Midhani Dhatu: A right mix

Midhani Dhatu Nigam (MDNL), the state-owned alloy producers, share price slipped 3.46% to Rs 210.85 on NSE after releasing fiscal year to March 2020 business performance.
The leading manufacturers of superalloys, titanium & titanium alloys, special purpose steels and other special alloys witnessed 21% rise in value of production to Rs 985 crore in the year ended March 2020 (FY20) compared with Rs 814.83 crore in the year ended March 2019 (FY19).

Though, the COVID-19 lockdown has affected the final testing, certification and shipment of materials in March 2020, it has sustained sales turnover of Rs 711.37 crore in FY20 as against Rs 710.85 crore in FY19.
During FY20, MDNL has focused more on cost optimization measures including indigenization of various components, increasing outsourcing efforts and rationalisation of manpower.
This, along with the firm’s continued focus on revenue enhancement has yielded results for the company.
Export order book position including deemed export of Rs 73.73 crore (provisional and unaudited) (best ever since inception) and highest ever export sales of around Rs 13.28 crore (provisional and unaudited) have been achieved.
It has reported highest ever capital expenditure for modernization and growth of about Rs 230 crore (provisional and unaudited).

The company has filed more than 50 Intellectual Property Rights (IPRs) and bagged three patents during the year. It developed more than 10 new products for aero space, navy and energy sectors in FY19-20.
During the fiscal third quarter to December 2019, MDNL’s net profit rose 257.8% to Rs 60.50 crore on a 36% jump in net sales to Rs 206.02 crore.

The Government of India holds a 74% stake in the company as on 30 December 2019.
What makes Midhani special is that it It supplies ultra high strength steel for rockets and satellelites.

Increase in Indian space expenditure budget has been one of the key tailwinds for Midhani. Significant expenditure budget CAGR towards space, joint product development with ISRO for strategically important materials, is a big positive for Midhani

ISRO’s launches have started picking up pace since FY15 and are expected to grow significantly in FY20/21E.

The same has also led to FY20E capital budget for space increasing at 18%. The expected increase in launches will also be contributed by the launch of SSLV

Traditionally, Indian defence sector (right from supply to Akash missiles and to submarines) has been the key customer of Midhani.

It remains one of the key strength/capabilities of Midhani and will help in counter sectoral revenue stabilisation (Defence moves up as space takes a recess and vice versa).

Net net we believe that with a strong order book from ISRO, Defence the company’s long term prospects look good.

However the near term challenge would continuous heavy capex of Rs 200 crs every year over the 2-3 years which would mean very little free cash flow generation ahead.

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