Ratnamani Metals & Tubes Limited (520111) Earnings Call Transcript & Summary

Good afternoon to all. On behalf of Monarch Networth Capital, we welcome you to Ratnamani Metals & Tubes Limited Q3 FY '20 results con call. Today on the call, we have with us the management team of Ratnamani Metals, represented by their CMD, Mr. Prakash Sanghvi; and CFO, Mr. Vimal Katta. Without taking much of your time, I would now hand over the call to MD sir for his opening remarks, followed by a Q&A session. Thank you. Over to you, sir.

Good morning to everyone. Quarter 3 FY '20 result, I think you must -- everybody have seen, but I can just tell you the quarter 3 total revenue is INR 771 crore, INR 771 crore and net profit, about INR 201 crore after tax and order in hand, about INR 1,561 crore. Still, we have some tenders coming in line pipe division and some good inquiries are in stainless steel also, so we see in next -- this 2 months before March, we can look at reasonable orders. And some are the tenders, so it will take a little more time, but we see a good scenario with this new budget. You can say the government will spend about this whole PSU, refinery and petrochemicals, they will spend about INR 100,000 crore into all these PSUs, refinery and petrochemicals. At the same time, about INR 63,000 crore, are these power and related industries. They will invest, like NTPC, and that's agreed the order. So -- and then there is a -- just also they've declared about INR 30,000 crore in water by the central government. And so security is there. So all this positive note we are taking forward and the requirement will come in the oil and gas industries from the existing refinery. And the new refinery, Barmer, already the tendering started in both carbon steel, stainless steel, we have booked some orders also. So the new refinery has already started tendering and ordering. And the gas grid, the cross-country pipeline as well as the City Gas Distribution, about 27,000 kilometers in this budget, they have announced to link in the 2021. So there is a lot of opportunity for the company, and we are quite hopeful we will get our share in both the divisions, stainless steel as well as carbon steel. And now the expansion of -- in both the divisions stainless steel, more or less, we are ready. And by April, the second, third week, we'll take a trial production and -- in the stainless steel division. At the same time, in carbon steel, also all the equipment came and erected and some of the approval procedure and some of the testing are going on. So there also, we'll be ready to book order for under APA or under this ER approval or something by July onwards. So these are the 2 things in expansion. Otherwise, everything is under control, and good cash flow and everything is there. Also, payment outstanding as well as stock inventory, everything is covered. And raw material price is also more or less moderate, you can say. So this is what it is. Thank you.

[Operator Instructions] The first question is from the line of Kashyap Jhaveri from Emkay Investment Managers.

A couple of questions. One, in terms of the refinery, you mentioned that Barmer already some packages have started being awarded. But in terms of refinery, we haven't seen much of the orders coming now so -- at least until now. So when in the future we will say that these refinery contracts probably will start flowing in? Do you expect any further delay? Or finally, in terms of CapEx, you would start awards getting -- or the contracts getting awarded?

No, No. Now this Barmer refinery, already they are tendering. I think we may quote in next 2 to 3 days, 1 big tender for carbon steel pipe -- project piping. And even in steel, we got some orders also from the fabricators. So it's started at Barter Refinery from [ EI sides ], from others because they have given different, different package to different EPCs.

Okay. And just an IOC, in Panipat, Barauni and [ Prali ], so the total is roughly about 17 million, 18 million tonnes there also. So there also, project awarding has started or it will start in...

Yes, some, these 10 new EPC also came Tata projects. We also took 3, 4 projects in hydrocarbon, this -- something for IOCL something for BPCL. I think, 3 or 4 packages, they also got. And they've also started inquiring about the things, and they may also come with the tender or some quotation like that. Our people are already here.

Are you [indiscernible]?

Exactly, I don't know. I can let you know later. I'll find out from my marketing. But our people already visited because they got about 3 to 4 package, something Petrofac or [indiscernible] they got it and something over here [ L&T ] and EIL, it is like that. Yes.

And in terms of pipe requirement between refinery and petrochemical securities, what would be the pipe requirement as a percentage of total project cost?

About 8% to 10% of their CapEx, it is a pipes and tubes, all type of pipes and tubes whether they're carbon steel, stainless steel it [indiscernible]. All put together is 8% to 10% of their CapEx is the pipe and tube volume.

And between refinery, petrochem, water and between CS and SS, can you give us the EBITDA margin hierarchy what is the highest -- just to see, we might get orders from refinery but if they are from lower end CS price then in terms of earnings, they don't sort of contribute so much. If you could give us hierarchy in that.

Generally, all project pricing, there is a good margin because it's not a big quantity, like line pipe, number one. Number two, there is a number of sizes and number of grades like from alloy steel, API, ordinary, so it's all a mix. It is not big quantities. So a reasonable margin, what we are getting regularly, say, about 20% to 25% EBITDA level that we may get here also. And there is not much competition also.

So versus today, where we are doing more of water and the margins are...

No, no, no. This year we didn't do any water. So see it is a product. Water is the last priority for us. If anything available in oil and gas, petrochemical, power, first chance is there, we take it. And then if the capacity is available, then, of course, we go for water also.

Okay. Okay. And any guidance on EBITDA margins for FY '21?

Same 16% to 17% plus/minus 1%.

The next question is from the line of Kunal Kothari from BP Equities Private Limited.

Sir, my first question is like every quarter, we are continuously doing small orders in titanium space. So how we did in this quarter? And now what to expect for next year?

We have a reasonable booking in titanium segment also and some of the [ litmuses ] took place in this particular third quarter also and still some more -- some orders are in hand, and it is under production. So it will go in next quarter also.

Sir, any volume terms like we did this much in FY '20, and we can expect in FY '21 this much growth expect that we can?

I think firstly, we might be -- complete about INR 80 crore to INR 90 crore. And similarly, we may get some more requirement from the sea-based power plant. And one of the good order we got in for export. And this is our first order and such type of requirement keep coming. That's what our customers is selling.

Okay. Sir, my second question is, in quarter 1, quarter 2, as you have mentioned previously, we for this financial year, we are only doing oil and gas orders. So our margins also improved like in quarter 1, around 17% and in quarter 2, 19%. But for this quarter, sir, it has dipped to around 14% to 14.5%. So can you explain to me what the factors that led to the margin decrease and the sales mix and like, what to expect for the next quarter also?

No, basically, in first half, our share from line pipe was on lower side, which got reflected in the turnover also. So line pipe is a competitively lower-margin business compared to standard steel and alloy steel. So this -- in this quarter, line pipe business has started giving us the volume at the top line. So some shrinkages at the margin level was expected. That has happened. But blended margin range of 16% to 18% and it will continue to hold true in the long run also.

The next question is from the line of Kaushal Shah from Dhanki Securities.

Sir, if you can please provide us the breakup of the order book. Do we have anything from water in the INR 1,560 crores? Or it is all oil and gas?

Everything is oil and gas and power metallurgy. Basically carbon steel is purely oil and gas, okay? Stainless steel has other sectors also. So -- but mainly will be oil and gas sector, refineries sector, plus the power sector and then remaining, fertilizer, process industry and others. But carbon steel is 100% oil and gas.

Got it. Sir, Prakash, sir mentioned in the opening remarks that we are starting the stainless steel division in April, but...

Prior production. Yes.

Correct. So that -- we will wait for approvals, right, after which we can begin to...

It will take us 3 to 4 months maximum. Because most of the domestic, where we are already approved, earlier also we were doing importing and doing cold [ renovating ]. So up to '18, so we already approved from the domestic industry. But at the same time, we need to do from this outside Saudi Aramco, then this iron -- Kuwait and then [indiscernible] and this oil center outside the refineries and petrochemical. That's the reason I say maximum 3 to 4 months will take. But for commercial production, we may start by this June, July, definitely for [indiscernible] for a distributor, because some of the items we may manufacture here, stock has the write-off.

Correct. So effectively, both for carbon as well as stainless steel, we can practically say that in the next year about roughly, let's say, 9 months of production may be available approximately?

We can conservatively calculate 6 months. If we can do more, that's better in the second quarter of financials, but I will take 6 months definitely, we -- from both the division, we can get the revenue.

Right. And sir, the current order book of around INR 1,500 crores, INR 1,600 crores. So that is the run rate that we are doing on a quarterly basis, around INR 700 crores, INR 750 crores. So that is kind of we can expect for next 2 quarters. How is the bid pipeline and also the new orders that you are...

Big tenders are there and in this particular month, only these people are bidding oil. And of course, it will take 2 or 3 months to take decision by this whole PSU. But now government, you can see in its budget, they said we will have to lay 27,000 kilometer of just oil and gas pipeline. So they might be faster, and they will come with the new and newer projects also, and hopefully, we will be, again, by this March end or April, we may get a good jump in the orders booking position.

The next question is from the line of Mihir Manohar from Capgrow Capital.

So I just wanted to understand it from a structural perspective. So when you place the orders, I mean, is it like EBITDA per tonne is fixed or are EBITDA margins fixed?

Mihir, basically, because ours is an order-driven business, so each order will have a different profitability based upon the nature of product and where it is going to be used. So -- but blended, we look at the blended margins because in our product bouquet, a number of products are there. Some are lower-margin products; also some are very high-margin products. So ultimately, we end up with the current margin profile. And the main consideration for any order is, it should make sense, it should add to the bottom line. So that is the thing. So we try to see that we end up with those products where margin can be better than other opportunities. That's how we have been working so far. So which we'll continue, and that is the reason we can confidently say the margin profile should continue to range between 16% to 18%.

Okay, okay, understood. And one more thing about this Barmer refinery. So what kind of margins one can expect from the projects that you will get from this refinery? And will it be more of stainless steel or carbon steel?

It will be a mix. It will be a mix of carbon steel and stainless steel. And so far, based on our prior experience, we should be getting orders both in stainless steel and carbon steel based upon the opportunities which are there because we have the capabilities and capacities. So we are confident we should be in a position to get our share out of those opportunities.

Right, right. Understood, sir. Sir, just for a broader understanding of mine. I mean, so is it like 60%, 70% orders would be stainless steel and… [Technical Difficulty]

Yes, you can go ahead with your question.

Yes, sure. So just one last thing from my side. So I mean about this Barmer refinery. Is it like 30%, 40% would be stainless steel and 60%, 70% would be carbon steel?

No, No. Carbon steel will not be very significant. Mainly stainless steel will be higher. You can say, almost 60%, 70% will be stainless steel and higher grade material, and roughly 30% would be carbon steel.

The next question is from the line of Tanush Mehta from Dalal & Broacha.

Sir, can you distinguish, firstly, that out of the order book of around INR 1,500 crores, how much would be carbon, if you could give us a breakup?

So INR 516 crore is stainless steel and INR 1,053 crore is carbon steel. Total is INR 1,569 crore.

Okay. Sir, I would have missed it.

And then out of this INR 1,569 crores, INR 448 crores is exports.

Okay. And sir, just to give a broad understanding, can we assume that carbon steel margins would be around 1.2x or 1.3x of stainless steel margin, is that...

No, no. SS will be higher.

Oh, the other way around, I'm sorry.

Yes, yes. You can assume the SS will be almost, you can say, 1.5 to 1.8x of carbon steel.

The next question is from the line of Vikash Singh from PhillipCapital.

Sir, just wanted to understand this SS new capacity, which is coming. Sir, in 3 to 4 months, you said that you will get all the approval. The way we understand that basically approval only comes after you complete the mill and it's a mill-wise and not the older approval of -- I mean, the mill should be working on that. Since you said that 8-inch is already there. But this mill was not commissioned. So how can this mill can utilize this 8-inch approval, which we got for the other mill?

It is 2 months. One is approved segment, other one is the commercial segment to stockists and distribution [indiscernible]. So, so far, we have already approved all the cold finishing of 8-inch. So once we made a [ model hollow ] and [ model hollow ] we can import from anywhere earlier before this facility. But now the facility is available with us, we can use our own [ model hollow ] and doing cold finishing at our end. So that segment we will start. And for others to make it as it is, all finished by [ model hollow ], for their segment, we will get the approval from all these international players, because there, we were not approved, that mill is not shown them, because that mill is coming now. So we will get them over here. We'll get it audited and we'll get in next 3 to 4 months after trial production. But at the same time, we will sell commercial material, commercial products then to stockists, distributors and where we want to use for cold finishing internally.

Okay. And sir, once we get the -- all the approvals. So what is our assessment, how quickly -- what kind of utilization level we can see in the second half of next year and then FY '22?

Yes, that's the reason I say, I will get 6 months for actual approval on customer-side, the sales. And even FY '22, we will definitely, in this FY '21, we'll get all -- almost all the approval internationally, nationally, whatever we require. So definitely, FY '22, we may use 40% to 50% capacity. This year, we may try 20% to 25% of our capacity utilization.

Okay. And sir, ultimately, what could be the mix of your -- the -- as you said that you would be doing some stock and sell items versus the mix of the order booking kind of. So what kind of the mix for this mill could be there ultimately?

Well, about 30% will go to the stockist distributors domestically as well as internationally, and 60% to 70% of our book. Our focus is always to the actuate direct sale always. But some of the products, the standard products, you have to give them all the customer and industries to be already producing because they keep stock and they give in a retail also. So we need to have both the customer distributors as well as actuators.

Okay. And sir, just one last thing, if I may ask. So currently, how -- out of the total CapEx of both the mill, how much we have already spent? And what is the pending amount for us?

Almost we might have spent about INR 250 crore total in -- for both the projects. About INR 450 crores, we have already spent for both the carbon steel division as well as stainless steel division and remaining, say, INR 150 crores is still pending because of some of this last payment of 15%, 10% and some of the steel -- some of the equipment balancing equipment still to come because to start the line, we have, say, 1 line. But to ramp up the capacity, we need to put another line or some of the equipment. So that still, we will get in the next 6 months, you can say. So all put together, INR 150 crore further we'll go.

Okay. Sir, at the December end, what will be our cash and debt balance should be right now?

At December end, it was more than INR 300 crores.

Is the total net debt we are talking about?

I'm talking about cash, cash equivalents, net cash will be a total INR 150 crores, because we have drawn INR 150 crores of long-term debt. So on a net basis, INR 150 crores of cash, cash equivalent.

Okay, okay. And sir, this -- both the new facility, which are coming. So what kind of fixed cost we are looking at initially?

Fixed costs will not be very significant. Exact figures, so I'll have to look at. But the total figure will not be -- other than depreciation, will not be too high. We'll have roughly INR 25 crores, INR 26 crores of interest cost initially, and other costs should be closer to around INR 20 crore, INR 25 crores sort of thing.

The next question is from the line of Pritesh Chheda from Lucky Investments.

Sir, just on the fixed cost side. So the depreciation should be how much about INR 30 crores, INR 40 crores on this asset?

Around INR 35 crores sort of thing.

And you said the operating cost will be about INR 25 crores to INR 30 crores from the new asset.

Yes.

At what capacity utilization does the new asset break even?

Currently around 40%, 45% sort of thing.

It breaks even.

Yes.

And this INR 350 crore of stainless steel seamless capacity that we put, what will be the asset turn in that INR 350 crore?

Roughly 2x easily. It can go up to 2.5x also, depending on the product mix going forward. And carbon steel should give us anything between 3x you can say. It can be higher also. If oil and gas sector with coating is there, it can be higher also.

So just on the stainless steel side, since our expected capacity utilization is about 40% in FY '21, 40%, 45% in FY '21 -- '22, sorry. So this facility might very -- may contribute less in the EBITDA in FY '22, is that the assessment correct? If you have a fixed cost of about...

Yes, initially, it will be on the lower side because capacity utilization depends on a number of factors, this being a [ production ] facility. So to be on the conservative side, the figures, what you are talking about, roughly around 40% to 50% should be the capacity utilization into India. So it will not be contributing significantly to the EBITDA initially.

And currently, our capacity on SS is fully utilized, largely utilized?

Fully utilized.

And carbon steel is also largely fully utilized.

Yes. See, but in carbon steel, we got -- we'll start getting help of debottlenecking at CapEx in helical SAW, which should add roughly 40,000 tonnes of additional capacity. And in case of ERW, also from July, August we should be getting additional capacity because we are expanding the finishing line capacity there. So again, 70,000 tonnes, these should move to anything around 120,000 to 140,000 tonnes sort of thing, yes.

So total carbon steel capacity addition will be almost 30% of…

We'll increase including the -- this LSAW, 120,000, another 60,000 or...

[indiscernible] 80,000 tonnes.

So 120,000, plus 80,000, 200,000.

80,000, 120,000, [ 220,000 ] [indiscernible] so 40,000 tonnes.

40,000 plus 120,000 is LSAW.

About 200,000.

Roughly 200,000 tonnes total.

Yes. With this new LSAW capacity, roughly 1,20,000 tonnes.

How much capacity do we have currently?

350,000 tonnes carbon steel.

Okay. So on that 200,000 gets added? [Technical Difficulty]

Ladies and gentlemen, the line for the management is disconnected. Please hold while we reconnect them. Ladies and gentlemen, thank you for being on hold. The line for the management is now reconnected. Thank you, and over to you, sir.

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