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Monday, June 03, 2019

ULJK calls a 'Buy' on Rama Steel Tubes
CMP:     99        Target: 145

Investment Rationales
Overall Demand to grow at healthy pace

Rama manufactures ERW pipes ranging from half inch to two and half inches in diameter. 60-70% of their product portfolio is square hollow sections, while 10% comprises of tubular pipes which are used as electricity poles. These pipes find application in Airports, Metro stations, Skywalks, Automobile, Furniture, Power plants and Telecom. For Rama, 50% of their product goes to Infra, 30% to Auto and balance 20% are exported. Government capex on infrastructure and power sectors will drive the demand for ERW pipes. Demand for ERW pipes in India is 9.5m TPA which is expected to grow by 8-9% every year (in addition to the replacement demand) driven by government capex in infrastructure and power as well as the rising auto demand due to higher disposable incomes. This will lead to higher demand for ERW pipes and thus, Rama Steel will stand to benefit.

Consolidating presence in the South

  • The Southern market is growing faster than the national average and Rama feels it can participate in this growth. The South has a number of small single location mills but they are not able to compete with the larger players due to lower bargaining power with steel suppliers.
  • Over the last two years, the company has managed to move volumes as well as EBITDA/ton sharply upwards as margins in Western India are in double-digits. This is likely to continue going forward as revenues from South begin to flow in and its share of business from the low margin Delhi plant reduces, going forward.
  • Rama Steel has already set up its first 36,000 MTPA capacity plant at Lepakshi (one hour from Bengaluru). At the peak of it’s capacity, it is expected to generate revenues of INR 1.4bn with EBITDA margins of ~9-9.5% on a total investment of Rs430m. The company had previously been supplying to the Southern markets from their Delhi plant but with the commissioning of the Lepakshi plant in October, they now seek to consolidate their share here.

No direct sales to OEMs, only through dealer network
The company sells 100% of their products through their dealer network which helps them to keep their debtor days under check. Rama gives a 25 days dealer credit. They don’t supply directly to any OEMs. Currently, the company has a network of 200 dealers and distributors in the North and the West and is working on hitting a number of 1000 over the next three years – the primary focus is South and Tamil Nadu.

Well organized player – Getting the other advantage
70% of the market is controlled by organised players such as Rama Steel, APL Apollo Tubes, HiTech Pipes, Surya Roshni and Tata. The balance 30% of the industry is highly fragmented and controlled by unorgainsed players. Due to lack of scale, the unorgainsed sector has to procure their steel requirements from distributors of steel mills, which results in higher raw material costs (3-4% higher). Further, the unorgainsed sector is unable to give credit to buyers versus a 30-45 days credit period offered by the larger players. As a result the organised players are able to increase their share in the market.

Capacity addition outside of Delhi to help expand footprint across India
Previously the company only had one plant at Delhi of 60,000 MTPA capacity from which they catered to the North, West and Southern markets. Thereafter, in July 2015, the company set up its first capacity of 36,000 MTPA at Khopoli near Mumbai and further expanded it to 72,000 MTPA. The existing capacities are already operating at ~85% cu. Apart from that, the company has set up a 36000 MTPA capacity plant at Lepakshi near Bengaluru in October 2017.

Foray in to Pre Galvanised (GP) pipes to improve profitability
The total pipe revenues, black pipes accounted for 84% and GI pipes the balance 16%. GI pipes are exported to EU, Africa and some parts of Middle East but the company has no intention to grow this business further. Pre-galvanised pipes (GP) are light in weight, comparatively cheaper and have longer replacement cycle (about 6 months). They are used in furniture, low cost housing, umbrellas etc. The new capacities at Mumbai and Lepakshi will be for pre-galvanized pipes and will enjoy higher margins of ~9-9.5% (as compared to ~8% on black pipes).

Valuation: At CMP the stock is trading at 9.1x its FY19E EPS of INR 11.6 and 7.5x  its FY20E EPS of INR 14.1. We recommend to Buy the stock with a target price of INR 145 per share with an upside potential of 39.42%.

IndiaNivesh calls a 'Buy' on HeidelbergCement India Ltd.
CMP: 208                      Target: 271

Valuation: At the CMP, HeidelbergCement India trades at FY21E EV/EBITDA of ~6.81x and EV/tonne of Rs 7639. No additional capacity is estimated to be operational till the end of FY21E. During FY19–21E, the company is estimated to repay debt of Rs 2.5bn. Even factoring in the same EV as in FY19, it effectively indicates an upside of 16.6%. Even though in FY20E, it is estimated to become net cash as against being net debt till FY19, Heidelberg is valued at 9.06x (average of FY15-19) FY21E EV/EBITDA indicating a target price of Rs 271. Maintaining BUY.

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