September 8, 2017

Analysis: Maithan Alloys Limited

www.drvijaymalik.com has a dedicated section for investment & stock specific queries of readers: “Ask Your Queries”. Over time, readers have asked queries about multiple stocks in this section. Answers to these queries have been done post preliminary analysis of the stocks under consideration. Such analysis has been found helpful by readers.

“Analysis” series is an attempt to summarize & share with all the readers, the key questions and their answers, which have featured on “Ask Your Queries” section. The primary aim of this new feature is to share the knowledge with all the readers of the website.

The current section of this series, “Analysis” covers Maithan Alloys Limited, an Indian manufacturer of Ferro alloys focusing on the production of Ferro- manganese, Silico- manganese and Ferro- silicon primarily catering the demand of steel manufacturing industry.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys


Reader’s Query


Dear Doc sahib,

I have done an analysis, with my limited knowledge, about Maithan Alloys Limited. The report is attached with this mail.

When you find the time, please go through it and if you can share your expert feedback. If you want to publish it in your blog, it will be my privilege.

I thank you for all your guidance.

Cheers!

Gunasekar Arunachalam

Maithan Alloys Limited


Financial Analysis


Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys


Valuation Analysis


Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys


Business and Industry Analysis


Comparison with Industry peers:

Maithan Alloys Limited is in the business of manufacturing and exporting ferrous alloys - Ferro Silicon, Ferro Manganese and Silico Manganese.

As per screener.in, Maithan alloys’ last five years sales growth is more than most of its peers.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Increase in production capacity and sales volume:

Maithan Alloys Limited have consistently increased its production capacity (as per page 6, Investor presentation May 2017). Moreover, its plants are running at 95% capacity utilization (from 92% in FY 2015-16).

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

All the three plants are running at maximum capacity and hence volumes will increase only marginally. Maithan Alloys Limited is looking to acquire assets to increase capacity. It has been communicated clearly in its FY16-17 Annual report’s management review section.

So, we can assume that the sales volume growth in FY 17-18 will be muted.

Management has successfully demonstrated its project execution capability by commissioning its biggest plant (72 MVA, more than 50% of the capacity) at Vishakapatnam, Andhra Pradesh Special Economic Zone. The Management has completed both phase - I (36 MVA) and phase – II (36 MVA) projects on time.

Conversion of sales growth into profits:

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Generally, Sales growth is more than OPM growth. Maithan Alloys has been pushing sales growth at the cost of margins.

Conversion of profits into cash

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Maithan Alloys Limited is collecting most of the cash after sales.

Creation of value for shareholders from the profits retained:

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

The value created per INR retained is 3.68. The company is creating wealth for the shareholders.


Management Analysis


Background check of promoters and directors:
  1. Department of Income tax has carried out a search & seizure operation in the premises of Maithan Group on 20.09.2007 and subsequent dates. More information is not readily available in the public domain.
  2. On May 20, 2017, Meghalaya Chief Minister Mukul Sangma has named Maithan alloys, along with other firms as one of the 15 most polluting units in the Meghalaya state

Apart from these two above highlighted issues, there are no other issues, penalties or regulatory actions are to be readily found in website search using Google

Management succession plans:

The Company is managed by the Asansol-based Agarwalla family who are in the manganese alloys business for more than two decades.

Status as per FY16-17 Annual report:

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Status as per FY17-18 Annual report:

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Father (Mr. S. C. Agarwalla) and his two sons (Mr. Subodh Agarwalla and Mr. Sudhanshu Agarwalla) are playing a major role in the leadership team, thus ensuring stability in the succession.

Remuneration paid to the promoters/directors:

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

When the company has recorded losses in the years from FY 11-12 to FY13-14, promoters have taken a pay cut proportionally (except in FY11-12). In the recent years, the pay hike is generous, however, it is within legal limits.

Related party transaction:

i) Subsidiaries

Maithan alloys had three subsidiaries – i) AXL Exploration (P) Ltd ii) Anjaney Minerals Ltd and iii) Anjaney Alloys Limited.

In FY 2015-16, Anjaney Alloys Limited is amalgamated with Maithan Alloys. Hence, as on 31st March 2017, the company has two subsidiaries – AXL Corporation and Anjaney Minerals.

At the consolidated level, AXL Corporation and Anjaney Minerals contribute only 1.5% of net assets of the group.

ii) Related Party Transaction

The related party companies were i) Anjaney Ferro Alloys Ltd. ii) Maithan Ceramic Ltd iii) Maithan Steel & Power Ltd and iv) Maithan Smelters Pvt. Ltd. However, Companies numbered i), ii) and iii) ceased to be related party companies.

From FY17-18, Maithan Alloys Limited have related party transaction only with Maithan Smelters Pvt. Limited. 

Maithan Alloys Limited have given advances to subsidiaries. – INR 90 Lakh to one of the two subsidiary companies.

Maithan Alloys Limited has incurred “On behalf expense” of INR 6.34 Crores for Maithan Smelters.

Considering the company size, these transactions could be concluded are insignificant.


Consistent dividend payment:

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Promoter shareholding:

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

The promoter has consistently reduced shareholding in the company from the heights of 74.36% at the end of FY1314 to 70.69% as on 31st March 2017. This needs to be read with a lot of caution.

During FY2016-17, the promoter-cum-Chairman Mr. B. K. Agarwalla has resigned. The exact reason is not readily available in the public domain. Maithan alloys is a family owned and family run company. Under normal circumstances in a family run company, the Chairman is expected to retire, rather than resign, even the reason is medical related.

One section of Agarwalla family (may be related to Mr. B. K. Agarwalla) has exited the company completely by transferring their shares to other section of Agarwalla family (may be related to Mr. S. C. Agarwalla)

“Maithan Smelters – a company that is influenced by current leadership has received 18.54% of shares in FY2016-17. It is clearly communicated in the FY2016-17 annual report in “related party disclosure” section. As per Zaubacorp website, President and CFO of Maithan Alloys is a director in Maithan smelters.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

The promoter group has consistently reduced shareholding in the last four years and undertaken a complicated share transfer arrangement in FY16-17. However, the current leadership of Maithan Alloys’ influenced company (Maithan Smelters) has increased its stake in Maithan Alloys from 0% to 18.54% in a year.

FII Shareholding:

FIIs own 0.27% of the company. This stake has been acquired in FY16-17.



Other Business Parameters


Product pure play

Maithan Alloys Limited is committed to manufacturing only Manganese alloys. Management has further emphasized that it will not involve in the commodity trading, which is a common practice because of the wild price swings in the manganese commodity market.

Moreover, Company is not currently involved in the mining and focused only on becoming most competitive producer of Manganese alloys.

This message has been consistently communicated in all its last 6 year annual reports.
Most of the other companies in the same industry are involved in trading.

Government influence

The Ferro Alloys Industry is a power intensive industry, with key raw materials and power adding up to about 80% of the cost of sales (as per FY15-16 Annual report, page number 23). Andhra government and other governments have announced various subsidies for electricity. Revision or cancellation of subsidies will have an impact on earnings.

Stable customers with established relationship

Maithan Alloys Limited has established a client base across India, marked by long-term relationships with prominent steel manufacturing clients like SAIL, JSW, JSPL and JSL. Almost 100% of the Company’s domestic sales are to clients who have been associated with the Company for over seven years.

Further MAL also has a presence in the international market and derives ~50% of its revenues from exports.

Domestic – Export business split-up:

In FY1617, split-up is 50:50.

The company has no client concentration or geographic concentration. MAL’s exports are to countries wherein there is no or marginal manganese alloy production

Credit Rating History


Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Credit Rating has been consistently upgraded for Maithan Alloys.



Margin of Safety


MoS in purchase price:

Share price as on 16th August is ₹502.05 at PE ratio of 5.54. The margin of safety condition is satisfied.

Self-Sustainable growth rate (SSGR):

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Free Cash Flow (FCF):

Company is free cash flow positive, with FCF/CFO as 50%


Further Annual Report Analysis


Contingent Liabilities

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Claims against the company / deputed liabilities not acknowledge at debts is only INR 4.1 crores. Even in the worst case scenario, the low gearing will not change drastically.

Loans / Advances

Total (short term and long term) loans and advances amounted to INR 65 cr., comprising 7% of the Company’s total assets.

Short-term loans and advances for the year stood at INR 37 cr. (a decrease of 25% from last year).

Current Investments

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Management has parked the majority of the cash in debt mutual funds. INR 60 Crores is parked with SBI Magnum Insta Cash fund, which is debt and money market mutual fund with high liquidity.

It is to be noted that company holds 144,000 units of HPCL shares. Though the amount is INR 5.8 Crores, the company may not have enough expertise in equity markets.



Ratio Analysis

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys


Conclusion

Maithan Alloys Limited is available at attractive price. It has been growing more than its peers and has long term relationship with its domestic customers. It has consistently reduced debt and has healthy cash flow from operations. Credit rating has been consistently upgraded.

Maithan Alloys Limited does not involve in trading business and hence insulated from both wild profits and losses of the trading business. Revenue mix is 50:50 between domestic and export with no geographical risk in export markets.

Management has been increasing their remuneration over the years. In the last year, salary levels have been increased more than 100%, which is not an encouraging sign. Related party transactions (such as rents, lease payments, loans) are at minimum level.

Receivables, promoter shareholding and remuneration are to be keenly observed.


Author’s Response



Hi Gunasekar,

Thanks for sharing the analysis of Maithan Alloys Limited with us! We appreciate the hard work put in by you in the analysis.

Let us first try to analyse the financial performance of Maithan Alloys Limited over last 10 years.

We believe that while analysing any company, the investor should always look at the company as a whole and focus on financials which represent the business picture of the entire group. Therefore, while analysing Maithan Alloys Limited, we have analysed the consolidated financials of the company.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Maithan Alloys Limited has been growing its sales since last 10 years (FY2008-17) at a rate of about 15% year on year from ₹378 cr. in FY2008 to ₹1,342 cr. in FY2017.

The sales growth has been achieved by the company by continuously increasing its own production capacity, where it has increased the capacity from 24 EVA furnace in FY2007 at one location of Kalyaneshwari in West Bengal to a combined capacity of 137 EVA furnace by FY2013 at three locations (Kalyaneshwari: 48.75 EVA, Byrnihat, Meghalaya 16.5 EVA and Vishakhapatnam 72 EVA furnace). The latest capacity addition of 72 EVA furnace at Vishakhapatnam became operational in 2013.

As per the Q1-FY2018 results press release by Maithan Alloys Limited, it has achieved 95% capacity utilization, which leaves the very little scope of volume driven growth in near future without installing new capacities by the company.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

In the above press release, an investor would also notice that the company has acknowledged that the increase of 64% in sales revenue in the period is primarily driven by higher pricing of the products.

We believe that the sales growth, which is primarily driven by the price increase and not supported by the sale of higher volumes, is not sustainable in the long run. Therefore, it becomes essential for any investor to keep a close watch on the future capacity addition plans of the company either by installing new plants on its own or by purchasing plants from existing players.


In the Q1-FY2018 results press release, the company has highlighted that it is open to acquisitions to increase capacity in addition to doing de-bottlenecking in the existing plants.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

In case, the company goes for acquisitions, then it would be essential for the investors to assess whether the company is able to purchase assets at attractive valuations. This is because, at March 31, 2017, the company has a significant amount of cash & investments (₹158 cr) on its books and many a times presence of cash leads to expensive acquisitions by companies, which later on proves to be a costly affair.

An investor would notice that the sales growth achieved by Maithan Alloys Limited until now has been associated with fluctuating profitability margins.

The operating profit margin (OPM) was 18% in FY2008, which declined to 3% in FY2009, which then increased to 17% in FY2011 only to decline again to 6% in FY2014. The OPM has now increased to 21% in FY2017.

Such fluctuating operating profit margins indicate that the company does not have a pricing power over its customers and in turn, has to absorb the increases in the inputs costs on its own, which leads to reduced profit margin in times when raw material prices go up.

A look at the list of customers disclosed by the company in its investor presentation of August 2017, will indicate that the customers of Maithan Alloys Limited are large steel companies, which are much bigger in size and have a lot more negotiating power than Maithan.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

The large steel manufacturers would always have a lot of competing suppliers willing to sell them their products, which limits the ability to Maithan Alloys Limited to increase prices of its products at its will.

Moreover, the fact that steel manufacturers produce commodity products and therefore, in turn, face stress on their profitability in different phases of commodity cycles. Therefore, it seems obvious that one of the main means for steel producers to keep their profitability intact would be to lower the cost of their raw material purchases as much as possible.

This attempt of steel producers to keep their input costs as low as possible precludes any possibility of vendors like Maithan Alloys Limited, which supplies a commodity input (Ferro-alloys), to steel producers to get price hike at their own will.

Moreover, India is currently facing an oversupply of Ferro-alloy production. In the management discussion and analysis section of FY2017 annual report, page 27, Maithan Alloys Limited has mentioned this situation to the shareholders.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys


Maithan Alloys Limited has clearly communicated to the shareholders that currently, India has 3.5 MTPA of production capacity of Ferro-alloys whereas the domestic consumption is only 2.3 MTPA. It does not come as a surprise that in such a tough competitive scenario, some of the Ferro alloy manufacturers have closed their operations.

An investor would appreciate that in such tough competitive situation, a supplier (Maithan Alloys Limited) of a commodity product (Ferro alloys) to very large customers (steel producers), who themselves produce commodity output (steel), would find it difficult to get favourable pricing terms from its customers.

These industry dynamics are clearly visible in the profitability performance of Maithan Alloys Limited over the years, where its operating profit margin (OPM) has been varying from 3% to 21%.

A look at the credit rating rationale for Maithan Alloys Limited prepared by CARE Limited in Oct. 2015 has also highlighted these issues being faced by the company:

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys


In light of the above discussion, we do not agree with the disclosure by Maithan Alloys Limited in its FY2017 annual report, page 8 that it does not pass on the increases in costs to its customers as a business strategy.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

We believe that every business wants to protect its profitability margins and given the capitalistic nature of the private business, the key aim of the companies is to maximize the returns to the shareholders. Sustained profit margins help companies to plan their future capacity additions efficiently whereas fluctuating profit margins make it difficult for providers of capital including lenders and equity investors to gain confidence in the business model of the company, thereby leading to higher cost of capital for the company.

Therefore, when companies state that they do not pass on the cost increases to end customers as a strategy while implying that they have the ability to do so but choose not to do it and in turn take a hit on their profits, we do not believe them.

The inability of the company to pass on the increase in inputs costs to its customers in normal course of business also becomes evident when an investor reads the FY2017 annual report of the company, page 12, management Q&A and gets to know that the company had to shut one of its furnaces in Q2 for one month, as it was not able to make any money on the prices offered by its customers due to increasing costs.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Therefore, we believe that the operations of Maithan Alloys Limited in a commodity business which faces over-capacity is leading to fluctuating profit margins and there is no certainty that the OPM, which is at 21% in FY2017, might not decline in future. OPM has declined from the levels of 18% to 3% in FY2008-09 and from 17% to 6% in FY2011-14 in the past and it remains to be seen whether Maithan Alloys Limited will be able to maintain its profitability margins going ahead.

Therefore, when Maithan Alloys Limited claims in its FY2017 annual report, page 11, in the management Q&A section that the company has a noncyclical business model in a cyclical industry and has insulated itself from the sector realities, we feel that the financial performance does not corroborate the same.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

The financial performance of the company is very cyclical, which is visible both on the annual results as well as in the quarterly results performance:

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys


An investor would notice that during the last 10 quarters (March 2015 to June 2017) as well the OPM has witnessed significant fluctuations from 4% to 31%, which indicates the lack of pricing power in the hands of Maithan Alloys Limited.

Moreover, from the above quarterly chart, an investor would notice that the key reason for the highest ever OPM of Maithan Alloys Limited in FY2017 (21%) is the superior OPM in Dec 2016 and March 2017 quarters when the OPM reached 25% and 31% respectively.

In the FY2017 annual report, Director’s Report section, page 30, the company has highlighted to the shareholders that the improvement in the profit margins in FY2017 was due to power subsidies and favourable trend of raw material prices.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

In an interview with CNBC TV18 (click here), Subodh Agarwalla, Whole time Director & COO of Maithan Alloys Limited has communicated that the high margins of the last quarter of FY2017 are due to the power subsidies from state govt. and state electricity boards (SEBs).

As per the FY2017 annual report, page 143, the electricity charges have declined by about ₹54 cr. in FY2017 to ₹242 cr. from ₹296 cr. in FY2016.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

These power subsidies, which have led to marked improvement in the OPM of Maithan Alloys Limited in FY2017, seem to be a one-time affair because, in the Q1-FY2018 results, the power costs have increased by about 28% from about ₹71 cr. in Q1-FY2017 to about ₹91 cr. in Q1-FY2018.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Moreover, upon analysis of break-up of input costs, an investor would appreciate that out of the marked improvement of 10% in the OPM of Maithan Alloys Limited in FY2017 (21%) from FY2016 (11%), the improvement of 9% is on account of decline in power costs (6%, from 27% of sales in FY2016 to 21% of sales in FY2017) and decline in raw material costs (3%, from 51% of sales in FY2016 to 48% of sales in FY2017).

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Therefore, we believe that the improvement in OPM of Maithan Alloys Limited is on account of the power subsidies as well as a decline in raw material cost, which are external factors.

Therefore, while the company communicated to its shareholders in its FY2017 annual report, page 9, that it is the culture of the company, which has led to improvement in the profitability margins of the company, we believe that the primary reason for this improvement is due to external factors like power subsidies and favourable movement in raw material costs.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

We believe that the improvement of profitability margins by about 15% during FY2013-17 (EBITDA margin improving from 7.75 in FY2013 to 22.15 in FY2017) is primarily due to decline in raw material costs (11%, from 59% of sales in FY2013 to 21% of sales in FY2017). This decline in the raw material cost is evident from the analysis of Manganese prices during FY2013-17, which has declined from about USD 3.5/kg at April 1, 2012, to about USD 2/kg at March 31, 2017, representing a decline of 43%.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

We assume that the prices of Manganese ore (which is a key raw material for Maithan Alloys Limited) would have also followed the similar trend of Manganese metal because in commodities the key determinant of final metal price is the price of the ore.

The net profit margins (NPM) of Maithan Alloys Limited have been following the trend of operating margins. NPM declined from 10% in FY2008 to 0% in FY2009 and then increased to 12% in FY2011 and again declining to 1% in FY2014. The NPM has improved to 14% in FY2017.

It would be evident from the above discussion about fluctuating profitability margins that the business model of Maithan Alloys Limited is cyclical and is highly dependent on the external factors, which are many times completely outside the control of the management. It is difficult to predict the profitability of the company in any particular year with any degree of confidence.

The management has agreed in FY2014 (when NPM declined to 1%) that during certain periods even reporting a profit should be considered an achievement. Annual report FY2014, page 9:

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Therefore, we believe that any investor of Maithan Alloys Limited should keep a close watch on the raw material prices and power costs for the company because company’s profitability is highly dependent on these inputs. Any unfavourable movement on these fronts can hit the profit margins going ahead.


Since FY2011, the tax payout ratio of Maithan Alloys Limited had been below the standard corporate tax rate prevalent in India. This seems because of the fact that two of the three plants of the company has tax incentives from govt.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

While assessing the net fixed asset turnover (NFAT) for Maithan Alloys Limited, an investor would notice that the NFAT of the company has been consistently at a healthy level of more than 3 throughout last 10 years. The NFAT has declined during FY2011-14, which coincides with the significant capacity expansions undertaken by the company at its Vishakhapatnam site.

Since the operationalization of the plant, the company has been able to optimally utilize it and has now reached the capacity utilization level of 95%. As a result, we are able to observe that the NFAT has improved from 3.26 in FY2014 to 5.27 in FY2017.

The improvement in the NFAT after capacity addition indicates that Maithan Alloys Limited has been able to time its capacity additions well with the customer demand so that the new capacity does not have to remain idle waiting for customer orders.


Looking at the inventory turnover ratio (ITR) of Maithan Alloys Limited, an investor would notice that Maithan Alloys Limited has been witnessing declining ITR over FY2011-14 when the ITR declined from 8.3 in FY2011 to 5.0 in FY2014. During this period, Maithan Alloys Limited has accumulated the highest level of inventory (₹206 cr.), where the increase in inventory was primarily on account of increased purchase of raw material.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

However, since FY2014, the company has been able to utilize the inventory more efficiently and as a result, ITR has improved to 8.0 in FY2017.

When an investor analyses the receivables days of Maithan Alloys Limited, then the investor would notice that the receivables days of the company have been increasing consistently from 22 days in FY2008 to 64 days in FY2016. Only in the latest year (FY2017), the receivables days have witnessed a decline to 58 days.

Increase in the receivables days indicates that the company has to give higher credit period to its customers, which leads to delay in collection of money from the customers. This effectively means that the company has to fund the working capital of its customers, while it needs to raise bank finance to meet its own working capital requirements.

Increasing receivables days is also one of the parameters, which indicates that the company lacks the negotiating power over its customers, which also got reflected in the discussion on the profitability margins above in this article.

As Maithan Alloys Limited is facing the situation of funds getting stuck in receivables, it is not able to convert its profits into cash flow from operations.

Over last 10 years (FY2008-17), Maithan Alloys Limited has reported a cumulative net profit after tax (cPAT) of ₹566 cr. whereas over the same period, it has reported cumulative cash flow from operations (cCFO) of ₹535 cr.


In case of companies, which have asset heavy (i.e. capital intensive) business model, any amount of funds that are stuck in receivables may prove detrimental because, in case of companies having capital intensive nature, there is a huge requirement of money to fund expansion plans to achieve sales growth. However, as witnessed above, the business model of Maithan Alloys Limited is relatively asset light, which is evident from the NFAT being consistently above 3.0 and reaching a level of 5.27 in FY2017.

The relative asset light business model of Maithan Alloys Limited has ensured that the company needed to do a total capital expenditure of ₹301 cr. over last 10 years (FY2008-17) to increase its sales from ₹378 cr. in FY2008 to ₹1,342 cr. in FY2017.

If an investor analyses the total cumulative financial performance of Maithan Alloys Limited over last 10 years (FY2008-17), then she would notice that the company had met the entire capex of ₹301 cr. from its cumulative CFO of ₹535 cr. during the same period.

As a result, after meeting entire capex, Maithan Alloys Limited had a free cash flow (FCF) of ₹234 cr, which it seems to have used to pay the interest costs and reduce debt during last 10 years, pay dividends to shareholders and increase the cash balance on its books.

Free cash flow (FCF) analysis is one of the main pillars of assessing the margin of safety in the business model of any company.


While studying about Maithan Alloys Limited, an investor comes across certain other aspects, which are important for analysis and subsequent final investment decision by investors:

1) Good project execution skills:

An investor would notice that Maithan Alloys Limited has been able to expand its manufacturing capacity on a regular basis and has been able to achieve optimal utilization of the installed capacities in a timely manner.

The evidence of increasing the capacity from 10 EVA in 1997 to 137 EVA in 2013 indicates good project execution skills by the company management.

2) Management succession planning:

An investor would notice that the founder promoter Mr. S. C. Agarwalla, has brought in his sons Mr. Subodh Agarwalla (WTD & CEO) and Mr. Sudhanshu Agarwalla (President & CFO) in the company.

The presence of the next generation of the promoter’s family in the company management offers a visibility of smooth management succession in the company.


3) Company’s stated strategy of an asset light business model:

Maithan Alloys Limited has communicated to shareholders in its FY2017 annual report, page 19 that being asset light is one of the key focus of its business model:

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

The company has highlighted that it has focused on buying manganese ore rather than investing in mining rights.

However, when an investor reads the FY2017 annual report of the company, page 150, then she notices that the company has two subsidiaries, which have mines and have applied to Govt for either obtaining the mining rights or renewal of existing mining rights:

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Creating these subsidiaries for mining activities seems to be in line with the business strategy communicated by Maithan Alloys Limited to its shareholders in FY2012 annual report, page 14, where the company has cited backward integration into ore mines and the ability to source ore from in-house (captive) mines as a key strength:

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys


At the face of it, it might seem that in FY2012, when the company was on the upper curve of its business cycle, then it had believed that acquiring mines would be a good business strategy. However, in later years, when the company faced the down-cycle, then it might have changed its business strategy to buying ore from the market (which is evident from the high inventory levels in FY2014 as discussed above) and avoid focusing on mining rights.

However, further analysis of FY2017 annual report, page 105, will indicate that Maithan Alloys Limited has increased investments in its subsidiary Anjaney Minerals Limited by about ₹3 cr, which has acquired mining lands and has applied for mining licenses.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

The acquisition of the leasehold rights on land in the subsidiary is visible upon comparative analysis of the fixed asset schedule in the consolidated financials and the standalone financials of FY2017 annual report, where an investor notices that addition of leasehold land & development in the gross block of about ₹3 cr. is present in the consolidated financials but is absent in the standalone financials.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys


Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

We noticed during the earlier discussion that the asset light business model of Maithan Alloys Limited has helped it to meet its capex requirement from internal sources, which has led it to reduce its debt levels and accumulate cash reserves. Therefore, it becomes essential for an investor to get clarification about the recent investments by the company in leasehold land (which are supposedly mines).

An investor should get clarification from the company whether it has changed its strategy of remaining asset light and avoiding mining rights.

If the company states that now they wish to continue with their FY2012 strategy of backward integration with in-house captive mines, then an investor should keep a continuous watch on the capex levels, cash utilization, debt levels and NFAT levels going ahead so that she could get to know the impacts of changing business model of the company at the earliest.


4) Short term trading and dividend stripping on current investments:

Maithan Alloys Limited has a current investment pool of about ₹67 cr. out of which about ₹6 cr. is invested in shares of HPCL and balance about ₹61 cr is invested in mutual funds. FY2017 annual report, page 138:

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

The company has been buying and selling these investments at a very fast pace, which is evident from the following findings from the cash flow from investing section of the FY2017 annual report, page 125:

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys


In the above section, an investor would notice that in FY2017, Maithan Alloys Limited bought investments for a total amount of ₹546 cr. and sold investments for a total amount of ₹415 cr.

The company has an investment capital (current investments) of about ₹67 cr. It indicates that the company has been frequently buying and selling its entire investment portfolio just like many of the short term traders do.

When an investor analyses the other income schedule of FY2017 annual report, page 141, then she notices that in FY2017, Maithan Alloys Limited received total dividends of about ₹115.2 cr. and it incurred a short term loss of about ₹114.6 cr. The company reported the net difference of ₹0.6 cr. as dividend income in its financials.


An investor would appreciate that it seems that the company is buying securities (either equities or mutual funds) before the dividend is paid by the issuer (i.e. before ex-date) and it sells these securities after the dividend is removed (i.e. after ex-date). As a result, the company got a lot of dividend in FY2017 and because the price of these securities falls when the dividend is removed (after ex-date), the company has to sell these securities at a loss, which seems to have led to a lot of short term losses in FY2017. This activity is called Dividend Stripping.

An investor would appreciate that these activities of buying and selling securities within a short period of time to do dividend stripping do not relate to the core business of the company, which is to produce Ferro alloys and sell them at a decent profit.

We believe that focusing on such stock market/mutual fund activities of dividend stripping would be taking the focus of company’s management away from its core business area.

5) Conflicting information about a shareholder:

In the FY2017 annual report, Maithan Alloys Limited has disclosed the shares held by one entity Summit Packaging Private Limited (SPPL). However, the company has disclosed two different sets of information about the shares held by SPPL in Maithan Alloys Limited at pages 55-56 of the FY2017 annual report:

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Looking at the above information, an investor would notice that in section 9, the company is disclosing that SPPL held 240,000 shares, which were unchanged during the year. Whereas in section 10, the company is disclosing that SPPL held 246,000 shares at the beginning of the year out of which it sold 45,000 shares during the year and therefore, at the end of the year SPPL held only 201,000 shares in the company.

An investor should take a clarification from the company regarding this conflicting information published in the annual report.


6) Unexplained large other current liabilities:

In the FY2017 annual report, Maithan Alloys Limited has disclosed liabilities of about ₹122 cr. as “others” under other current liabilities on page 136.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

An investor would notice that there are no further details provided in the annual report about these liabilities, which might enable the investors to make an opinion about these liabilities. Investors may seek further details from the company about these liabilities.

7) Related party transactions:

In the FY2017 annual report, Maithan Alloys Limited has disclosed on page 148, that it has been dealing with sales and purchase transactions with many promoter group entities:

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

As per the information on page 147 of the annual report, it seems that these are the entities belonging to the erstwhile promoters Mr. B. K. Agarwalla, who has now exited his shareholding in the company.

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

Moreover, as per information on page 148, Maithan Alloys Limited has been incurring expenses on behalf of promoter owned entities:

Analysis Maithan Alloys Limited, equity research report, Ferro alloys, Ferro- manganese, Silico- manganese and Ferro- silicon alloys

An investor would appreciate that such transactions with promoter group entities, which involve the sale of goods, purchase of material, incurring expenses on behalf of promoter group entities might have a chance of shifting the economic benefits from the company to these promoter group entities.

Therefore, we believe that investors should keep this mind and if needed explore more about these transactions while conducting their analysis.


8) Disputed tax claims with the Income Tax Department:

We usually notice that most of the companies on their books carry contingent liabilities based on the difference in the assessment of direct and indirect tax liabilities applicable to them. We have observed that such disputes are common place in most of the corporates. It might be a result of the complexities involved in the taxation laws that the company and the tax authorities arrive at the different liabilities.

These disputes usually enter appeals and litigations and keep on pending in the grievance redressal systems for multiple years. Maithan Alloys Limited has disclosed more than 20 such cases of disputed tax demands in its FY2017 annual report. Moreover, upon search of online resources, an investor would find out that promoter group entities Maithan Ispat Limited and Maithan Ceramic Limited have been disputing the demands by Income Tax Dept. in the Income Tax Appellate Tribunal – Kolkata (Click here and here)

We believe that in case of such disputes, an investor should take a note of the amount of tax liability being contested and then make her opinion about the impact the company would face in case the dispute is decided against the company and it has to pay the liability to the tax dept.

In case of Maithan Alloys Limited, the total amount of disputed tax liabilities as per the audit report of FY2017 is about ₹10-12 cr, which is insignificant when compared to the cash and investments of about ₹150 cr. available with the company at March 31, 2017.

9) Exit by Mr. B. K. Agarwalla group

It seems that Mr. B. K. Agarwalla family has taken an exit from the company by resigning from the executive management positions and simultaneously selling/transferring their shareholding from the company.

It might be an ownership rearrangement act within the Agarwalla family involving their multiple businesses. Therefore, we believe that an investor should watch out for signs of any animosity arising within the promoter group regarding the commencement of competing business, unresolved disputes about ownership of the company and other entities.

Currently (Sept 7, 2017), Maithan Alloys Limited is available at a price to earnings (P/E) ratio of about 6.5, which offers some margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.




Overall, Maithan Alloys Limited seems to be a company operating in a commodities product market which is characterized by a current oversupply situation. As a result, the company is not able to pass on the increase in input costs to its end customers and has to take a hit on its profitability over the years. The inability of the suppliers to pass on cost increases in the industry has led to a few players closing down their operations and even Maithan Alloys Limited had to shut its plant when the production became unviable due to rising inputs costs, which it could not pass on to customers. As a result of such industry dynamics, it becomes difficult to make any prediction of profitability margins of the company going ahead.

Currently, the company seems to be enjoying tailwinds in the terms of reduced power costs due to apparent one-time subsidy by Govt. and favourable raw material cost trends and thereby it has reported highest ever profit margins. However, it remains to be seen whether the company is able to sustain such margins. In the past, the company has witnessed operating profit margins plummeting from double digits to low single digits.

The management of Maithan Alloys Limited has shown good project execution skills by frequently successfully executing capacity expansion plants to meet the sales growth requirements. Until now, the company has been able to keep its business asset light and therefore, it has been able to reduce its debt levels while doing the capital expenditure despite a significant amount of funds getting stuck in receivables. The company has been able to produce free cash flow, which has been used by it to pay dividends to shareholders and has added to the cash reserves of the company.

The company now seems to be revising its stated strategy staying asset light and not acquiring mining rights. In FY2017, it seems to have acquired leasehold land rights in its subsidiary and seems to have applied for a mining license. An investor should seek further clarification about this step by the company. The company also has stated its desire to explore acquisitions as a mean to grow in future. 

An investor should keep a close watch on the utilization of the available cash by the company in such venture because the corporate history is full of examples where companies have squandered the cash reserves on inefficient capital allocation decision.

The investors should also keep a note of the short term trading and dividend striping activities being done by the company as it seems that these activities are not the core business focus area of the company.


The promoter group seems to be undergoing an ownership rearrangement exercise in which one section of the promoter family seems to have exited the company’s shareholding and executive position. However, the continuing promoter group has brought in the next generation in the executive positions leading to good visibility of management succession.

Maithan Alloys Limited has been involved in various related party transactions, where it has sold good, purchase material and incurred expenses on behalf of promoter group entities. We believe that investors should do the due diligence of these activities.

There have been certain issues in the annual report like conflicting data about shareholding of one of the shareholders, which we believe that investors should take clarification from the company.

These are our views about Maithan Alloys Limited. However, investors should do their own analysis before taking any investment related decision about Maithan Alloys Limited.

You may use the following steps to analyse the company: “Selecting Top Stocks to Buy - A Step by Step Process of Finding Multibagger Stocks

Hope it helps!

Regards,

Dr Vijay Malik

P.S:
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  • I have used the financial data provided by screener.in and the annual reports of the companies mentioned above while conducting analysis for this article.


DISCLAIMER


Registration Status with SEBI:

I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013

Details of Financial Interest in the Subject Company:

Currently, I do not own stocks of the companies mentioned above in my portfolio.