Ratnamani Metals & Tubes Ltd: The Bright Spot Amongst The Greys!
Ratnamani Metals & Tubes is a leading metal tube and pipe manufacturer that caters to over 19+ industries globally. It specializes in stainless steel, carbon steel, and exotic alloys tubes and pipes.
- the company with the largest domestic production facility in Stainless Steel (Seamless and Welded) Pipes & Tubes.
- the largest domestic manufacturer of Nickel Alloy Pipes & Tubes and Titanium Welded Tubes.
- one of the major manufacturers of Carbon Steel Welded Tubes.
Before you read any further, let me quickly explain the differences between a pipe and a tube.
Ratnamani’s Business Segments:
Stainless Steel (SS) & Exotic Alloys:
Products in the Stainless Steel (SS) segment:
- Heat Exchanger Tubes
- SS Seamless Tubes
- SS Welded Tubes
- Titanium Welded Tubes
- Seamless Nickel Alloy Tubes
- Exotic Alloys Seamless Tubes – Inconel, Incoloy, Monel
- SS Seamless Instrumentation Tubes
- SS Pipes
- SS Seamless Pipes
- SS Welded Pipes
- SS 3LPE (3 Layer Polyethylene) / 3 LPP (3 Layer Polypropylene) Coated Pipes
Carbon Steel (CS):
Products in the Carbon Steel (CS) segment:
- High Frequency Electric Resistance Welded Pipes (HFW-ERW)
- Submerged Arc Welded (SAW) Pipes
- Helical SAW Pipes (H-SAW)
- Longitudinal SAW Pipes (L-SAW)
- Pipe Coating Solutions
- 3 LPE (3 Layer Polyethylene)
- DFBE (Dual Fusion Bond Epoxy)
- FBE (Fusion Bonded Epoxy)
- Food Grade Epoxy
- Cement Lining
- Induction Bends
Ratnamani’s business is heavily reliant on the capital expenditure plans of its customers. Since significant capital expenditure in these sectors occurs (on an average) every 2-4 years (timelines may change due to the macroenvironment), Ratnamani’s revenues tend to be lumpy and are entirely dependent on them winning the underlying contracts.
What is important to note here is the quantum of expenditure that these end user industries set aside specifically for pipes and tubes:
- Oil & Gas, Refinery, Petrochemicals – 7-8% of entire capex.
- Power – Nuclear & Thermal – 5% of entire capex.
- Other Industries – 4% of entire capex.
Ratnamani has a three-pronged strategy for growing its business:
- Attain increasing market share by addition of capacities.
- New state of the art manufacturing facility at Kutch will establish global competitiveness of the L-SAW division.
- Incremental addition of capacities across all segments to drive ever increasing volumes.
- Import substitution of high value products.
- Manufacturing foray into 10’’ NPS Seamless products in Stainless Steel, Nickel Alloy, and Inconel (this makes them the only domestic manufacturer for these products).
- Titanium welded tubes (one of the few domestic manufacturers).
- Move up the value chain by manufacturing low-volume high-value exotic alloy tubes and pipes.
Competitive Advantages & Economic Moats enjoyed by Ratnamani:
Moderate Customer Switching Costs
A Pipes and Tubes Supplier needs to be ‘approved’ by the customer or sometimes by the EPC which undertakes the construction (capex) work. These approval processes involve the customer (or EPC) visiting and auditing the facilities and products, and generally takes over 5 years.
Due to the intense scrutiny applied by the customer, they tend to not switch suppliers based on cost, provided quality remains high.
In tubes, the criticality associated with failure is exceedingly high (nuclear, API, defense, aerospace), and hence, customers tend to stick to their high-quality trusted supplier.
Hence, the players in the industry that cater to the larger reputed customers enjoy moderate customer stickiness.
In 2016, Ratnamani embarked on a new journey by deciding to set up a hot extrusion facility that would produce mother hollow pipes (backward integration) and would allow for extrusion from up to 10” inch mother hollow pipes. This exercise will enable backward integration into mother hollow pipes as well as forward integration into value-added pipes and tubes of Stainless Steel, Nickel Alloys, and Inconel etc. It also undertakes inner and outer coating of pipes and tubes thereby reducing commissioning time for the end-customer (forward integration).
This integration puts the company on par with global leaders like Sandvik, Sumitomo, and Salzgitter.
Ratnamani’s product portfolio, especially in the high-margin SS segment is entirely ‘made-to-order’ as per the needs of the customer. This approach of catering to the precise needs of the customer results in higher customer satisfaction and better Product-Market fit.
The company has a domestic market share of over 40% in stainless steel tubes for niche applications.
The CS segment generally tends to have more standardized requirements.
It also undertakes setting up of ‘Mobile Plants’ near the end user’s location which can be set up and dismantled quickly. This helps reduce transportation costs and commissioning time. Generally, these mobile plants are set up for water distribution projects, pipes for potable water, and drainage infrastructure.
The company’s manufacturing facilities at Kutch, Indrad, and Chhatral, in the state of Gujarat allow for easy connectivity with the ports of Kandla and Mundra, thereby helping lower transportation costs. The company enjoys lower transportation costs than its peers (lower by about 1.5% – 2.5%).
Risks Faced by Ratnamani:
Performance Linked to Capex Initiatives
Ratnamani’s performance is strongly linked to the capex requirements and initiatives of its end customers. Generally, over 80% of demand is reliant on new projects. Hence, it is imperative for the company to have a strong sales network to ensure that it builds long-term relationships with customers thereby boosting opportunities for new contracts. This focus on developing a strong sales team is evident from their efforts to continuously add representatives in new geographies as well as partner with local leading suppliers.
The company has had a few years of flatlined growth due to the lack of / deferral of projects by Oil & Gas companies which are their largest customers.
Raw Material Risk
HR Coil (key raw material) supply in India was largely monopolized in the hands of Jindal Stainless due to high anti-dumping duty placed on imports for the same. However, the government has relaxed the duty considerably to enhance the competitiveness of HR Coil prices. This move is favorable for Ratnamani as it will help lower the supplier’s power and increase Ratnamani and its peers bargaining power.
Ratnamani does not face excessive margin pressure due to raw material risk as the business is based on a ‘conversion’ basis (fixed profit) as well as the company’s approach of booking raw material on a back-to-back basis when an order is received. However, the past two quarters have seen an exceptional surge in steel prices (jumping to INR 55,000 per ton from INR 38,000 per ton), molybdenum, and nickel prices. This large increase in input prices has forced customers (and EPCs) to delay parts of their orders.
Working Capital Risk
The Metal Pipes and Tubes industry is characterized by high working capital requirements. This comes about largely due to the chunky nature of contracts which are executed over a period of a few quarters resulting in high inventory buildup (buildup for 4-5 months) and high working capital days (between 150-200 days on an average).
These large working capital requirements also pose as an entry barrier to new entrants.
The application of metal tubes and pipes is in environments which are subject to extreme temperatures and pressures thereby rendering other substitutes such as plastic pipes entirely useless. Substitution Risk is near negligible in the core end-user industries.
Product Mix Risk
The growth in the high margin SS segment has been lower than the growth in low margin CS segment since 2012. Since 2014, CS revenues have been higher than that of SS revenues, leading to margin compression.
Margin Profile: SS Margin (SS Segment) > ERW Margin (CS Segment) > Helical SAW Margin (CS Segment)
Ratnamani does face competition from domestic as well as global (mainly Chinese, Japanese, and European) competitors.
Its key domestic competitors are:
- SS Segment – Suraj, Tubacex, Jindal Saw (new entrant)
- CS Segment – Welspun Corp, Jindal Saw
Ratnamani has been relatively insulated from local competitors in the SS segment due to their strong relationships with customers. The CS segment is largely commoditized with low product differentiation which leads to margin compression in lean years due to oversupply.
Under the ‘Make in India’ directive, the government has aimed to boost domestic manufacturing through initiatives such as the ‘Purchase Preference Local Content’ (PPLC) policy for the Oil & Gas sector. The PPLC policy allows Class 1 local suppliers to win public sector contracts even if they quote rates 20% higher than the lowest bid.
Class 1 local supplier is one whose goods contain a minimum of 50% raw material that is sourced locally. Ratnamani would fall under this category in the eyes of an EPC due to it sourcing over 70% of its raw materials domestically, also, Ratnamani tends to be the L1 bidder for most of the projects (L1 means the Lowest Bidder).
Ratnamani is also looking towards the government to impose anti-dumping duty on cheap poor quality Chinese imports that are used in lower value projects.
As we have seen, the opportunities for the company are contingent on their end-user customers following through on their capital expenditure plans. Thus, the scope of these opportunities keeps changing annually.
- Oil & Gas / Petrochemicals / Refineries / Pipelines / City Gas Distribution (CGD)
- ERW facilities fully booked.
- Refineries have been undertaking upgradation projects to meet the new BS6 regulations as well as desulfurization requirements.
- New INR 39,000 Cr expansion undertaken by the Joint Venture between IOC and CPCL will offer new opportunities.
- Recently, a massive 44 Billion USD greenfield refinery was to be set up in Maharashtra (or Gujarat) with one of the major investors being Saudi Aramco. However, due to the glut in oil prices globally, this investment may be axed or put on hold. Any positive updates on the project could be a game changer.
- Pipeline penetration (Oil & Gas, Water) is low in India (4 Km per 1000 sq km) when compared to developed countries like USA (50 Km per 1000 sq km). Considering that both countries are geographically large, this comparison does make sense and opens opportunities in the CS segment.
- The growth in LNG terminals and the higher use of Natural Gas as energy (currently stands at 7% of India’s total energy consumption) will fuel demand for newer LNG terminals as well as the underlying pipeline network (CGD).
- Water Infrastructure
- Demand to be driven by programs such as Nal Se Jal, River Linking, AMRUT etc.
- Ratnamani became an approved supplier of condenser tubes in the SS segment as well as in titanium to one of the major international Atomic Energy Corporations. It envisions good opportunities in this space.
- Domestic power sector has deferred some of their capital expenditures.
- Secured supply of Urea grade tubes, however, no new large capex has been announced yet.
- Strong Order Book in hand (as of April) – INR 1953 Crs
- A strong emphasis on the development of Pharma Parks (especially APIs) in India will drive new capex in API manufacturers who are consumers of exotic alloys and stainless steel tubes.
- Ratnamani may put a plant in Southern or Eastern India to cater to the demand in those areas. Hot Extrusion Facilities and expansion in the L-SAW segment are yet to come online fully.
- Ratnamani is working towards enhancing its distribution network in new geographies.
- Some key global projects that the company sees opportunities in (no disclosures regarding whether any of these have fructified or not) –
- ADNOC Refinery – Ghasha Project, Abu Dhabi
- UAE Expansion Project
- Ethylene Cracker Project – Amur, Russia
- ONGC Cluster – 7 & 8 Series
- HPCL Barmer – Company expects to get INR 150 Cr order (as per Q2 concall)
- LNG Project (EPC is L&T), Mozambique
- Overall, the company sees new demand coming from Middle East, Africa, and Asia, while replacement demand coming from North America.
- Government Focus on Infrastructure Enhancement.
Financially, the company’s minimal debt burden (BV D/E of 10%, MV D/E of 2.2%) and healthy cash balance is likely to provide operational flexibility and help maintain a strong liquidity position. The company has stood out in terms of its performance despite a poor macro environment over the past few years.
The company generates a very small portion of its revenues (~1% of revenue) through energy generation via Wind Mills.
It seems to me that the capex cycle for most of their customers has already begun and I expect to see healthy revenue growth over the next 2-3 years. However, post that period, I believe that the capex cycle (significant capex) will undergo a slowdown for the next 1-2 years before reviving again. I expect Ratnamani’s revenues to be mildly cyclical due to exposure to the Oil & Gas industry and allied sectors, partly offset by increasing revenues due to market share gains (as a result of import substitution).
I expect operating margins to improve gradually over the course of the next few years due to high margin SS segment making a comeback. Terminal year margins will be 14%.
Sales to Capital ratio will start to improve as new capacity utilization increases, eventually reaching 1.6
Terminal Year Cost of Capital stands at 8.52% with ROIC at 10.52%
Based on my narrative and understanding, Ratnamani’s intrinsic value stands at INR 1044.73 per share (base case) and INR 1279.58 per share (bull case).
At the current price of INR 1922 per share, I do not find Ratnamani Metals & Tubes particularly attractive from a valuation perspective, yet, I do like the company fundamentally.
At the end of the day, the sole intent of investing is to generate wealth, and Ratnamani has done just that!
To me, Ratnamani Metals & Tubes is the bright spot amongst the greys!