Stock Fundamentals

Why the stock of Mishra Dhatu Nigam is a good long-term bet

Satya Sontanam | Updated on April 24, 2021

Low leverage and decent growth prospects make it a good bet for long-term

Since our last buy call on Mishra Dhatu Nigam (Midhani) in October, 2020, the stock has fallen by about ten per cent. However the positive long term outlook on the company’s prospects remain intact and long term investors can look to buy at current levels.

Midhani is a PSU catering to the needs of India’s strategic sectors such as defence, space, atomic energy and aeronautics by supplying critical materials and alloys. With increased budgetary capital expenditure for defence for FY22 coupled with the newly introduced Defence Acquisition Procedure 2020,business prospects appear good for Midhani.

At the current market price of ₹179.95, the stock is valued at about 25 times its trailing twelve month earnings. Though higher than the historical average of 18 times (since listing in 2018 to mid-Feb 2020), it is largely due to the lower earnings that the company posted in the first half of FY21 impacted by Covid-19. A look at another valuation metric, market cap to sales show that the company is valued at 4.15 times its FY21 sales (Covid impacted), modestly higher than the average 3.6 times for the two year period prior to FY21.

The pre-Covid peak of ₹248 per share was in February 2020 on the back of higher budgetary (Budget 2020) allocation to Indian Space Research Organisation (ISRO) - a key customer - and robust earnings announced for the third quarter of FY20. Prior to these events, in January 2020 the stock was trading at about ₹150-160. Given its lows during the market crash in March-April 2020 was around ₹170, the stock performance indicates it had actually held up well during times of uncertainty.

In the last couple of years, the dividend yield has been 1.2- 1.5 per cent.

Midhani is one of the leading manufacturers of super alloys, titanium & titanium alloys, special purpose steels and other special alloys.

As per the company’s annual report, these high-performance alloys global market is forecasted to grow at a rate of approximately 5 per cent from an estimated USD 9.0 billion in 2019 to USD 13 billion in 2027.

The company derived nearly 55 per cent of the revenues from the aerospace segment in FY20. Defence, energy and other segments contributed 26 per cent, 13 per cent and 6 per cent, respectively, to revenue in the said year.

Midhani will be a beneficiary of the increasing demand in the aerospace industry for light materials due to stringent emission norms and increasing fuel efficiency, which are expected to be one of the critical drivers for the alloys market.

Going ahead, the share of order book from defence is also likely to inch up. The prominence given to ‘Make in India’ products and the Centre’s focus on becoming self-reliant in defence production can translate to steady order flows for the company in the future. According to the Budget documents, although total defence budget allocation for FY22 increased by mere 1.4 percent, the allocation for capital expenditure increased by 18.75 per cent to ₹1,35,060 crore and this augurs well for Midhani.

The company has also tied up with Hindustan Aeronautics Limited (HAL) for development and production of composite raw materials. These are currently imported and government’s strong intent on import susbtitution is expected to provide good order inflows to Midhani.

Financial performance

Even with disruption in production activities due to the COVID-19 pandemic, Midhani was able to mitigate its impact. The company recently announced that it recorded highest ever sales of ₹810 crore (provisional) in FY21, about 14 per cent higher than FY20.

For the nine-month period ending December 2020, the company recorded sales of ₹479 crore (10 per cent down y-o-y) and net profit of about ₹92 crore (down 23 per cent y-o-y), significantly hit by the operational performance in the first half of the fiscal.

The profitability metrics improved impressively in the third quarter of FY21 with the EBITDA margin increasing to 45 per cent from 30 per cent in Q2FY21 and 27 per cent in the same period a year ago.

This is due to reduction in the prices of cobalt, one of the raw materials, and other one-off items.

Having said that, cost control measures such as indigenisation of various components and increasing outsourcing efforts, as per the management, are expected to improve the margins compared to previous year.

As on September 30, 2020, the debt to equity ratio stood at reasonable 0.15 times.

Published on April 24, 2021

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