>RATNAMANI METALS & TUBES

■ Revenues surge: Ratnamani Metals & Tubes (Ratnamani) reported another strong quarter in terms of revenue growth—in Q3FY2012 its revenues grew by 74.2% on a year-on-year (Y-o-Y) basis to Rs280.7 crore. The sales growth was backed by a 140% growth year on year (YoY) in the carbon steel tube and pipe (CS pipe) segment and a 57% Y-o-Y jump in the stainless steel tube and pipe (SS pipe) segment. The company is experiencing strong traction in the export business with exports contributing about 50% of the revenues.
 
■ OPM affected by forex loss: The gross profit margin (GPM) dipped by 180 basis points YoY to 36.7% despite an increase in the realisation mainly due to a higher raw material cost. The realisation for CS pipes increased by 29% YoY whereas that for SS pipes improved by 18.6%. The operating profit margin (OPM) was down by 560 basis points YoY to 14.9% despite a surge in the revenues. The fall was due to a foreign exchange (forex) loss of Rs12 crore on marked-to-market (MTM) forex denominated loans.
 
■ Net profit grows by 19.2%: On the back of a 70% fall in the other income and a 54.8% increase in the tax outgo (with the effective tax rate up by 520 basis points to 29.6%), the net profit growth was at 19.2% to Rs19.8 crore.  Marginally tweaked estimates: In view of the volume and revenue performance of the quarter, we have tweaked our estimates for FY2012 and FY2013. Our revenue growth estimates have increased by 3.9% and 4.6% for FY2012 and FY2013 respectively while our earnings estimates have increased by 5.4% and 4.5% for FY2012 and FY2013 respectively.


■  Valuation: Through the first nine months of FY2012, the company has reported a strong revenue performance. However, its margins have trended down consistently. The management commentary remains encouraging in terms of the potential opportunities in the oil & gas sector. Going forward, we expect the company’s revenues and profits to grow at a compounded annual growth rate (CAGR) of 30% and 15.6% respectively over FY2011-13. At the current market price, the stock is attractively trading at a price/earnings (PE) multiple of 4.7x its FY2013E earnings. On an enterprise value (EV)/EBITDA basis, it is trading at 3.5x FY2013E EBITDA. We maintain our Buy rating on the stock with a price target of Rs132.

■ Segmental performance

SS tubes and pipes

The business of SS pipes contributed 50.5% to the total revenues in the third quarter, down from 61.0% in the

corresponding quarter of the previous year. The gross sales from the SS pipe segment grew by 57.6% YoY to Rs137.7 crore. The growth was primarily driven by a 32.9% Y-o-Y growth in the volume whereas the realisation grew by 18.6% YoY.

CS pipes

The revenues from the CS pipe segment surged by 140.4% YoY to Rs137.5 crore. The growth was backed by a volume growth of 46.3% YoY. The realisation improved by 29%. The coating revenues surged to Rs39.2 crore, up from Rs2.3 crore in the corresponding quarter of the previous year.

■ Order book position

The order book reported an increasing trend—the order book as of end January 2012 was at Rs635 crore, up from Rs596 crore at the end of October 2011. The company added orders worth Rs230 crore in the quarter. Ratnamani is witnessing traction in the refinery and hydrocarbon segment. The power and oil & gas sectors account for close to 70-75% of its outstanding order book. The company expects to see further traction in the city gas distribution and cross-country pipelines. Of the order book, the export order book is about Rs179 crore whereas the domestic order book is worth Rs456 crore.

►   Marginally tweaked estimates: In view of the volume and revenue performance of the quarter, we have tweaked our estimates for FY2012 and FY2013. Our revenue growth estimates have increased by 3.9% and 4.6% for FY2012 and FY2013 respectively while our earnings estimates have increased by 5.4% and 4.5% for FY2012 and FY2013 respectively.

► Valuation: Through the first nine months of FY2012, the company has reported a strong revenue performance. However, its margins have trended down consistently. The management commentary remains encouraging in terms of the potential opportunities in the oil & gas sector. Going forward, we expect the company’s revenues and profits to grow at a CAGR of 30% and 15.6% respectively over FY2011-13. At the current market price, the stock is attractively trading at a PE multiple of 4.7x its FY2013E earnings. On an EV/EBITDA basis, it is trading at 3.5x FY2013E EBITDA. We maintain our Buy rating on the stock with a price target of Rs132.