with Manganese products primarily targeting the domestic market. The project is estimated to cost ₹275 crores and is expected to be completed within 24 months from today, with approximately 20% of the CAPEX planned for FY20. However, environmental clearances are still in process, with an anticipated 6-month delay.

Raw Material Sourcing & Cost Efficiency

The company primarily imports high-quality Manganese ore from Africa and Australia, with domestic purchases (mainly low-grade from MOIL) accounting for less than 10% of value. Management emphasized its cost efficiency, including optimizing raw material blends and maintaining low overheads. For Ferro Manganese and Silico Manganese, the variable cost breakdown is approximately 50% Manganese ore, 30% power, 15% Coke & Coal, and 5% others. Current power costs range from ₹4.5-5.0 per unit.

Market Dynamics & Export Strategy

Maithan Alloys' revenues are equally split between domestic and exports, with exports primarily directed to Asian economies (excluding China). The company avoids the Chinese market due to its lack of transparency and historical export duties on alloys. Management anticipates domestic steel industry capacity utilization to remain above 80% over the next three years, with an additional 16 million tonnes of capacity and ₹75,000 crores in CAPEX, boosting demand for Ferro alloys.

Cash Management & Capital Allocation

The company boasts a strong net cash position with ₹667 crores in cash and liquid investments. Management projects this to grow to ₹1,000 crores by the time the new plant is operational, with ₹300 crores allocated for the Greenfield CAPEX, leaving ₹700 crores. While earning approximately 7% post-tax on surplus cash, the company intends to retain this cash for another 9-12 months to fund potential inorganic growth opportunities. A buyback would be considered if suitable growth avenues are not identified.

Historical Performance & ROCE

Over the last five years, Maithan Alloys has demonstrated significant growth, with Revenues, EBITDA, and PAT increasing at a CAGR of 16%, 45%, and 86% respectively. The company's operating ROCE has consistently remained above 50% in the last three years, reaching over 60% in FY19. This strong performance is attributed to prudent capital allocation and superlative operating efficiency, overcoming initial underperformance of the Visakhapatnam plant in its early years.

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