Analysis: RHI Magnesita India Ltd

The current section of the “Analysis” series covers RHI Magnesita India Ltd, formerly known as Orient Refractories Limited. The company is a part of the global RHI Magnesita group and is one of India’s largest manufacturers of refractory products used in industries like steel, cement, glass etc.

“Analysis” series is an attempt to share with all the readers, our inputs to the company analysis submitted by readers on the “Ask Your Queries” section of our website.

Please note that to benefit the maximum from this article; an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.

RHI Magnesita India Ltd: Detailed Fundamental Analysis

RHI Magnesita India Ltd has undergone many corporate restructurings in its short history of existence. The company was formed in FY2011 as Orient Refractories Limited when Orient Abrasives Limited (OAL) decided to separate its refractory business. In FY2012, OAL transferred its refractory business to Orient Refractories Limited.

In FY2013, the Rajgarhia family of OAL sold their stake in Orient Refractories Limited to the RHI group of Austria.

In 2016, the RHI group of Austria merged with the Magnesita group of Brazil and the parent group of Orient Refractories Limited changed from the RHI group to the RHI Magnesita group.

In FY2018, RHI Magnesita group decided to merge its three Indian subsidiaries into one. It received all approvals in 2021; therefore, RHI Clasil Pvt. Ltd. and RHI India Pvt. Ltd. merged into Orient Refractories Limited.

Soon thereafter, in July 2021, the name of Orient Refractories Limited was changed to RHI Magnesita India Ltd. The company revised its financials from FY2020 onwards to show the impact of this merger of three companies.

In the meanwhile, in FY2020, Orient Refractories Limited acquired Intermetal Engineering India Private Limited, which became its wholly-owned subsidiary. As a result, from FY2020 onwards, the company started reporting consolidated financials as well as incorporating the financial performance of its subsidiary.

Therefore, while analysing the past financial performance of RHI Magnesita India Ltd, an investor should keep in her mind that from FY2012 to FY2019, standalone financials reflect its overall performance. However, from FY2020 onwards, the consolidated financials reflect the performance of its subsidiary as well as the merger of RHI Clasil Pvt. Ltd. and RHI India Pvt. Ltd.

Further advised reading: Standalone vs Consolidated Financials: A Complete Guide

Therefore, during the last 10 years (FY2013-FY2022), we have analysed standalone financials from FY2013 to FY2019 and consolidated financials from FY2020 onwards.

With this background, let us analyse the financial performance of RHI Magnesita India Ltd.

Financial and Business Analysis of RHI Magnesita India Ltd:

Sales of RHI Magnesita India Ltd have grown at a pace of 21% year on year from ₹361 cr in FY2013 to ₹1,995 cr in FY2022. Further, sales have increased to ₹2,336 cr in the last 12 months ended September 2022 (i.e. Oct. 2021-Sept. 2022).

It may seem that the revenue of the company has increased consistently at a fast pace. However, the revenue of RHI Magnesita India Ltd declined during FY2020 and FY2021.

In FY2020, the revenue of the company may seem to increase sharply from ₹748 cr in FY2019 to ₹1,388 cr in FY2020. However, it was due to the merger of RHI Clasil Pvt. Ltd. and RHI India Pvt. Ltd. into the company.

FY2021 annual report, page 132:

The corresponding figures of the Company for the year ended March 31, 2020 have been prepared by the Management based on the audited financial statements of the Company and its erstwhile fellow subsidiaries as adjusted for giving effect to Scheme as approved by the NCLT

If an investor removes the impact of the merger, then in FY2020, the revenue of RHI Magnesita India Ltd had declined from ₹748 cr in FY2019 to ₹699 cr in FY2020.

FY2020 annual report, page 11:

Thereafter, the revenue of RHI Magnesita India Ltd declined from ₹1,388 cr in FY2020 to ₹1,370 cr in FY2021.

Apart from these two years of decline, RHI Magnesita India Ltd has increased its revenue every year.

Over the years, the operating profit margin (OPM) of the company has been nearly stable at 20%; however, there have been a few periods of decline in OPM like FY2015 when the OPM declined to 18% from 20% in FY2014 and FY2019-FY2021 when the OPM declined consistently from 20% in FY2018 to 15% in FY2021. In FY2022, the OPM of the company increased to 19%, which further increased to 20% in the last 12 months ended September 2022 (i.e. Oct. 2021-Sept. 2022).

To understand the reasons for such a financial performance of RHI Magnesita India Ltd, an investor needs to read the publicly available documents of the company like its annual reports from FY2012 onwards, credit rating reports by CARE and CRISIL, corporate announcements as well as other public documents. Then she would understand the factors leading to an overall increase in its sales and profit margins over the years with fluctuations in between.

The above-mentioned documents indicate that the following key factors influence the business of RHI Magnesita India Ltd, which are critical to understand for any investor analysing the company.

1) High dependence on the steel industry:

Refractory products are used as the inner lining of the furnace in which materials like iron ore, steel, glass etc. are melted. As per RHI Magnesita India Ltd, the steel industry consumes about 75% of refractory products.

FY2018 annual report, page 10:

The steel industry accounts about 75% of consumption of refractory materials, with cement (12%), non-ferrous (6%) petrochemicals (4-5%) and glass (3%) making up the remainder.

As the steel industry is the largest consumer of refractory products; therefore, factors affecting the demand and prices of steel have a significant indirect impact on the demand for refractory products.

As per the company, the refractory industry grows at about 1.5 times the growth rate of the steel industry.

FY2022 annual report, page 33:

Historically, revenue growth of refractory players has been ~1.5 times of growth in steel production

The impact of adverse conditions in the steel industry is more apparent in RHI Magnesita India Ltd because it had been almost entirely dependent on the steel sector for its sales.

FY2018 annual report, page 10:

ORL supplies only to steel industries.

In FY2015, the steel industry globally as well as in India faced troubled times with reducing demand and prices. In such situations, steel manufacturers push the refractory players to lower their prices. It resulted in a decline in the profit margins of RHI Magnesita India Ltd in FY2015.

FY2015 annual report, page 33:

have led to a drop in the growth rate of steel sector in Indian economy…Further, steel companies in India are experiencing a rise in operating costs…the pressure of prices of steel products coupled with rising operating costs has led to decline operating margin

Advised reading: How to do Business Analysis of Steel Companies

2) Pricing power of refractory manufacturers:

Over FY2013-FY2022, the OPM of RHI Magnesita India Ltd has stayed in the range of about 20%; however, there have been periods when the profit margins of the company have declined. For example, during FY2019-FY2021, the OPM of the company declined sharply from 20% in FY2018 to 15% in FY2021.

The key reason for this decline was a sharp increase in raw material costs, which RHI Magnesita India Ltd could not pass on to its customers. The raw material prices have increased sharply because China, which is the biggest supplier of raw materials, imposed duties on their export.

FY2018 annual report, page 11:

China is a major supplier for inputs to refractory material and has been imposing heavy taxes on mining and export of refractory products and raw materials including magnesium used in production of refractory products…India’s refractory industry sources almost half of its raw material from China…This has resulted in sharp increase in imported raw material costs

The sharp rise in raw material costs had put severe pressure on the margins of refractory players and as a result, the companies had started looking for alternative materials sources including recycling.

FY2019 annual report, page 13:

Indian refractory makers are currently reeling from high raw material prices…The refractory industry is looking for alternate minerals and trying to increase the use of recycled materials.

FY2021 annual report, page 19:

Indian refractory manufacturers are dependent on China for key raw materials like Bauxite and Magnesia. Clogged logistical network and lack of transportation facilities are taking toll on timely delivery of raw material. Increased freight and raw material cost are starting to be felt in result of refractory industries in the year 2021.

The inability of the company to pass on an increase in input costs to its customers led to a decline in the profit margins of the company during FY2019-FY2021.

Advised reading: How to do Business Analysis of a Company

3) High technology requirement of refractory products:

During the manufacturing of steel, cement, glass etc. a part of refractory material is mixed with the final product. As per RHI Magnesita India Ltd, the manufacturing of materials like steel, cement, glass etc. consumes a few kilograms of refractory material per tonne of production.

Sept 2022 presentation, page 4:

1 tonne of STEEL demands ~10‐15 Kg of refractories

1 tonne of CEMENT demands ~1 Kg of refractories

1 tonne of GLASS demands ~4 Kg of refractories

1 tonne of ALUMINIUM demands ~6 Kg of refractories

1 tonne of COPPER demands ~3 Kg of refractories

As the refractory material is mixed up in the steel/cement/glass etc. in the manufacturing process and affects the final product quality; therefore, the quality of refractory material becomes very important.

FY2018 annual report, page 11:

Refractories constitute around 2~3% of the total steel manufacturing cost…Despite being a small portion of the total steel manufacturing costs, refractories are critical to get the desired size, shape and quality of the final product.

As a result, refractory companies need to spend money on research continuously to produce the best quality refractory material.

The technology to produce the best refractory material, which can be used by major steel and glass producers is not easily available and is in fact controlled by only a handful of large global refractory players.

As a result, most domestic refractory manufacturers have tied up/formed joint ventures with or sold their companies to foreign refractory players. There have been many instances in the Indian refractory industry where domestic players brought in/sold to foreign players.

Orient Refractories Limited was sold by the Rajgarhia family in FY2013 to the RHI group.

Rudraraju family, which established Clasil Refractories to produce refractory products entered into a joint venture with RHI group to gain access to its technology.

FY2021 annual report, page 13:

In India he joined family-owned Refractory Manufacturing Unit in Visakhapatnam called Clasil Refractories in 2006. In this pursuit for producing World Class Refractory Products, they entered into a Joint Venture with RHI AG.

RHI Clasil Pvt. Ltd was merged with Orient Refractories Limited in 2021.

In 2022, Dalmia group is selling its refractory business to RHI Magnesita India Ltd. The Dalmia group has mentioned access to technology from the RHI Magnesita group as one of the reasons for this sale.

Corporate announcement to Bombay Stock Exchange (BSE) by RHI Magnesita India Ltd on November 19, 2022, page 4:

Commenting on the transaction, Sameer Nagpal, Managing Director & CEO of DBRL said…For the next phase of growth of this business it is imperative to have access to technology which RHI Magnesita, being a global leader, brings to the table. We believe our business can be optimally utilised to serve Indian customers by becoming a part of RHI Magnesita’s network.”

Currently, players like RHI Magnesita India Ltd are focusing on making products, which are otherwise imported into the country. However, these products are being made by using technology provided by global refractory players.

FY2022 annual report, page 4:

During the year we started number of projects at the Bhiwadi and Vizag plant to make certain high-grade import substitute products like purge plugs, coke oven blocks, tap hole clay mass, etc. These are being done via technology transfer arrangements with the European and American plants of the parent company

RHI Magnesita India Ltd established a research & development (R&D) centre, which is created in collaboration with the global R&D network of RHI Magnesita group giving it access to the global technology and knowledge base of the group.

FY2022 annual report, page 4:

The year saw the setting up of a world-class R&D centre at our Bhiwadi plant. The centre works in close collaboration with RHI Magnesita global R&D network

Apart from these acquisitions of Orient Refractories Limited and Dalmia group’s refractory businesses, there have been many other transactions where Indian refractory players have sold to/entered into collaboration with global refractory companies.

In 2011, Tata group sold its majority stake in its refractory business to the Nippon group of Japan (Source). ACE Refractories was sold to the French group, Imerys (Source)

Currently, global players like Vesuvius Group, UK, RHI Magnesita etc. control a significant portion of the Indian refractory market. The key reason for the same is access to the advanced technology available to them.

The requirement for advanced technology along with a long and tough approval process by customers creates barriers to entry for new players in the refractory industry.

Advised reading: How to analyse New Companies in Unknown Industries?

4) Intense competition among refractory players:

An increasing presence of global refractory players in India is increasing the competition in the refractory industry. These players have access to good quality products made with advanced technologies and provide an option to the customers to switch suppliers if they ask for a high price for refractory materials.

Due to the competition, players like RHI Magnesita India Ltd are not able to pass on those input price increases, which are specific to it. For example, RHI Magnesita India Ltd sources many raw materials from its parent in Europe, which has seen an increase in costs (energy surcharge) due to high energy prices in Europe due to the Russia-Ukraine war.

Unfortunately, RHI Magnesita India Ltd is not able to pass on this increase in input costs to its customers because none of its other competitors is facing this energy surcharge; thereby, undermining its pricing power.

FY2022 annual report, page 32:

The rise in energy surcharge which we are not able to pass on to all our customers as our competitors are not asking for any energy surcharge (all their supplies are from India and China and not from Europe) is a major concern which have reduced the margins.

Therefore, increasing competition due to the presence of many global refractory manufacturers in India has affected the pricing power of RHI Magnesita India Ltd and other refractory players.

5) Strategy of increasing the business size and market share:

To strengthen their competitive position, all the global players are focusing on increasing their market share and business size by acquiring as many local players and their refractory units as possible.

RHI Magnesita group has focused on increasing its stake in the Indian refractory market by making JV with Clasil Refractories, acquiring Orient Refractories Ltd, acquiring Intermetal Engineering India Pvt. Ltd., and acquiring the Cuttack plant of Manishri Refractories & Ceramics Pvt. Ltd.

In Oct. 2022, RHI Magnesita India Ltd announced the acquisition of the refractory business of Hi-Tech Chemicals Ltd. for about ₹621 cr.

Corporate announcement to BSE, October 19, 2022, page 1:

Company has executed a BTA with Hi-Tech Chemicals Limited (“Hi-Tech”) vide agreement dated 18 October 2022 for acquisition of the refractory business of Hi-Tech by way of a slump sale on a going concern basis for a cash consideration of INR 621 Crores

In addition, the company is also in the process of acquiring the refractory business of Dalmia group for ₹1,708 cr.

Corporate announcement to BSE, November 11, 2022, page 4:

DBRL will transfer its Indian refractory business to Dalmia OCL (DOCL)…RHI Magnesita will acquire all outstanding shares in Dalmia OCL (DOCL) in exchange for 27 million new shares in RHI Magnesita India Limited…a value of approximately ₹1,708 Crores

The refractory business of Dalmia group will add a manufacturing capacity of about 320,000 MTPA to the company (source).

The integration will add almost 320,000 tons of capacity to RHI Magnesita India production footprint, particularly in magnesia carbon and alumina bricks.

In addition to the above inorganic methods, RHI Magnesita India Ltd has also increased its manufacturing capacity by organic methods i.e. by doing capital expenditure in its plants & machinery.

In FY2018, the company increased the capacity of its Bhiwandi plant from 9,300 MTPA to 11,700 MTPA.

FY2018 annual report, page 12:

expanded its existing production capacity of isostatic products from 9,300 tons per year to 11,700 tons per year at Bhiwadi…The plant was successfully commissioned on 17 May, 2018

In FY2022, the company started work on increasing the manufacturing capacity of its three plants and completed the expansion of its Vizag plant by 30%.

FY2022 annual report, page 3:

During the year, the capacity of the Vizag plant was expanded by almost 30%. Capacity expansion projects are ongoing at the other two plants.

To increase its business size and resultant competitive advantages, RHI Magnesita India Ltd has planned to double its manufacturing capacity to about 300,000 MTPA over the next 4 years by investing about ₹400 cr.

FY2022 annual report, pages 4 and 14:

business goal of doubling our production capacity and revenue by FY 2025-26 as compared to 2020-21. This will be achieved through organic and inorganic means. In 2020-21, we earmarked a phased capex investment of Rs. 400 crores upto 2025-26 for expanding capacities and automation of our three plants..

The company aims to double its production to almost 3,00,000 tons per annum by 2026.

Apart from increasing capacity by way of acquisitions and capital expenditure, the company is also going in for franchise agreements where third parties produce the refractory goods required by the company. The company has one such agreement with a plant based in Salem (source).

This also has an allied plant in Salem run under franchise arrangement, that produces monolithics.

6) Cost-cutting measures by RHI Magnesita India Ltd:

In light of the competition, the company has focused on reducing its costs by taking measures like reducing employee costs through a voluntary retirement scheme (VRS). The company came out with a VRS scheme in FY2013.

FY2013 annual report, page 45:

In response to the VRS, 43 employees opted for the same. Expenditure of ₹125.86 Lacs on VRS has been charged to statement of profit and loss

The company faced margin pressure when the cost of sourcing raw materials from China increased. As a solution, the company decided to focus on recycling refractory products because it provided a cost saving of up to 30% and also reduced dependence on China.

FY2022 annual report, page 34:

Localization and recycling to support margins (discourage imports): Recycled material which saves 30% of the cost. This will also reduce dependence on China.

To achieve its recycling objectives, RHI Magnesita India Ltd purchased a manufacturing plant of Manishri Refractories & Ceramics Private Limited capable of producing MGU bricks via recycling.

FY2020 annual report, page 15:

Company has invested Rs. 43.56 Crores to purchase certain assets of plant…of Manishri Refractories & Ceramics Private Limited (MRCPL). This plant capacity is 10,000 Tons for manufacturing of MGU bricks through recycling and with further capex the capacity will be increased to 18,000 Tons per annum.

The company also tied up with a large steel manufacturer to source used refractory material for recycling.

FY2022 annual report, page 17:

company recently signed its first long-term contract with a major steel maker in India for lifting of spent refractories for recycling

As a result of these initiatives, RHI Magnesita India Ltd could achieve up to 16% share of recycled raw material in its operations.

FY2022 annual report, page 70:

Use of more than 16 % of recycled raw collected from different steel plants.

Going ahead, an investor should keep a close watch on the profit margins of the company to understand if it can pass on an increase in its input costs to its customers.

The tax payout ratio of RHI Magnesita India Ltd has largely been in line with the standard corporate tax rate prevalent in India.

Advised reading: How to do Financial Analysis of a Company

Operating Efficiency Analysis of RHI Magnesita India Ltd:

a) Net fixed asset turnover (NFAT) of RHI Magnesita India Ltd:

NFAT of the company used to be high in the range of 13-16 until FY2019. However, since the merger of three subsidiaries of RHI Magnesita, the NFAT of the company declined to the range of 6-7.

This sharp decline in the NFAT is due to the different product profiles of merging companies. The data from the three-years financials of the merging companies (source) shows that one of the merging companies, RHI Clasil Pvt. Ltd had a comparatively very low NFAT.

RHI Clasil Pvt. Ltd: FY2018 sales: ₹266 cr, fixed assets: ₹60 cr, NFAT = 4.4

Due to the merger of a company with an NFAT of 4.4 with another company with an NFAT of 14.9, the NFAT of the resultant entity declined.

Going ahead, an investor should keep a close watch on the NFAT of the company to assess whether it can use its fixed assets and manufacturing capacity optimally.

Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors

b) Inventory turnover ratio (ITR) of RHI Magnesita India Ltd:

In the past, the inventory turnover ratio (ITR) of the company used to be in the range of 6.5-7.5. However, upon the merger of the three companies, the ITR of the company declined to 4.2 in FY2022. This is visible in the sharp rise in the inventory of the company from ₹278 cr in FY2020 to ₹608 cr in FY2022.

Going ahead, an investor should keep a close watch on the ITR of the company to assess whether it is using its inventory efficiently.

Further advised reading: Inventory Turnover Ratio: A Complete Guide

c) Analysis of receivables days of RHI Magnesita India Ltd:

Over the years, the receivables days of RHI Magnesita India Ltd have stayed in a range of 70-80 days. After the merger of three entities, the receivables days witnessed an improvement to 64 days in FY2020. However, since then, the receivables days have gone back to the historical average of about 75 days in FY2022, which is visible in a sharp rise in the receivables of the company from ₹332 cr in FY2020 to ₹489 cr in FY2022.

Going ahead, an investor should monitor the trend of receivables days of RHI Magnesita India Ltd to assess whether it is able to collect its receivables on time and keep its working capital position under control.

Further advised reading: Receivable Days: A Complete Guide

When an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of RHI Magnesita India Ltd for FY2013-2022, then she notices that over the years (FY2013-FY2022), the company has not converted its profit into cash flow from operations.

Over FY2013-22, RHI Magnesita India Ltd reported a total net profit after tax (cPAT) of ₹989 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹718 cr.

It is advised that investors should read the article on CFO calculation, which would help them understand the situations in which companies tend to have the CFO lower than their PAT. In addition, the investors would also understand the situations when the companies would have their CFO higher than PAT.

Further advised reading: Understanding Cash Flow from Operations (CFO)

Learning from the article on CFO will indicate to an investor that the cCFO of RHI Magnesita India Ltd is lower than the cPAT due to a sharp deterioration in the working capital position of the company since its merger with other RHI subsidiaries.

In fact, in the FY2022 annual report, the company highlighted to its investors its worsening working capital position. At the same, it urged its customers to help it with support for working capital.

FY2022 annual report, page 33:

Industry is operating on thin margins and high working capital due to its nature of business. Over the last few years, we are also facing serious issues of financial sustainability due to constantly rising costs on all fronts, thus reducing margins due to constant price pressure from customers…There is an urgent need for all stakeholders, especially our customers to help us by compensating for such cost increases and support through working capital to avoid any adverse impact

Going ahead, an investor should keep a close watch on the working capital position of RHI Magnesita India Ltd.

The Margin of Safety in the Business of RHI Magnesita India Ltd:

a) Self-Sustainable Growth Rate (SSGR):

Read: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it can convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.

Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.

An investor may calculate the SSGR using the following formula:

SSGR = NFAT * NPM * (1-DPR) – Dep

Where,

• SSGR = Self Sustainable Growth Rate in %
• Dep = Depreciation rate as a % of net fixed assets
• NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
• NPM = Net profit margin as % of sales
• DPR = Dividend paid as % of net profit after tax

(For systematic algebraic calculation of SSGR formula: Click Here)

SSGR is dependent on NFAT and is directly proportional to it. Therefore, companies with a high NFAT have a higher SSGR. Despite being a manufacturing company, RHI Magnesita India Ltd has a high NFAT ranging from 7 and above.

As a result, the company has reported an SSGR above 50%, which is higher than the sales growth rate achieved by RHI Magnesita India Ltd over the last 10 years (FY2013-FY2022) both before the merger with RHI subsidiaries and after the merger. It indicates that the company could generate sufficient funds from its internal resources to fund its business growth.

Therefore, over the last 10 years (FY2013-FY2022), the company did not need to dilute its equity and had a minimal debt of ₹65 cr in FY2022. The company was debt-free until FY2019. The debt appeared in the balance sheet as a part of the merger with other RHI subsidiaries.

Moreover, an investor may note that at the end of FY2022, the company had cash and investments of ₹78 cr indicating that it has a surplus net cash position. In addition, the company has a net worth over ₹1,000 cr.

An investor gets the same conclusion when she analyses the free cash flow position of RHI Magnesita India Ltd.

b) Free Cash Flow (FCF) Analysis of RHI Magnesita India Ltd:

While looking at the cash flow performance of RHI Magnesita India Ltd, an investor notices that during FY2013-FY2022, it generated cash flow from operations of ₹718 cr. During the same period, it did a capital expenditure of about ₹413 cr.

Therefore, during this period (FY2013-FY2022), RHI Magnesita India Ltd had a free cash flow (FCF) of ₹305 cr (=718 – 413).

In addition, during this period, the company had a non-operating income of ₹82 cr and an interest expense of ₹28 cr. As a result, the company had a net free cash flow of ₹359 cr (= 305 + 82 – 28). Please note that the capitalized interest is already factored in as a part of the capex deducted earlier.

While looking at the overall cash-flow position of RHI Magnesita India Ltd over the last 10 years (FY2013-2022), an investor notices that the company has primarily used its free cash flow in the following manner:

Payment of dividends to the shareholders: ₹252 cr excluding dividend distribution tax (DDT).

An increase in cash & investments of about ₹71 cr i.e. from ₹7 cr in FY2013 to ₹78 cr in FY2022.

Going ahead, an investor should keep a close watch on the free cash flow generation by RHI Magnesita India Ltd to understand whether the company continues to generate surplus cash from its business and keep its debt levels under control.

Further advised reading: Free Cash Flow: A Complete Guide to Understanding FCF

Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin of safety in the business model of any company.

Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

Additional aspects of RHI Magnesita India Ltd:

On analysing RHI Magnesita India Ltd and after reading annual reports, credit rating reports and other public documents, an investor comes across certain other aspects of the company, which are important for any investor to know while making an investment decision.

1) Management Succession of RHI Magnesita India Ltd:

RHI Magnesita India Ltd is a part of the RHI Magnesita group. The company originally used to be a part of Rajgarhia as Orient Refractories Ltd before they sold it to the RHI group. Upon the sale of the company, the promoter, Mr S G Rajgarhia, resigned from the position of managing director.

Then, RHI group appointed Mr Pramod Sagar as managing director of the company. Mr Pramod Sagar is an old employee of the company since 1992 and had been working with the company for 21 years.

FY2013 annual report, page 5:

Joined Orient Refractories Limited (de-merged from Orient Abrasives Ltd.) on 15th April 1992 as Marketing Manager. Before taking up his present assignment, he was heading Marketing and Operations of Orient Refractories Ltd. as Senior Vice-President.

After the merger of the three subsidiaries of RHI Magnesita group, Mr R V S Rudraraju, a part of the promoter family of RHI Clasil Pvt. Ltd. joined the board of directors of the company in an executive position.

Currently, the active day-to-day management of the company is handled by Mr Pramod Sagar as managing director & CEO (aged 57 years) and Mr R V S Rudraraju as chief operating officer (aged 52 years).

As RHI Magnesita India Ltd does not have any identified family as a promoter in India, an investor may assume that whenever the company needs to fill up a position in the senior management, then RHI Magnesita group might be able to hire a suitable candidate either from within the company or from outside.

Further advised reading: How to do Management Analysis of Companies?

2) Scope of improvement in the internal controls and processes at RHI Magnesita India Ltd:

An investor notices many instances that indicate that the internal controls and processes in the company leave scope for improvement.

2.1) Composition of the board of directors:

On many occasions, the composition of the board of directors of RHI Magnesita India Ltd was not as per the statutory requirements.

For example, in FY2015, for a total of about 5-month period, the board of directors did not have the required number of independent directors.

FY2015 annual report, page 17:

The board of directors of the Company and its various committees thus ceased to be properly constituted during the period 30 July, 2014 to 12 November, 2014 till the time independent directors were appointed in place of resigning independent directors…again ceased to be properly constituted during the period 9 February,2015 to 31 March, 2015 as at least 1/3rd of the total board should be comprised of independent director where the Chairman is an independent director.

In FY2020, one of the independent directors continued to hold his position without approval from shareholders despite crossing the statutory age limit of 75 years.

FY2020 annual report, page 26

Further in violation of the requirements of regulation 17(1A) of said Regulations, Mr. Rama Shankar Bajoria continued to hold office of Independent Director without approval of shareholders by means of a special resolution (as he crossed 75 Years of age as on 1 April 2019).

The company did not appoint an independent woman director on time even though the regulations had stipulated it. In addition, during a part of FY2020, it did not have the required number of total directors.

FY2020 annual report, page 26

Company was in Non-Compliance with regard to appointment of Independent Women Director till 12.08.2019 and No. of Directors being less than six till 12.08.2019 and also during 1.1.2010 to 10.02.2020 as required

Advised Reading: How to study the Annual Report of a Company

2.2) Failure to comply with other statutory requirements:

In FY2017, the company breached its limit of transactions with related parties.

FY2017 annual report, page 23:

The threshold limits approved by its shareholders…for material related party transactions of the Company with RHI AG, Austria was breached by the Company during the year.

In FY2020, the company delayed an announcement of its board meeting to the stock exchanges and investors at large. Therefore, both the stock exchanges, NSE and BSE, fined the company.

FY2020 annual report, page 26:

NSE & BSE also imposed fine on Company for Delay in furnishing prior Intimation of Board meeting which was duly paid by the Company.

On multiple occasions, RHI Magnesita India Ltd violated foreign exchange management regulations concerning its trade receivables and payables and it had to repeatedly apply for a pardon for its violations.

FY2021 annual report, page 161:

Foreign currency trade payables amounting to Rs. 43.78 lacs (31 March, 2020: Rs. Nil lacs) have been written back during the year. Subsequent to the year end,(the Company has approached the authorised dealer, under the Foreign Exchange Management (Import of Goods and Services) Regulations, 2015, to condone the delay in relation to obtaining approval for write back

FY2021 annual report, page 162:

Other Payables as at 31 March, 2020 are foreign currency payables which were overdue for more than three years…During the year, the Company has approached the authorised dealer…to condone the delay

FY2022 annual report, page 159:

Includes foreign currency receivables amounting to ₹ 547.83 lacs…which are overdue for more than nine months. The Group has approached the authorised dealer…to condone the delay

FY2022 annual report, page 165:

Includes foreign currency trade payables amounting to ₹ 8,314.54 lacs…which are overdue for more than 180 days. The Group has approached the authorised dealer…to condone the delay

In FY2018, the company delayed depositing undisputed statutory dues to the govt. authorities.

FY2018 annual report, page 59:

Company is generally regular in depositing undisputed statutory dues in respect of income tax, though there has been a slight delay in a few cases

Moreover, since FY2016, RHI Magnesita India Ltd has rarely spent the required amount on CSR and almost every year, the auditors have pointed it out.

FY2016 annual report, page 16:

The Company was required to spend Rs. 230.37 lacs…towards CSR activities. However the Company has spent Rs. 205.04 lacs towards CSR

FY2022 annual report, page 47:

expenditure made by the Company towards CSR activities during the year ended 31 March 2022 was less than the prescribed amount by ₹187.68 Lacs

2.3) Fire in the warehouse of RHI Magnesita India Ltd:

In FY2012, the company had a fire in its warehouse. However, at the time of the insurance claim, the insurer did not agree with the claim raised by the company and as a result, it had to recognize a loss.

FY2013 annual report, page 45:

During the previous year, a fire occurred at the warehouse…the Company estimated the loss of ₹149.76 Lacs…The Company filed a claim with the insurance company for the equivalent amount…as the management was confident that claim receivable shall not be lower than the above amount….was settled for a lesser amount and accordingly net loss of ₹55.73 Lacs has been accounted for

2.4) Differences in the same data presented by company in different parts of annual report:

In FY2016 annual report, RHI Magnesita India Ltd reported different data for the salary taken by Mr S. C. Sarin at three different places in the annual report.

On page 27, the company reported the remuneration taken by Mr Sarin as ₹10.52 lac. On page 31, it mentioned the remuneration of Mr Sarin as ₹119.38 lac. Further, on page 83, the company mentioned the remuneration taken home by Mr Sarin as ₹15.54 lac.

2.5) When the majority shareholder (RHI) voted against a board resolution:

Normally, we see that the resolutions in the annual general meeting (AGM) are proposed by the board of directors with the consent of the majority shareholder. This is natural because the majority shareholder has the maximum representation on the board by way of its nominee directors.

However, in FY2015, the secretarial auditor pointed out that the shareholders have defeated the resolution of creating security in favour of banks.

FY2015 annual report, page 17:

However, the shareholders defeated the special resolution proposed under Section 180(1)(a) giving authority to the board of directors to borrow money by creation of charge / security on the assets of the Company upto ₹150 crores

The resolution was defeated when 90.57% of shareholders voted against the resolution.

FY2015 annual report, page 46:

In FY2015, the company had a total of 120,139,200 equity shares (FY2015 annual report, page 50). Therefore, if 83,644,267 votes are cast against the resolution, then it becomes clear that the majority shareholder, Dutch US Holding B.V., Netherlands (representing RHI group) holding 83,637,771 (FY2015 annual report, page 68) has voted against the resolution.

This incident might present a case where the management of the company moved a resolution via the board without keeping the majority shareholder on the same page.

An investor may seek any further clarifications directly from the company.

2.6) Land pending for allotment in the name of the company for more than 15 years:

Multiple land parcels and a building owned by the company in Vishakhapatnam (Vizag) have not been transferred in the name of the company since 2005-2007 because, apparently, the revenue department of the govt. is still assessing the stamp duty.

FY2022 annual report, page 79:

Stamp duty is under assessment with Revenue Department of the Andhra Pradesh. Title deed will be transferred in the name of the Company once stamp duty is deposited after assessment is completed.

On the face of it, it seems like a case where the company has moved an application for the transfer of the title deed in its name and after that, it has not followed up with the authorities.

An investor would acknowledge that such incomplete actions like the transfer of title deeds might prove a significant roadblock in future if the company intends to transfer/sell these assets to any other person.

An investor may contact the company directly to understand the reasons for such a long delay in the assessment of stamp duty by the govt. authorities and whether it has continued to follow up with the govt. office for closure of its application.

Going ahead, an investor should keep a close watch related to the signs indicating a lack of strong processes and controls at the company.

Advised Reading: How to study the Annual Report of a Company

The Margin of Safety in the market price of RHI Magnesita India Ltd:

Currently (January 7, 2023), RHI Magnesita India Ltd is available at a price-to-earnings (PE) ratio of about 42 based on consolidated earnings of the last 12 months ending September 2022 (Oct. 2021 – Sept. 2022).

However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, which 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, even a low PE ratio of the company’s stock may be a sign 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

Analysis Summary

RHI Magnesita India Ltd has grown its revenue at a fast pace of 21% year on year for the last 10 years (FY2013-FY2022). The company has used both organic and inorganic methods. RHI Magnesita group has acquired companies, and plants, formed joint ventures in India and consolidated all of them under RHI Magnesita India Ltd. As a result, the sales of the company have increased from ₹361 cr in FY2013 to ₹2,336 cr in 12 months ending Sept 2022 (i.e. Oct. 2021 to Sept 2022).

The company is planning to grow aggressively and therefore, it has announced aggressive expansion plans to double its production capacity by investing ₹400 cr by FY2026. In addition, in recent months it has acquired refractory businesses of Hi-tech Chemicals and Dalmia group.

High technological requirements to produce good quality refractory products needed by steel, cement and glass industries create a strong barrier to entry for new players in the refractory industry. Therefore, most small Indian players are not able to grow beyond a point and thereafter, they either tie up with/sell out to global players, which bring in technology to cater to large customers. As a result, the refractory industry is dominated by a few global players.

These global players, all of whom have the technology to cater to large customers compete intensely for market share. Because of this intense competition, players like RHI Magnesita India Ltd are not able to pass on an increase in their input costs and are facing pressure on their profit margins and working capital.

Therefore, companies like RHI Magnesita India Ltd focus on aggressive business size growth to gain competitive advantages. To withstand competition, the company is also focusing on cutting costs by reducing employee costs (VRS) and developing alternative raw material sources like recycling. These steps have helped the company in improving its profit margins in recent years.

Ever since the merger of three Indian subsidiaries of RHI Magnesita group, the working capital of the company has come under stress and a significant amount of money is stuck in receivables and inventory. However, as the company’s business is asset-light with a high turnover; therefore, it had to do only limited capital expenditure to achieve its business growth.

As a result, until now, it has managed to grow its business without raising a lot of debt. However, going ahead, looking at the aggressive growth plans, an investor needs to keep a close watch on the debt levels of RHI Magnesita India Ltd.

An investor also needs to keep a close watch on the profit margins of the company as well as signs of weakness in the internal controls and processes of the company. In the past, RHI Magnesita India Ltd has seen many instances of non-compliance with statutory norms; therefore, an investor needs to be cautious while analysing the company.

Further advised reading: How to Monitor Stocks in your Portfolio

These are our views on RHI Magnesita India Ltd. However, investors should do their own analysis before making any investment-related decisions about the company.

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

I hope it helps!

Regards,

Dr Vijay Malik

P.S.

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Disclaimer

I, Vijay Malik, am a SEBI-registered Research Analyst (Regn. No. INH100008364). This article is for educational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. Investors should do their own research before making any investment decisions.

I, or my immediate relatives, do not have any financial interest in the companies discussed as on the date of publication of this article, nor do we hold one per cent or more of the securities of such companies at the end of the month immediately preceding it. I do not have any material conflict of interest and have not received any compensation or other benefits from the companies or any third party in relation to this article during the 12 months preceding its publication. I have not served as an officer, director, or employee of the subject companies, nor have I been engaged in market making activity for them.