Ratnamani Metals & Tubes Ltd

Good day, ladies and gentlemen, and welcome to the Q2 FY '23 Earnings Conference Call of Ratnamani Metals & Tubes Limited, hosted by Monarch Networth Capital. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded.

I now hand the conference over to Mr. Sahil Sanghvi from Monarch Networth Capital. Thank you, and over to you, sir.

Hello, thank you, Michelle. So good afternoon to everyone. On behalf of Monarch Networth Capital, we welcome you all for the Ratnamani 2Q FY '23 earnings call. We are delighted to host the management of the Ratnamani Metals today. And from their side, we have Mr.

Prakash Sanghvi, MD and Chairman; Mr. Manoj Sanghvi, who is the Business Head; and also Mr. Vimal Katta, the Chief Financial Officer.

So without taking much time, I'll hand over the call to Mr. Manoj Sanghvi for the opening remarks. Thank you, and over to you, sir.

Yes. Thank you, Sahil. Yes. Good afternoon to all the participants. I welcome you all to this call and hope everyone is doing good. Our results for the second quarter of FY '23 have already been uploaded on the exchanges. And I believe everyone has a got a chance to go through it. As you all past few months, prices of steel has been broadly stable, resulting into resurgence of stalled projects. Further decline in the commodities may auger well for the infrastructure demand and more traction may be expected in both CS and SS segment.

The developed economies are still facing high inflation, resulting in high interest rate outlook compared to our country, which still reflecting strong macroeconomic scenario. Various expansion projects across refineries and process industries are likely to help us maintain the capacity utilization and order flow. The traction of specialty pipes and tubes is visible owing to higher energy prices also.

Since you all are well updated on the various schemes in water pipes and oil and gas transmission lines and opportunities arising thereof, I would like to straight away touch upon the quarterly financial numbers and business update in brief, and then we can take the questions.

So on the operating revenue, it has increased by 26% year-on-year and is marginally down by 8% on a sequential basis, whereas on EBITDA, there is an increase to INR 154.77 crores from INR 120.50 crores. We are also confident to maintain the guidance of top line of INR 3,800 crores to INR 4,000 crores in the given financial year, with an EBITDA estimate of 15% to 17%. Our order book as on 1st October 2022 is INR 2,946 crores, which as of 1st November is roughly INR 3,200 crores. Our focus is to continue to be the leader in stainless steel specialty products and keep on expanding our existing lines of business, both vertically and horizontally.

And for the purpose, we have already announced the capex of around INR 180 crores in stainless steel coal finishing facilities as highlighted in May 22 call.

Also with a view of having carbon steel pipe manufacturing facility in the eastern part of the country, we have announced a capex of roughly INR 150 crores. Both the projects are more or less progressing as projected. However, there might be some delay in capex of carbon steel pipe manufacturing facility in the eastern part of India, which is considering the recent order what we received in Rajasthan and some equipment‟s are being shifted over there.

Now with regard to the transaction to acquire majority stake in Ravi Technoforge Private Limited, Rajkot-based company, for which definitive agreements were executed on 5th October 2022, I would like to update you all that the acquisition for the first trench that is 53% is completed. We have already provided details about the transaction structure on the exchanges.

In order to add a new growth driver, both domestically and globally, with a blend of diversification, the company has poured into this line and have decided to acquire majority stake at RTL. This will also help us to explore new segments, markets and products. We are well positioned to leverage our managerial, technical and financial capabilities to scale its operation, making it more sustainable and further create long-term value for the shareholders.

To conclude, I would like -- I would once again emphasize that our philosophy has always been to consider any decision on the long-term vision keeping sustainability and value creation in its core. That's all on our side.

Now I would like to invite questions, please.

We have the first question from the line of Ashutosh Tiwari from Equirus Securities.

Yes. So congratulations on good set of numbers. Firstly, on this stainless steel side, especially on export, how are -- what kind of demand are we are seeing? Are we, let's say, whether you talked about two, three years back in terms of export opportunity with this new plant? Is it happening on the same line that we are getting more on exports and also domestic market is the important situation happening now. So how should we look at the stainless steel plant utilization level going here on two, three years?

So on your first part, on the export side, we are seeing traction. The order book also, it will be is at the highest level both for stainless steel as well as carbon steel. So order inflow, both domestically as well as for exports, the inflow is increasing at a gradual pace.

So I mean in what time frame are we probably wish to utilize this 24 kilotons of Hot Extrusion facility?

So this year, it is 20% to 30% utilization. And in three years we will be able to utilize maximum capacity

Two, three-years, timeframe?

Yes.

And will it be largely done from domestic markets. And we heard initially you talked about distributors also we are passing -- so how would the sales volume ramp up if you can throw some color on that?

It will be a mix of export as well as domestic and also end users will be projects as well as distributors.

And on domestic side, let's say, which projects are especially the ones where we are looking at more volumes in both carbon steel and stainless steel.

So for both carbon steel and stainless steel, a lot of oil and gas projects are there. Reliance also recently announced petchem expansion in the West for INR 75,000 crores. So there, of course, the design is going on right now. So we expect a good amount of carbon steel process pipe, and stainless steel pipe orders. Then for all LNG expansion, a lot of stainless steel welded pipe will be required and for carbon steel, of course, oil and gas and other than oil and gas, a lot of traction is seen on the water segment also for Gujarat projects.

The last that we have won was a lifetime record largest order Last major order what we had was one single order, which was for Rajasthan where we are installing a mill. So currently, we are supplying close to 10%, 15% from our plant in Kutch.

That will be manufactured in Rajasthan and supplied from there.

And Gujarat also we know some project, there is no finalization is it?

Yes. So there were three big projects, which is called Sauni Yojna. So those projects will lead to some quantities that will be finalized within this month.

So I think for few quarters you provided the pipeline how much you bid for. Can you provide the number how much you bid for that is now in, say, oil and gas and water and a few other segment also? Bidding that you've done already.

Stainless Steel, the quotes are very, very small in nature. So it is very difficult for me to highlight one particular project and say INR 100 crores project. But yes, carbon steel like Sauni itself is 2.5 lakh tons. Then there is Gujarat Water Infrastructure Limited, they have few projects. So all put together, right now, close to 300,000 tons, which would be close to INR 3,000 crores for water is under consideration in Gujarat. And then we have few projects in Rajasthan and Punjab also. So now that we have a mill over there in Rajasthan, we might have some advantage for the projects in Rajasthan also. So where you‟ve located this mill?

This mill will be near Jodhpur.

And what about Punjab? Like Punjab you talked about.

So there is one project which is coming in Ludhiana, so which is if you see proximity from Kutch to Ludhiana, of course, Jodhpur or Fauladi where this plant will be is much nearer. So our chances of getting better realization as well as the order increases.

And on the oil and gas side, what kind of units we have like what we bid for our pipeline in other tons?

Right now, some few projects of IOCL are there. No major big project is there, but there are various small, small projects CGD requirement is there. IOCL has got two projects, one down south and one in the East, which is under bidding. Then there is one line of BPCL, which is there under bidding. So all put together close to between 75,000 tons to 100,000 tons in oil and gas.

Just on the water side, historically, water has been low order segment, but because now we're talking about big projects coming up, is it possible that the margins in water can improve or we should not assume that?

Yes. In Kutch maybe it remains difficult a little bit, but with the advantage of geographical location, yes, margins can increase.

And last one is the Ravi Technoforge side, can you provide some colour that how we probably are looking at go to next two to four year period? And what kind of margin improvement, a cost-cutting opportunity used over there?

So right now, at Ravi, the sales revenue for last year was close to INR 280 crores with an EBITDA margin of close to 14%. So we plan in next two to three years to have a revenue of INR 500 crores to INR 600 crores. And improving EBITDA margin by 200 basis points, approximately 2% close to 16%. And with the strength of Ratnamani and with the infusion done by Ratnamani, it seems to be possible.

And what would the mix of export and domestic for them as of now? 30% is export and 70% is domestic. But if you see the final bearing, which is manufactured, maybe it is total export is 60%.

We have the next question from the line of Hirenkumar Thakorlal Desai, an Individual Investor.

Congratulations on a good set of numbers, sir. The question is the oil prices are remaining firm. So can we assume that all the investments that are being planned in refining and everywhere where our products go are continuing? That‟s the first question.

Yeah. Thank you. So, yes, with oil price remaining at this level, of course, there -- we have seen that new projects are being announced. Not only, that but the old projects, which were stalled, revival is seen again. Now question is whether it takes six months or 12 months for them to complete the feed and then float the first MTO.

Sir, the second question is related to export opportunities. So as we -- most of us are aware, the energy prices are rising in euro, et cetera. And some, kind of, restrictions in China. Are we getting some improvement in terms of export opportunity? And if yes, are we ready to use them in terms of capacity?

Yes. So we are seeing benefits of that. In the last call also, I had mentioned that some orders, which were being manufactured in Russia or Ukraine are being diverted to other countries.

Similar one order for carbon steel, we had received. Similar for stainless steel also, a lot of orders from Europe or other geographies, we have started receiving.

So, I mean, what kind of a difference that can make in terms of our growth opportunity?

Difficult to say, but yes, of course, our margins can improve, because right now, this is a new market, which has opened up. So because of constraints from supply -- supply from Ukraine or Russia to Europe. So we have more opportunities now, where in Europe earlier, some customers who were buying from these markets have, in turn, came to us. And once they experience the quality, the product and the services and we have had repeated customers. So once they place an order with us, we feel that, again, if those markets start -- still some percentage of customers will remain with us.

That's good to know. And any effect in terms of China, restrictions being there in China?

No. As such, we have no major raw material or anything coming from China. So there is no major impact to us.

And not much of a threat in terms of imports from China, right?

No, not much of a threat also. And in between stainless steel anti-dumping is already recommended. So as soon as the Finance Ministry approves, the further threat will be curtailed.

We have the next question from the line of Manoj Bahety from Carnelian Asset Management.

Sir two, three questions from my side. One is, as you just mentioned that right now, your hot extrusion is operating at around 20% to 30% capacity utilization. And in your overall product mix also, I believe that SS proportion is small. And as we move ahead, it can be used up. So just wanted to understand that as the capacity utilization of hot extrusion moves up and as the composition of SS will keep increasing. So can we expect a steady increase in EBITDA margins going forward? And if you can help us with what that range would be, in fact, if you

can also explain that what is the difference between margins on pure SS and hot extrusion vis- à-vis? That will be helpful, sir.

That product-to-product margin is very difficult to annualized because within stainless steel also, you would have some products where margins are low. And some products, which go to defense or other aerospace sector where margins will be very, very high. So on the margins, it is very difficult. On a broader picture, yes, the revenues for stainless steel will go up. We have with the existing capacity, we have potential to go up to INR1,500 crores, INR1,600 crores.

And eventually in the next two years, when there is optimum utilization of capacities for extrusion, we will reach there. But at the same time, because we will have distribution market, we will have projects, so the blended margin will remain around at 15% to 17% EBITDA level.

And sir, where are we right now, as you mentioned that assets will ultimately move to INR1,500, INR1,600 over the next two years, where are we right now? Where are we, as group, we are at… In terms of SS, you cited INR1,500 crores, INR1,600 crores. What is the current number, sir?

This year of our revenue 30% to 35% will be SS. 30% to 35% will be SS. So broadly around INR1,100 crores, INR1,200 crores is SS, right? Yes, yes.

Which will move up to INR1,500, INR1,600. So big delta will come with the capacity utilization of hot extrusion, which will ultimately be to some extent, mitigated the increase in the project-based revenue. That's what you are mentioning, right, sir?

No, I could not understand your question.

So you mentioned that whatever margin expansion, which will happen because of the scale off of hot extrusion and because of the increased proportion of SS, that will be, to some extent, neutralized by a higher proportion of project revenue, which will be lower margin. Is my understanding correct?

No, no. So we have two major capacity utilization, which will happen in next two years. One is stainless steel extrusion, and other is line pipes or project pipes. Right, right, right.

Okay. So stainless steel, of course, within stainless steel also because to utilize the capacity -- optimum capacity of extrusion, you will have to supply two projects directly to the end user, where margins will be reasonably good. But you have to alternatively also supply to distribution network where margins might not be as good as we supply to the end user.

Okay.

And then we have also line pipes and project pipes. So there also line pipe margins are a little different than what it is in the project pipe. So blended both put together, we can achieve 15% to 17%. 15% to 17%, right, sir. And my second question is, is there a scope of extending hot extrusion to some other product segments also? Like, right now, we are doing only for pipes and all. So is it possible to use this capacity for some other products also?

No. It can be used for pipes only. But yes, pipes, then by adding certain equipment, we can explore another market. So that is – that study is going on right now. Okay, okay. And sir, last… Like exploration market, we've seen that these pipes go, but there is further investment and equipment we need to add.

Okay, okay. But mainly, it will be into pipes only or other products also. Like exploration, again, it will pipes only, right? It is all pipes only. It will be only pipes, right? Yeah.

And sir I have one another question, which is mainly on the capEx part. So I think the current capacity, we will be able to utilize in next one year. So if you can talk about future expansion, capital allocation, organic, inorganic. So looking at the opportunities we are seeing across various segments, so some perspective on that will be helpful sir?

As already informed in my opening remarks, two major expansions is already planned. One is for stainless steel cold finishing. Another is for spiral-welded pipe plant along with coating in the eastern part of India. So these two together is roughly INR300 crores to INR350 crores.

And then, of course, we have inorganic, we have invested in Ravi. Already INR50 crores have been pumped into the company. So that will also be utilized for expansion over there. Okay. Yeah.

But sir looking at the cash flows, which we are making. Don't you think that this INR300 crores, INR350 crores, INR50 crores is too small, right? Looking at the, I mean, now the quantum of free cash flows, which we are generating?

So we are working on various things, various organic opportunities, various greenfield projects backward, forward. So as and when the time is right, we will let you know.

We have the next question from the line of Abhishek Ghosh from DSP Mutual Fund.

Yeah. Sir, I‟ll just repeat my question. So for these two projects that you all are doing in terms of the spiral plant in the east and the coal finish facility for the SS part of it, for which you said INR300 crores to INR350 crores will be the capex. What should be the broad asset turn that one should assume from these two projects whenever they stabilize and get to optimal utilization? 1.5 to 2x. 1.5 to 2x. And you believe what will be the broad time lines for these projects to get commissioned?

Stainless steel by end of next financial year. And carbon steel, we will update you in another three to six months, the timeline because that might get a little delayed considering what is happening in Rajasthan right now.

And the margin profile will be similar to what you make -- what you usually do for the current business, 15% to 17%. Would that be the right assumption?

Both put together, yes. But if you say carbon steel alone, maybe less because it is only spiral welded pipes, right, so.

And sir, just one more thing. You've guided for about INR 3,800 crores to INR 4,000 crores of revenue in FY '23. That is already factoring in the sharp decline in steel prices that we have seen, is it?

Yes. That is after factoring in the declining we've seen.

And from there on, is it fair to assume that on a volume front because one doesn't know how the commodity prices behave, but a 10% kind of volume growth, given the ramp-up of SS facility and the line pipe facility that you have put up, 10% to 15% of volume growth, is it a fair assumption to make from on FY '23 levels?

Yes. Our target is always close to 15%. 15% to 20%, but with the base increasing now 10% to 15%, yes, we can consider.

Sir, the other thing is, your export as a proportion, if I just broadly look at the order is broadly hovers around anything in the region of 15% to 20%. But what is happening around the globe in terms of given the higher energy prices and realignment of pipeline capexs. Do you think this export, which is 15% to 20% of overall order backlog can see meaningful shift? Or is it likely to remain in the same zone? Any thoughts, sir?

It would remain close to 25% at max.

So you're seeing traction both in exports and domestic?

There's one major project for carbon steel, if we receive, then you can see a major shift. But then a majority of our exports is for stainless steel. And at times for a few projects, we get carbon steel.

Sir, but your exports margins, are they meaningfully different from that you get in domestic because of the rupee depreciation and other things, do you enjoy better margins there?

No. Margins are similar only. And as per the policy hedge or a natural hedge whichever is there is already there. So we are not playing on the currency risk or gain.

So margins are similar. It's just that it gives you more of operating leverage and more diversification from the domestic market?

Yes.

And sir, I had a question on cash flows, but I think you've already referred to that.

We have the next question from the line of Sahil Sanghvi from Monarch Networth Capital.

So sir, what would be the capex target to be spent this year and the next year, if you can give that?

Close to INR 125 crores this year.

This year. And next year will be similar or?

Yes, INR 150 crores, INR 175 crores next year.

And the acquisition of Ravi Technoforge, spending for that will be separate, right?

Yes, that will be over and above this.

We have the next question from the line of Sailesh Raja from B&K Securities.

After three years, we started taking more water-based project order, so of the total order book value of INR 3,200 crores. So currently, what is the contribution coming from water-based projects? And also, how is the margins in this particular project? Usually, the water-based project margins are low actually sub 10% margin. Are you still confident of maintaining that blended EBITDA of 17%, sir? Overall?

Right now, our water order would be close to INR 900-odd crores. And this is spread over until the end of next financial year. So of course, the margins are a little less, maybe not close to 17%. But yes, on a blended level, we will still be able to maintain 15% to 17%.

So how is the working capital cycle here?

Working capital cycle is longer here because of the contractor, the payment term is 180 days from the date of billing.

So my second question, in Ravi Technoforge, any further capex you need to deploy there to achieve that INR 500 crores, INR 600 crores turnover?

For achieving INR 500 crores, no further capex is required. But beyond that, yes, we will have to have additional capex.

And do we supply to all MNC companies, like the SKF, Schaeffler, Timken?

Yes. SKF, Schaeffler, Timken, NBC, NRB, NACHI. And we are in talks with Exxar. So yes, all major, all top-bearing manufacturers are the customers.

So how much of revenue comes from these MNCs?

75% comes from three or four top-bearing manufacturers.

So any plans to add more products, sir, in this company?

Yes. Work is in progress. We will update on when it shaped out.

We have the next question from the line of Vikas Singh from PhillipCapital.

Sir, I just wanted to understand, our bid book at this point of time. And if you could give us some color on our order book has been increasing much faster than peer. So going forward, what contributed to it? And how do you see this to move going forward?

Sorry, can you repeat your question, please?

So firstly, I wanted to understand your bid book at this point of time. And second question was that our order book addition has been faster than some of the peer. So just wanted to understand is that because everybody got the same CS segment I'm talking about, same kind of product. So what contributed to it? Are we taking a little bit of margin hit in order to initiate more volumes? Or things are different, if you could give us some insights into it?

No margin hit, we are not taking.

Sorry to interrupt. Sir, on the management side, your voice is breaking. Can you please repeat the last line what you are trying to say?

Yes. What I meant to say is there is no margin hit that is being taken. But we are trying to play on our strengths like we had one mill, which could go to Odisha, right. But then we had opportunity in Rajasthan and thereby, the freight, which would have been paused for anybody else has been converted partially into our margin.

Mr. Singh, any further questions?

I have actually lost the last part of the conversation, actually, and the bid book is still pending at what kind of the bid book we are holding right now in the carbon steel segment?

Bid book. So bid book, I already clarified in the first question itself, that close to INR 3,000 crores are under bidding in water segment, INR 1,000 crores, INR 1,500 crores in oil and gas segment, domestic. And there are some international projects which are also under bidding.

Sir, one more thing regarding one of your international competitors, Tubacex, which has posted one of the best results since inception. So just wanted to understand, basically, is that a company specific phenomena? Or globally, the demand has been now picking up pretty fast and we would also eventually get benefit from it?

For stainless steel, yes, we are seeing increased demand, which is also reflected in the order book. So if you see the order book is also at the highest level, close to INR 3,200 crores. And for the last five, six months, it has been over INR 3,000 crores, in spite lot of dispatches happening. So yes, the order inflow has increased.

As that was the last question for today, I would now like to hand the conference over to Mr. Sahil Sanghvi for closing comments.

Yes. Thank you. Thank you all. We would like to thank the management for basically answering all the questions and also all the participants for joining the call. Manoj sir, would you like to give any closing comments?

Yes, I would like to, thank all the participants for attending the earnings call and having the patience of hearing me out. And any questions from the investors can always be entertained by e-mail also. Thank you.

Thank you.

Thank you. On behalf of Monarch Networth Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.