This article provides in-depth fundamental analysis of Ratnamani Metals & Tubes Ltd, an Indian manufacturer of stainless steel tubes, carbon steel tubes, longitudinal submerged arc welded (SAW) pipes, circumferential seam welded SAW pipes, electric resistance welded pipes (ERW) and helical SAW pipes.
Ratnamani Metals & Tubes Ltd Research Report by Reader
Q: Dear Dr. Vijay, please give your comments on my following analysis of Ratnamani Metals & Tubes Ltd:
- Market Cap=Rs.2,667.09 Cr
Financial Analysis of Ratnamani Metals & Tubes Ltd:
- Sales 10 yr CAGR = 20.36
- Profit 10 yr CAGR = 19.96
- Net Profit Margin = 7.58 to 11.35% in last 10 years. (Currently 10.5)
- 10 year tax payout = 27-34% ~ 30%
- Interest coverage = 27.61
- Debt to Equity ratio = 0.04, reduced debt from Rs.320cr in 2010 to Rs.38Cr in 2015.
- Current ratio = 2.56
- CFO > 0
- 10 year cPAT- Rs. 999.51 Cr ~ 10 year cCFO- Rs. 943.2 Cr
- No equity dilution in last 10 years (except ESOPs as far as I found).
Valuation Analysis of Ratnamani Metals & Tubes Ltd:
- P/E ratio = 15.96
- PEG ratio = 0.99
- Price to Sales = 1.6
- Dividend Yield = 0.96%, uninterrupted and increasing in last 10 years.
Business and Industry Analysis of Ratnamani Metals & Tubes Ltd:
- Company 5yr ROCE=25.55 (Large peers- Welspun Corp. (5yr ROCE=7.58), Jindal Saw (5yr ROCE=6.47) )
- Sales 10 yr CAGR = 20.36 ~ Profit 10 yr CAGR = 19.96
- Self sustainable growth rate: 31.13% (correct if I am wrong); ROE 5yrs = 21.51.
- Credit rating for long term borrowings improved form CRISIL “AA-” to CRISIL “AA” in FY15.
The company manufactures Stainless steel tubes and Carbon steel tubes.
As per my understanding,
- Largest raw materials is steel. Hence, Margin will be maximum when steel price is low.
- Oil and gas business is the biggest customer. Sales will grow when this business does well. Slowdown here might hurt the company.
Thus the industry is somewhat cyclical.
- Only company in India with approvals for supplying nuclear power plants.
- Supplies for power plants in India, hence there could be some govt. influence here.
Management Analysis of Ratnamani Metals & Tubes Ltd:
- Found nothing negative about the promoters.
- Promoter shareholding = 60.27>51%, but highly fragmented among 83 individuals (max-4.08%; min-0.01%)
- Promoter shareholding increased in last 3 quarters from 59.86% to 60.27%.
- Gross salary of management is Rs.26.94 Cr (FY15 PAT= Rs.172 Cr, Ceiling as per Companies act = Rs.28.44Cr), which is too high compared to net profit.
- FII holding = 12.5%
I took the data from screener.in, moneycontrol and valueresearch. I only referred annual report for FY15. At what situations should we look older annual reports?
I am sharing my analysis so you could give me your comments on it which will also be useful for other readers.
Disclosure: I hold shares in the company bought @Rs.600.
Dr Vijay Malik’s Response
Thanks for writing to me! I appreciate the time & effort put in by you in analyzing Ratnamani Metals & Tubes Ltd and sharing your analysis for the benefit of author and readers of www.drvijaymalik.com
Ratnamani Metals & Tubes Ltd has established a subsidiary in USA in FY2015, whose primary job is to import material from its Indian parent Ratnamani Metals & Tubes Ltd and sell in USA/nearby markets. However, I have chosen to analyse standalone results of Ratnamani Metals & Tubes Ltd for last 10 years due to following reasons:
- Sale of material by parent company, Ratnamani Metals & Tubes Ltd, to USA subsidiary (₹57 cr.) has been included in the standalone financials. The only component of revenue missing in standalone financials is the net profit of ₹94 lac and net assets of ₹1.03 cr., which is insignificant in terms of overall operations of the company.
Let us, therefore, analyse the standalone financial performance of Ratnamani Metals & Tubes Ltd over last 10 years.
Financial Analysis of Ratnamani Metals & Tubes Ltd:
Ratnamani Metals & Tubes Ltd has been growing its sales consistently at a pace of 10-20% year on year since last 10 years (FY2006-15). It is important to note that this sales growth has been accompanied by sustained profitability. Operating profit margins (OPM) of Ratnamani Metals & Tubes Ltd has been consistent at 18-20% throughout last decade. Similarly, net profit margins (NPM) have also been consistent at 9-11% in last 10 years.
Sales growth with sustained profitability margins is the first sign of any good investment opportunity.
Also Read: How to do Financial Analysis of a Company
Credit rating agency, CRISIL, explains in its rating rationale for Ratnamani Metals & Tubes Ltd, the reasons for its sustained performance:
The operating performance is supported by strong market share of over 35 per cent in the stainless steel tubes and pipe (SSTP) segment in which Ratnamani has backward integrated operations. Furthermore, the company has a diversified product profile, with carbon steel pipes contributing about 50 per cent to its income. In this segment also, the company focuses on highmargin business and hence has been able to maintain strong operating margin of over 16 per cent during the past five years. Furthermore, the products are used in various end user industries, including power, oil and gas, chemicals, water, and refineries, enabling Ratnamani to partially offset risks related to slowdown in a single industry or geography.
CRISIL helps the investor understand that Ratnamani Metals & Tubes Ltd has been able to establish itself as a preferred player in its market segments with diversified customer & geographic profile and therefore, able to protect its profitability margins over the years.
Reading credit rating reports is helpful for equity investors as credit reports, as explained in the article link shared above, many a times provide information, which is not usually available in the annual reports e.g. installed capacity of operations. CRISIL rating rationale provide this information about Ratnamani Metals & Tubes Ltd:
Ratnamani, incorporated in 1983, manufactures welded and seamless SSTPs (installed capacity of 27,300 tonnes per annum [tpa]), carbon steel (installed capacity of 270,000 tpa), longitudinal submerged arc welded (SAW) pipes, circumferential seam welded SAW pipes, electric resistance welded pipes (ERW), and helical SAW pipes
Ratnamani Metals & Tubes Ltd has been paying taxes at 32-35% rate, which is equal to the standard corporate tax rate in India. This is another good sign.
Operating Efficiency Analysis of Ratnamani Metals & Tubes Ltd:
Over the years, Ratnamani Metals & Tubes Ltd has been reflecting improved operating efficiency. Net fixed assets turnover (NFAT) has been improving from 2.78 in FY2007 to 3.87 in FY2015. NFAT has been declining during the initial years up to FY2011, as Ratnamani Metals & Tubes Ltd was doing capex, which took some years to reflect in the revenues. Since FY2011, NFAT has improved significantly.
Inventory turnover ratio of Ratnamani Metals & Tubes Ltd, which declined to 3.1 in FY2011 has improved to 5.6 in FY2015.Improving asset and inventory turnover indicate that Ratnamani Metals & Tubes Ltd is able to use its capital more efficiently and generate higher sales from same level of assets.
Receivables days of Ratnamani Metals & Tubes Ltd have been following its capex pattern. Receivables days deteriorated from 30 days in FY2007 to 76 days in FY2011 but has improved since then, to 53 days in FY2015. Improvement in receivables days indicates that now Ratnamani Metals & Tubes Ltd has been able to collect the money from its customers faster. Improved collection practices usually, lead to lower working capital finance requirements and thereby lower interest costs and improved profitability.
Ratnamani Metals & Tubes Ltd has PAT for last 10 years (FY2006-15) of ₹986 cr. whereas the CFO over the similar period is ₹910 cr. Lower cumulative CFO than cumulative PAT indicates that the funds generated by the company are getting stuck in the working capital.
The same issue has been highlighted by CRISIL in its rating rationale as one of the key rating sensitivities:
These rating strengths are partially offset by its working-capital-intensive operations and susceptibility to a slowdown in end user industries
This information is another reason for an equity investor to read credit rating reports for the companies she plans to analyse and invest.
Margin of Safety in the Business of Ratnamani Metals & Tubes Ltd:
i) Self-Sustainable Growth Rate (SSGR):
Self-Sustainable Growth Rate (SSGR) of Ratnamani Metals & Tubes Ltd is about 18-20%. As mentioned in the article on Self-Sustainable Growth Rate, SSGR does not factor in working capital changes. However, we can estimate whether funds are being tied up in working capital by comparing cPAT with cCFO.
Analysis of SSGR indicates that if Ratnamani Metals & Tubes Ltd can manage its working capital management and operating efficiency properly, then it can grow continuously at about 18-20% growth rate without creating additional debt burden on the balance sheet.
As Ratnamani Metals & Tubes Ltd has been growing at a rate of 10-15% over the years (the growth rate over 10 years is about 20%, however growth rates for last 7, 5 & 3 years are 10%, 14% and 11% respectively), it has been able to manage its grow story without leveraging its balance sheet.
Over these years, Ratnamani Metals & Tubes Ltd has been able to de-leverage its books by reducing debt from ₹106cr. in FY2006 to ₹30cr. in FY2015. It is important to note that the debt has increased to ₹320cr. in FY2010 as the company was doing substantial capex then. Currently, Ratnamani Metals & Tubes Ltd has miniscule amount of debt on its book as reflected by its debt to equity ratio of 0.03.
These findings of SSGR get re-affirmed when an investor analyses the cash flow from operations (CFO) of Ratnamani Metals & Tubes Ltd with its capital expenditure (Capex) requirements over last 10 years (FY2006-15).
ii) Free Cash Flow Analysis of Ratnamani Metals & Tubes Ltd:
During FY2006-15, Ratnamani Metals & Tubes Ltd realized total CFO of ₹910 cr. and out of it Ratnamani Metals & Tubes Ltd has to spend ₹637 cr. on capital expenditure, thereby releasing free cash flow (FCF) of ₹273 cr. as surplus for shareholders. It is important to note that the ₹637 cr. of capex resulted in sales growing from ₹319 cr.in FY2006 to ₹1,676 cr. in FY2015.
This data indicates that Ratnamani Metals & Tubes Ltd is a good example of efficient capital utilization. Despite meeting its entire capex requirements, Ratnamani Metals & Tubes Ltd was able to generate FCF of ₹273 cr. out of which it distributed ₹122 cr. as dividend to shareholders (including dividend distribution tax).
The ability of Ratnamani Metals & Tubes Ltd to grow its sales with capex from its CFO and generating good amount of free cash flow (FCF) over the years, indicates that the company has a good advantageous business model.
The investors would agree that a company which generates good amount of free cash flow (FCF) post meeting entire capex requirement from its operating cash flow (CFO) would not need any debt or equity dilution. The same is true for Ratnamani Metals & Tubes Ltd; it is almost a debt free company with no history of equity raising over last 10 years. (As mentioned by you, the minor increase in share capital is due to grant of employee stock options).
Ratnamani Metals & Tubes Ltd has been paying regular dividend to its shareholders. Company has been increasing its dividend payout with increasing profits. It amounts to sharing the fruits of growth with shareholders..
Share market too seems to have recognized it. The market capitalization of the Ratnamani Metals & Tubes Ltd has increased by ₹2,681 cr. against retained earnings of ₹864 cr. over last 10 years (FY2006-15). Management has created a value of ₹3.1 for the shareholders from every ₹1 of earnings retained & not distributed to shareholders.
Margin of Safety in the market price of Ratnamani Metals & Tubes Ltd:
Ratnamani Metals & Tubes Ltd is currently available at a P/E ratio of about 16.5, which does not offer any margin of safety as described by Benjamin Graham in his book The Intelligent Investor.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
Specific queries of Ratnamani Metals & Tubes Ltd:
1) Self Sustainable Growth Rate (SSGR):
SSGR as per my calculations is about 18-20%. You may find the methodology used by me while calculating SSGR in the following article: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company
2) Reading annual reports:
I believe that an investor should read annual reports at least for last 10 years, when available, before investing in any stock. Reading annual reports for last 10 years brings out the life history of any company like a story book unfolding in front of the investor and she can easily make up her mind whether the company is able to make a mark on her or not.
Annual reports of last 10 years tell the investor whether the company faced any challenging situations over these years, what kind of decisions did the management take to deal with these challenges, whether any new projects were started and if these were completed within stipulated time and cost. All this information becomes very essential while analyzing the company for investment.
Also Read: Understanding the Annual Report of a Company
3) Gross salary of management is Rs.26.94 Cr (FY15 PAT= Rs.172 Cr, Ceiling as per Companies act = Rs.28.44Cr), which is too high compared to net profit.
Salary of promoters is definitely high as compared to the salary drawn by executive promoters of various companies that I have analysed. However, this is one criteria on which the promoters score low in terms of shareholder’s friendliness. Otherwise on other parameters like management of the company in an efficient manner, creating business opportunities, buying stocks of own company or sharing dividends with improving profits etc. the promoters score well.
The assessment of management of any company is partly subjective exercise like choosing friends. Therefore, I would suggest that the investor should take her own decision in this regard.
Also Read: How to do Management Analysis of a Company
Overall, Ratnamani Metals & Tubes Ltd appears to be a company growing at a descent pace, with sustained profitability margins & operating efficiency. It has been able to meet its capex requirements from its cash flow from operations and able to generate free cash flows. Ratnamani Metals & Tubes Ltd has a healthy SSGR, which can ensure that it can keep on growing without needing debt to fund its growth, if it can manage its working capital efficiently.
These are my views about Ratnamani Metals & Tubes Ltd. However, you should do your own analysis before taking any investment related decision about Ratnamani Metals & Tubes Ltd.
You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company“
Additionally, the investor should keep track of the future performance of the company for signs of improvement or worsening as part of their monitoring exercise. She may use the steps explained in the following article for monitoring stocks in her portfolio.
Also Read: How to Monitor Stocks in your Portfolio
Hope it helps!
Answers to Investors’ Queries
- Receipt and repayment of exact loan amounts to a subsidiary and the MD
- Significant outstanding to promoters (~ Rs 23 Cr)
In the Contingent Liabilities section (AR 2015), I observe the following –
- Range of tax/custom/excise disputes
- Outstanding bills (to the tune of Rs 100 Cr
The above observations (coupled with the high salary paid to the promoters) make me uncomfortable
What are your thoughts?
1) They have a long list of outstanding tax dues/disputes (pg. 69 of AR 2015). I have seen most firms have only 1 – 3 disputes
- One of the above items relates to Employee State Insurance – are they not giving employees their due?
2) There is a Contingent Liability worth Rs 100 Cr (pg. 123) with no details other than saying bills discounted but not matured.
3) In Related Parties Disclosure, there is a receipt and repayment of loans worth Rs 6.5 Cr with promoter and a subsidiary (pg. 127). Why receive and repay in such a short duration?
- No info on the interest paid to promoter for this loan
4) In Related Parties Disclosure, there are huge payables (Rs 23 Cr) to promoters (pg. 128). No clarity on what this is – unpaid commissions or something else?
Thanks for writing to me!
1) Outstanding tax dues/disputes:
These are normal in day to day business mostly due to difference in the treatment of certain items and related tax assessment. The number of disputes being 1-3 for other companies is mere co-incidence. Disputes may be higher depending upon the diligence of the tax assessing officer. Disputes do not tell anything about whether the company is at fault or the tax assessing officer has erred in assessment. Only thing to be focused by the investor is that whether there is any tax demand which is large enough that it might hamper the liquidity position of the company. If there is any such demand, then the investor should analyse it further before she takes a final decision about investing in the company.
2) Contingent liability of ₹100 cr. for bills discounting:
Many a times the seller sells the goods to the buyer on credit. These sales might be backed by a letter of credit (LC) or by invoices accepted by large corporate buyers. In normal parlance, the seller would receive the payment after 45-90 days, as per the credit period agreed by the seller and the buyer. However, the seller may take the LC/accepted bill to the bank and raise loan against it. The bank gives money today and get the repayment when the money is received from the buyer after 45-90 days. During the tenor of this loan taken by seller against the LC/bills, the seller has received the money which would be paid once the money is received from the buyer. However, if the buyer does not pay, then ultimate liability is on the seller to repay the bank. That’s why the loan/money received from discounting of LC/bills is shown as contingent liability until the buyer pays up the money.
Usually, the companies do not disclose the names of the buyers whose bills/LCs are discounted by them.
3 & 4) ESI dispute, deals with the promoters:
I would suggest that you should write directly to the company and seek clarifications on the same.
Hope it clarifies your queries!
All the best for your investing journey!
Follow Up Q: Inventory Turnover Ratio
Thanks for the response, Vijay.
Quick follow up question regarding Inventory Turnover – you mentioned Inventory Turnover improved from 3 to 5 from 2011 to 2015 which true, but over a 10 year period from 2007 to 2015, it has remained largely static at around 5. So, how would you interpret this? It appears the management hasn’t been able to make any meaningful progress in this front?
Thanks for writing to me!
Both the interpretations are right. However, it depends upon the investor, which interpretation she assumes while taking the final investment decision. As investing is an art and not a science, therefore such situation of different investors interpreting same data differently and moreover, same investor interpreting same data differently at different times would always be common place.
Therefore, I advise that investor should not base their investment decision on any single parameter (like inventory turnover) and take a comprehensive view by factoring in multiple aspects.
All the best for your investing journey!
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