MIDHANI – Mini ratna, Max strength

Mishra Dhatu Nigam Limited (MIDHANI) is one of the leading manufacturers of special steels, super alloys and 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. It has emerged as a ‘National Centre for Excellence’ in advanced metallurgical production of special metals and super alloys in India. With the growth of its business and operations, MIDHANI has achieved the status of a Mini Ratna, Category-I company in 2009.

MIDHANI manufactures unique combinations of metal and alloys. These special alloys has superior mechanical properties and better workability which are essential for special applications in aerospace, power generation, nuclear, defence and other general engineering industries. Its products are key ingredients for strategic sectors in India, which typically cannot be imported from other countries due to its national security related concerns.

The Company manufactures special steels like martensitic steel, ultra high strength steel, austenitic steel and precipitation hardening steel. It manufactures three varieties of super alloys – nickel base, iron base and cobalt base and also manufactures varieties of titanium alloys. Most of the orders executed by the Company are import substitutes. Presently, it has a manufacturing facility in Hyderabad and is setting up two new manufacturing facilities in Rohtak and Nellore. The Company’s Rohtak plant and railway spring facilities will commence by September 2020.

The capability of Vikram Sarabhai Space Centre (VSSC) has allowed the expenditure to trickle down to domestic players like MIDHANI, as its space order book has increased to Rs.310 cr in FY19. The increase in space order book and execution has improved MIDHANI’s profitability metric and has helped working capital as well. We expect the Company’s performance to remain strong, at least for the next 2-3 years, on the back of the tailwind of space budget expenditure.

As space contributed ~55% of H1FY20 topline, margins expanded to 29.9%. Despite FY17-19 seeing a decline in volumes, there has been growth in value terms as MIDHANI focused on maraging steel – a Ni heavy alloy steel. The Company’s facilities are under-utilised, given the batch production process and niche product segments it caters to. As ISRO fulfills its potential of probable launches, higher volumes to MIDHANI can help reverse some losses on account of current underutilization of the company’s facilities.

Space has long been a forum for geopolitical competition, but in the past few years it has become emblematic of a brittle international order where assertive countries such as China and Russia are looking for new ways to challenge American military dominance. The Chinese leadership has set still more ambitious goals in an effort to become an “all-round space power” by 2030. Dozens of Chinese satellite companies have been established since 2014. This could pose as a threat to the Indian space program going ahead.

MIDHANI has incorporated a JV with NALCO for setting up of high end aluminium alloys plant for manufacturing of plates, sheets, etc. The company has got the land for the project and signed the agreement but is waiting for some legal clearance from the government. The total capacity of this facility will be 60,000mt. Currently, the Company incurs a capex of about Rs.50-100 cr. The Company expects it to increase to Rs.200 cr per year for the next few years. Majority of the capex is customer funded.

Traditionally, Indian defence sector (from supply to Akash missiles to submarines) has been the key customer of MIDHANI. Defence/Space remains one of the key strength/capabilities of the Company and will help in counter sectoral revenue stabilization (defence moves up as space takes a recess and vice versa). As on December 2019, total order book stood at Rs.1700 cr. In the current year 70% of orders are from ISRO followed by defense and energy. The Company is looking at Rs.900-1000 cr order inflows every year.

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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 12 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’