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RHI MAGNESITA INDIA LIMITED FUNDAMENTAL ANALYSIS

Overview of Business

RHI Magnesita India serves its customers through three state-of-the-art manufacturing facilities situated at Bhiwadi (Rajasthan), Vizag (Andhra Pradesh) and Cuttack (Odisha). All the plants are equipped with technologically advanced machines and deploy modern automation to churn out high quality refractory products


Refractories are used in the manufacturing of steel, Cement, Glass, Aluminium and copper. If we see how much quantity of refractories will be required for the above-mentioned items, we will have a more clear view about the importance of refractories in this modern life. 


Items (for 1 Tonne)

Steel

Cement 

Glass 

Aluminium 

Copper

Refractory quantity (in Kg)

10-15

1

6

3



 

Financial Analysis of RHI Magnesita Limited

Let us come to the financial performance analysis of RHI Magnesita Limited over the last 10 years. If we study the publicly available documents of RHI Magnesita limited, we will note here that RHI Magnesita was reporting standalone numbers till March 2018. Further, RHI Magnesita started to report consolidated numbers from March 2019. 


Hence, we will study the standalone financial performance of RHI Magnesita limited till March 2018. Further i.e. from March 2019, we will study the consolidated financial performance of RHI Magnesita limited. 


Sales Growth 



Over the last 10 years, the sales of the company have increased at a growth rate of 21% from ₹361 Cr in FY2013 to ₹1995 Cr in FY2022. Further, the company reported higher sales too i.e. ₹2168 Cr in its last 4 quarters ending Sep-2022. 


Initially the company was growing its sales with a beautiful growth rate i.e. 21% as 10 Year Sales CAGR is 21%. Further, if we see here the sales growth rate of the company in 7 years, 5 years and 3 years, we will find out that the company has maintained a continuous improvement in its sales growth rate. 7 Years sales CAGR is 24% , 5 Years sales CAGR is 31% and 3 Years sales CAGR is 39%. 


Further the company has faced a drop in its sales growth rate as we can see that for TTM the sales growth CAGR is 9%. 


If we analyze the trend in sales growth of the company, then we will notice here that the journey of the company was quite smooth over the last ten years except a slight decrease in sales of the company during FY2021. Sales of the company dropped from ₹1388 Cr in FY2020 to ₹1370 Cr in FY2021. 


Operating profit and Operating profit margin 

Over the last 10 years, the operating profit of the company has increased from ₹67 Cr in FY2013 to ₹385 Cr in FY2022. Further, the company reported an increase in its operating profit i.e. ₹425 Cr in its last 4 quarters ending June-2022. 


Similarly, if we see the operating profit margin of the company over the previous 10 years, It is usually 19 % to 20% which is a very healthy sign. It indicates that the company is able to protect its operating profits over the previous 10 years except FY19, FY20 and FY21. 


Sustainability in the operating profit margin of the company indicates that the company has pricing power over its customers and the company will be able to withstand the volatility in the raw material prices and will be able to maintain its operating profits. 


However, there are only three years i.e. FY19, FY20 and FY21 where operating profit margin slightly dropped i.e. 17%, 16% and 15% respectively. 


While trying to find out the reason for the drop in margin, management mentioned the following points as the major concern for pressure on the margin. 


The financial year 2020-21 was badly impacted in the first half as all the major steel buying industries like energy, auto, machinery, construction showed negative growth during the first half of 2020. The demand started growing in the second half due to good monsoon, Government fiscal policy and exports. 


Below are the factors that resulted in challenging times for the industries in terms of growth and margins. 

  • Volatility in currency is a big concern to keep the margins intact. Rupee depreciation against Dollar and Euro has impacted profitability. 

  • Non availability of containers and increase in freight and RM cost is the biggest concern for refractories in current and in future. 

  • While steel output prices turned soft, inputs continued to be costlier for domestic production. There is likely to be pressure on the margins in future. 

  • Raw materials availability from China is in short supply which will have an impact on profitability margin. 

  • COVID-19 second wave has disrupted supplies, demand, human resource and created uncertainty to Industrial growth for first quarter and third wave is expected soon, therefore market is very uncertain.


Net profit and Net profit margin 

Over the last 10 years, the net profit of the company has increased from ₹41 Cr in FY2013 to ₹269 Cr in FY2022. Further, the company reported an increase in its net profit i.e. ₹301 Cr in its last 4 quarters ending Sep-2022. 


Similarly, if we see the net profit margin of the company over the previous 10 years, It is usually 12% to 14% which is a very healthy sign. It indicates that the company is able to protect its net profits.  


There are only two years i.e. FY20 and FY21 where net profit margin slightly dropped i.e. 10% which is not too much reduction from its usual net profit margin which is around 12 % to 14%. 


Tax Payout ratio 

The company is paying taxes in the range of 33% to 35 % during FY2013 to FY2019. It is a good sign that the company is fulfilling the need of statutory compliances. 


However, if we see the tax payout during FY2020 to FY2022, we will see that the company is paying tax approx 25% to 27% which is below the standard corporate tax rate in India. It might be due to any tax relief scheme that the company will be enjoying but need to check this once. 


Interest coverage ratio 

While I prefer a company that has an interest coverage ratio of at least 3. If we see the interest coverage ratio of the company over the last 10 years, it is always on a much healthier side. As of FY22, it is 50.5. 

It indicates a very good sign that the company is very much in a comfortable position to pay its debt. The company is able to maintain its interest coverage ratio on a healthy side. Therefore, we can think that the company would not find it difficult to service its debt even in tough times. 


Debt to equity ratio 



While I prefer a company that has a debt to equity ratio less than 1. If we see the debt to equity ratio of the company over the last 10 years, it was 0 actually till FY 2019. Further, Debt to Equity ratio reached to 0.1 in FY2020, FY2021 and FY2022. It was basically due to the Capex that the company has executed during FY2020, FY2021 and FY2022. 


Debt to equity ratio of the company is very much within comfortable range and it indicates that the company is always taking care of its capital structures which is a very good sign for any company. 


Current ratio 

The current ratio of the company is currently 2.2, it indicates that current assets are very much enough to take care of its current liabilities.  


Conclusion of Financial Analysis of RHI Magnesita India Limited 

After analyzing the financials of RHI Magnesita India Limited for the last 10 years (2013-22), we have noted here that the company is growing at a healthy growth rate (CAGR 21%) and maintaining good operating profitability margins and net profitability margins. 

Company is able to increase its sales by capacity expansion without overly leveraging its balance sheet, as we can see the debt to equity level which is very much within comfortable position. The company is in a comfortable debt-servicing position, which is reflected by its healthy interest coverage ratio. Current ratio is also on a healthier side which indicates that current assets are very much enough to take care of its current liabilities.  

Operating Efficiency Analysis of RHI Magnesita India Limited 

Net fixed asset turnover (NFAT)

Let us analyze the Net fixed asset turnover (NFAT) of the company in the last 10 years. We will notice here that Net fixed asset turnover of the company was continuously in the range of 13 to 16 till FY2019. 

Net fixed asset turnover (NFAT) of the company started to come down from 14.93 in FY19 to 7.59 in FY22. It is because the company has executed capex during FY20, FY21 and FY22.  


Inventory turnover ratio 

Let us analyze the inventory turnover ratio (ITR) of the company in the last 10 years. We will note here that most of the time the inventory turnover ratio (ITR) of the company was in the range of 6.7 to 7.3. So, the company is able to maintain its inventory effectively. However, there is a slight drop in inventory turnover ratio (ITR) of the company during FY2021 and FY2022. 


Analysis of receivable days 

Let us analyze the receivable days of the company in the last 10 years. We will note here the receivable days of the company reduced from 77 days in FY14 to 75 days in FY22. It is fluctuating basically in a range of 64 to 92 days. Receivable days of the company are a little bit high and it needs to move down. 


We need to monitor the receivable days of the company in the coming future. It will be a good sign if the company is able to reduce its receivable days and collect its receivables effectively. 


Cumulative cash flow from operation (CFO) vs Cumulative profit growth (PAT)

We can note here that cash flow from operation for the last 10 years is ₹718 Cr and cumulative profit after tax for the last 10 years is ₹989 Cr. So, we can note here that the company is somewhere not able to convert its profits into cash flow from operation efficiently.  


We can see here that the company needs to manage its working capital efficiently. We have noted above that the company is still trying to reduce its receivable days but as of now there is nothing much improvement seen here. Reduction in receivable days will improve the collection efficiency of the company and the company will be able to convert its profits into cash flow from operation efficiently. 


We can see here the debt level of the company, which was almost zero till FY2019, increased to ₹65 Cr in FY22. Company has done capex during FY20, FY21 and FY22 and funds secured from debt got utilized in executing the capex.  


Company is growing its sales with a CAGR of 21% and controlling its debt level in a very comfortable position over the last 10 years indicates that the company was able to maintain its sales growth with their internal fund sources and with minimal outsourced fund e.g debt which is confirmed by observing the debt to equity ratio of the company.  


Conclusion of operating efficiency Analysis of RHI Magnesita India Limited

After analyzing the operating efficiency analysis of RHI Magnesita India Limited for the last 10 years (2013-22), we have noted here that the company is maintaining a healthy NFAT which is around 13 to 16 most of the time during the last 10 years. Maintaining such NFAT indicates that business is less capital intensive business and may face competition from other players working in similar fields. But, when we look at the margins that a company is  maintaining over the years, it indicates that the company is doing something good. 

Money is stucking in receivable. Receivable days of the company are a little bit high and it needs to move down. Company has to work on reducing the receivable days and to avoid stucking of money in receivables. 

Margin of safety in the business of RHI Magnesita India Limited  


Self sustainable growth rate 


The self sustainable growth rate of the company was continuously on a higher side than its 10 years sales CAGR 21%. When we see the sales growth of the company, we can note here that the company was growing at a much lower rate as compared with its self sustainable growth rate. In other words, we can say that the company was very much comfortable to grow with the pace as it was growing by using its own funds. 


It indicates that the company will be very much able to meet its growth plan with its internal resources. Hence, the company will not have to be dependent on the outsource funds like debt and equity dilution. 


Same could be seen by observing the debt on the company over the previous 10 years. If we see the debt to equity ratio of the company over the last 10 years, it was 0 actually till FY 2019. Further, Debt to Equity ratio reached to 0.1 in FY2020, FY2021 and FY2022. 


Dividend payout 

During the period FY13 to FY22, The company has paid a dividend of ₹252 Cr and retained the earning by ₹737 Cr. Company has increased the value of the fund that it has retained and reinvested in its growth plan by 13.23 times. It also indicates a good sign as the company has not deteriorated the trust of its shareholders. 


Free cash flow 

Let us see here the cash flow performance of the company. During the period of FY2013 to FY2022, the company has generated cash flow from operation ₹718 Cr. During the same period, the company has executed CAPEX of ₹413 Cr. So, if we determine here the free cash flow for the same period, it will be  ₹305 Cr. 


Other income for similar period of FY2013 to FY2022 = ₹82 Cr

Interest expense for similar period of FY2013 to FY2022 = ₹28 Cr 

Therefore, net free cash flow will be ₹359 Cr (i.e. ₹718 - ₹413 + ₹82 - ₹28) after considering the other income and interest expenses. 


Conclusion of margin of safety analysis in the business of RHI Magnesita India Limited 

The company is very much comfortable to grow with the pace as it was growing by using its own funds and the company will not have to be dependent on the outsource funds like debt and equity dilution. Same could be seen by observing the debt level of the company over the previous 10 years. If we see the debt to equity ratio of the company over the last 10 years, it was 0 actually till FY 2019. Further, Debt to Equity ratio reached to 0.1 in FY2020, FY2021 and FY2022. It was basically due to the Capex that the company has executed during FY2020, FY2021 and FY2022. Debt to Equity ratio 0.1 indicates that the company has managed its capital structure efficiently. 


Business Analysis of RHI Magnesita India Limited


Comparison of RHI Magnesita India Limited with its peers 



RHI Magnesita India Limited has had a higher sales Growth rate (CAGR) and profit growth rate (CAGR) for the previous 10 years as compared with its peers and maintained its margin too beautifully over the last 10 years. 


Conversion of sales growth in to profits 



We can see from the above table that net profit margin was fluctuating over the years in a range of 10 %to 13%. Maintaining such a level of net profit margin is very good. We can say here that sales growth is getting converted into profits as the company is maintaining a healthy net profit margin over the last 10 years i.e. from FY13 to FY22.  


Conversion of profits in to cash



We can see from the above table that net profits of the company are not getting efficiently converted into cash. It is the result of higher receivable days. Company has to collect its receivables efficiently. This is an issue that we need to monitor in the coming future whether the company will be able to improve its receivable days or not. 


Creation Of Value For Shareholders From The Profits Retained By The Company 



We can see from the above table that the company has created 13.24 times of the fund retained by it and hence we can say that the company has passed the test of creating at least one INR of market value generation for its shareholders for each INR profit retained by it over the last 10 years. 


Conclusion of business analysis 

RHI Magnesita India Limited has had a higher sales Growth rate (CAGR) and profit growth rate (CAGR) as compared with its peers and maintained its margin too beautifully over the last 10 years. 


We can say here that sales growth is getting converted into profits as the company is maintaining a healthy net profit margin over the last 10 years i.e. from FY13 to FY22. But, net profits of the company are not getting efficiently converted into cash. Company has to collect its receivables efficiently. 


The company has passed the test of creating at least one INR of market value generation for its shareholders for each INR profit retained by it over the last 10 years. 


Key Variables that will affect the RHI Magnesita India performance 


Below are the factors that resulted in challenging times for the industries in terms of growth and margins. 

  • Volatility in currency is a big concern to keep the margins intact. Rupee depreciation against Dollar and Euro has impacted profitability. 

  • Non availability of containers and increase in freight and RM cost is the biggest concern for refractories in current and in future. 

  • While steel output prices turned soft, inputs continued to be costlier for domestic production. There is likely to be pressure on the margins in future. 

  • Raw materials availability from China is in short supply which will have an impact on profitability margin. 

  • COVID-19 second wave has disrupted supplies, demand, human resource and created uncertainty to Industrial growth for first quarter and third wave is expected soon, therefore market is very uncertain.


I hope you have enjoyed the complete fundamental analysis of RHI Magnesita India Limited. Please share to reach up to max people for educational purposes only. It should never be considered as a recommendation as this post is only and only for educational purposes only. 

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