>Ratnamani Metals and Tubes

Recommendation: Hold
Price target: Rs129
Current market price: Rs115

Downgraded to Hold

Result highlights

• Revenues down due to sluggish performance of CS pipes: For the quarter ended June 2012, Ratnamani Metals & Tubes (Ratnamani) reported a mixed performance with the stainless steel (SS) pipes segment reporting a 24.8% year-on-year (Y-o-Y) revenue growth and the carbon steel (CS) pipes segment reporting a 28% Y-o-Y revenue decline. The net sales for the quarter dropped 2.5% to Rs282.3 crore. The overall volume fell whereas the realisation improved year on year (YoY) during the quarter. 
• OPM remains under pressure: The gross profit margin (GPM) improved by 600 basis points YoY to 39.1% on the back of an improvement in the realisations. The realisation for the SS pipes segment was up 30.5% YoY boosted by a delivery related to a nuclear plant deal. The realisation for the CS pipes segment increased by 14.2% YoY. The operating profit margin (OPM) was down by 190 basis points YoY to 16.8% due to the impact of a foreign exchange loss of Rs12 crore and freight charges, which are now borne by the company (effective from Q2FY2012). 
• Net profit down 24.7%: On account of a 12.8% fall in the operating profit, a 53.3% increase in the interest cost and a higher effective tax rate (32.6% against 30.1% in Q1FY2012), the net profit was fell 24.7% to Rs20.3 crore. The company's interest cost has been increasing quarter on quarter mainly due to the depreciating rupee because about 90% of its total debt of Rs255 crore is dollar denominated.
• Demand environment remains uncertain: The demand environment remains uncertain due to the existing volatile macro-economic environment. The export demand is resilient. The company's order book is improving. However, the pricing pressure remains. In the SS pipes segment, the demand for value-added products is improving. During the quarter under review, the volume of the SS pipes segment declined but its realisation surged mainly due to some deliveries relating to a nuclear plant deal. The deliveries under this deal would be recorded in Q2FY2013 as well. With regards the CS pipes segment, the demand remains volatile and the pricing continues to be under pressure. On the industry side, the company is witnessing demand from the refinery and power sectors.
• Downgraded to Hold: Ratnamani reported a soft performance for Q1FY2013 on account of the lower than expected performance of its CS pipes segment, the flat performance of its SS pipes segment and the higher interest cost. In view of the current quarter's performance and the domestic demand environment, we have tweaked our revenue estimates by 3.3% and 1.2% for FY2013 and FY2014 respectively. We have also revised our earnings estimates for FY2013 and FY2014 by 8.7% and 3.7% respectively. Accordingly, we have lowered our price target to Rs129 (5x FY2014E earnings). In view of the limited upside to the stock from the current levels, we have downgraded our rating on Ratnamani to Hold from Buy. The risk to our rating and price target remains a faster than expected revival in the demand environment.

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