Mishra Dhatu Nigam IPO

IPO Rating – 51 (Investment Recommended)* 

About the Issue 

Another Government of India company, Mishra Dhatu Nigam (Midhani), is set to get listed on the BSE and NSE through IPO. The issue will remain open from March 21 to March 23, 2018. The issue consists fully of Offer for Sale (OFS) of Rs 438.4 crore, offering 4,87,08,400 equity shares with face value of Rs 10 per equity share. Thereby, Government of India (GoI) is selling 26% of its stake in the company. The price band is in the range of Rs 87-90 per equity share. A discount of Rs 3 per equity share on the issue price is offered by the company to retail investors and the company's employees. The minimum lot size consists of 150 shares.

Purpose of the Issue

- To carry out the disinvestment of 48,708,400 equity shares by the selling shareholder constituting 26% of the company’s pre-offer paid up equity share capital;
- To achieve the benefits of listing the equity shares on the stock exchanges.

The company will not receive any proceeds from the offer and all the proceeds will go to the selling shareholder. 

Company Background 

Midhani is a leading manufacturer of special steels, superalloys and the only manufacturer of titanium alloys in India. These are high value products which cater to niche end user segments such as defence, space and power. The company was established in 1973 and it achieved the status of Mini Ratna,Category-I company in 2009. With technological ability, the company is manufacturing a wide range of advanced metals and alloys under one roof.

The company owns specialised metallurgical plants designed to manufacture a wide range of special metals and alloys using integrated and highly flexible manufacturing systems. The special alloys have superior mechanical properties and better workability, which are essential for special applications in aerospace, power generation, nuclear, defence and other general engineering industries. These products cannot be imported from other countries due to the national security-related concerns. 

It manufactures special steels like martensitic steel, ultra-high strength steel, austenitic steel and precipitation hardening steel. There are three varieties of superalloys, which it manufactures namely - nickel base, iron base and cobalt base. It also manufactures varieties of titanium alloys. Most of the orders executed are in the nature of an import-substitute. Presently, the company has a manufacturing facility in Hyderabad and is in the process of setting up two new manufacturing facilities in Rohtak and Nellore with capex of Rs 100 crores over the next three years. 

The company’s primary customers, defence and space, accounted for 71.56% and 22.43% respectively of the total revenue in FY17. A majority of the revenue is derived from its top five customers. The top five customers contributed 64.75%, 70.29% and 65.80% of the revenues during FY17, FY16 and FY15, respectively. As on January 31, 2018, the company’s order book stood at Rs 517 crore, comprising of Rs 283 crore for defence, Rs 168 crore for space and Rs 66 crore for other sectors. Most of the company’s revenue is derived from the work performed under the government contracts. In FY17, the company imported 53.66% of its total raw material requirements and the remaining 46.34% was purchased locally. 

Market drivers for company’s products 

The Indian aviation sector is likely to see investments of around USD 15 billion during 2016-2020 of which USD 10 billion is expected to come from the private sector. These investments include addition of 300 business jets, 300 small aircrafts and 250 helicopters to the existing fleet of Indian carriers, which, in turn, will fuel the demand for high value speciality steel, superalloys and titanium alloys. 

India is expected to emerge as the third biggest country in terms of defence-related expenditure from its current eighth position by 2020, especially through indigenously designed, developed and manufactured under the ‘Make in India’ initiative to encourage domestic manufacturers to produce high value specialty steel and superalloy grades and supply them to defence and aerospace. 

Financial Performance 

The company’s revenue has grown at a CAGR of 11.1% over FY15-17, whereas its EBITDA and PAT have grown at a CAGR of 17.2% and 10.4% respectively over the same period.



The company's growth in revenue and PAT has not been consistent over FY13-17. Its EBITDA margin in FY15, FY16 and FY17 stood at 20.5%, 19.8% and 22.9%, respectively, which looks stable. Also, the PAT margin has been stable from FY13 to FY17. The company has been paying out dividends regularly since last five years. 

Valuation 

On the upper price band of Rs 90 with EPS of Rs 6.74 for FY17, the P/E works out at 13.35x. As the company has a unique business model, it has no listed peers in the industry. It has delivered RoNW of 19.19%, 19.26% and 17.93% for FY15, FY16 and FY17, respectively. 

Our View 

Midhani has a unique business model. It is the only manufacturer of titanium alloys in India. For national security concerns, the special metals and alloys cannot be imported as these are used in defence and space sectors. Thus, the major customer, i.e. the Government of India, is dependent on the company for such products. Also, it has strong customer relationships over three decades. It uses advanced technology and for production of high-end value products, it is in the process of starting two new manufacturing units in Rohtak and Nellore, which will give additional revenue visibility over the medium term. Looking at the financial performance, the growth pace has lowered due to the expansion plans, but the company is expecting the business would be stabilised in the upcoming 2-3 years. On the valuation front, the issue looks fairly priced. Investors can subscribe to the IPO with a long term perspective.

*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment

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