Maithan Alloys Ltd (MAITHANALL) manufacture and export value-added Manganese alloys namely - Silico manganese, Ferro manganese, and Ferro Silicon alloys. MAITHANALL is a key supplier to reputable steel companies such as JSW, SAIL, JSL domestically and POSCO, Hyundai Steel overseas to name a few. For context, ~1.5% of Manganese alloy is required to produce one ton of steel. As MAITHANALL depends on the steel industry, we can expect cyclic behavior due to volatility in raw material and finished goods prices. MAITHANALL strives to differentiate itself from its competitors by being the lowest-cost supplier to steel companies.
Positives:
- The company has received a CRISIL AA/Stable and CRISIL A1+ ratings for its long term and short-term ratings respectively
- The company is witnessing steady sales growth with healthy net profit margins (though dependent on steel cycles which impact the raw material prices)
- The stock is trading at an attractive price (P/E as on 11th May is 3.85) with the debt-to-equity ratio almost zero. The PEG ratio is also low (0.11), indicating that the company is undervalued currently. The price-to-sales ratio is 0.87 increasing the stock’s attractiveness. The current ratio is a healthy 5.70.
- The management is focused on a single business segment – “Ferroalloys”. If we look at “Cash from Investing activity” section, it is evident that the company does some commodity trading. But since it is a common practice by all commodity companies, I am ready to give the benefit of the doubt to MAITHANALL as they must be knowing the industry cycles and are planning to utilize that.
- The Joel Greenblatt metrics – ROCE and the earnings yield – have been healthy – 54.9% and 41.9% respectively. MAITHANALL has efficiently allocated capital over the years as can be seen from their healthy ROCE numbers.
- The company’s net cash flow turned positive in Mar 2022 (70 crores) after a negative cash flow the previous year. Since the company has zero debt and significant cash reserves, the company is able to sustain crises well on its own. The retained earnings
- The succession plan is clearly sorted in this company and there seem to be no red flags against the promoter family.
- The management is able to execute projects (CAPEX expansions) as per their previously committed timelines.
- The business model of MAITHANALL is relatively asset-light. The company has a CAPEX of 2888 crores and has generated sales of 17039 crores in the same period of March 2011 to March 2022. This is also highlighted in one of their annual reports saying that MAITHANALL doesn’t want to backward integrate, meaning they don’t want to invest in mining rights. They would rather buy Manganese ore instead of mining it.
- The promoter shareholding has been almost constant over the past two years.
- All the domestic customers are associated with the company for over 7 years – So they have established good long-term relationships with their customers (Source: https://www.maithanalloys.com/wp-content/uploads/2021/11/QE-Sep2021-Investor-Presentation.pdf )
Aspects to think about before investing:
- Out of their three manufacturing plants, their two big plants at Kalyaneshwari & Visakhapatnam import 65% and 90% of their raw materials. This is a huge risk for a commodity company. (Source: Investor presentations)
- Their cumulative cash flow from the operations is much less than their cumulative PAT over the last 10 years. This indicates that MAITHANALL is finding it difficult to convert its profits to cash. Maybe the cash is struck in inventory and with debtors. So, I checked the data, and it aligns with this hypothesis. The cash conversion cycle and the working capital days are increasing. Established and powerful buyers will obviously have more power during negotiations, which is shown in these numbers. I still think it has not reached a panicky situation but as an investor, we have to be cautious and always keep a check on the inventories as well as the cash flow from the upcoming quarters.
- The cost of materials consumed and purchase of traded goods amount to 40% of sales in FY21-22 (This was 51% in FY20-21). Another important aspect is the power cost which was 12.4% of sales in FY21-22 (This was 20% in FY20-21). The company’s operating margin depends on the power cost significantly. That’s why in 2017 and 2018, when there was a power subsidy, it benefited the company as mentioned in those year’s annual reports. Power costs and issues associated with this is a concerning topic for the investor (Sometimes on the good side and sometime on the bad side). The Oct-Dec Q3, 2022 report mentions that the company has gone for an appeal of 90.5 crore which represents the arrear electricity charges pertaining to earlier years on account of increase in power tariff notified by concerned authorities. For further details about the power cost, one can refer to Note 36 (Pg 197) of annual report, FY 21-22. In other words, power costs are an important external factor that significantly impacts the profitability of MAITHANALL.
- Same is the case with the price of raw material costs. This is one more external factor that will significantly impact on the OPM of MAITHANALL.
- If the big steel companies become too fixated on keeping their input costs as low as possible, their vendors like MAITHANALL would have to shrink their margins. This has happened in the past and this is an inherent risk that an investor should be aware of.
- During FY21-22, inventories increased by 74.5% more than FY20-21. Raw material inventories amount to 502.11 crores and finished good inventories amount to 87.05 crores. This is the place where the company can improve a lot.
- There is an item called “Others” under Note 29 – “Other current liabilities” section of the annual report which has around 61.6 crores. There are no details provided anywhere. This item is a constant in all the company’s annual reports.
Overall Verdict:
MAITHANALL, a fundamentally strong company, and a clean management is available at attractive valuations now. Since it heavily depends on the steel industry, if we are able to time the entry and exit, we are looking at a multi-bagger (Holding time frame: 2-3 years from now) in my opinion.
Would love to hear your $0.02 on this analysis.
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