Mukand Ltd – Great restructuring story is on the cards
Mukand Ltd is part of the Bajaj Group of companies with Viren Shah Family being co-promoter. Company is engaged in the business of stainless/alloy steel and machine building. It is also engaged in the business of rolling of cold drawn bright bars of steel through its JV with Japanese company Sumitomo Corporation. Apart from the core assets, Mukand has enriched large land bank in the industrial area of Thane.
Company is seeing many latest developments which will augur well for its future growth and profitability. The developments such as the new JV with Sumitomo can escalate growth in its alloy steel business, strategic plans towards cleaner and leaner balance sheet to bring down finance cost, Cost reduction capex and monetization of land bank at Thane will unlock great value for shareholders going forward.
Mukand is an integrated alloy and stainless steel producer from India. Mukand has a steel making and rolling capacity of 500,000 metric tons per year. It has a strategic partnership at Hospet with Kalyani Steels having three steel producing plants with a total capacity of 700000 MTPA. Company operates 2 of the said three plants to produce close to 600000 MTPA of steel per annum. Company has a share of 58.62% in this production which brings its capacities at ~351000 MTPA of steel. Mukand is also in the business of design, manufacture, assembly and commissioning of industrial machinery, heavy duty cranes and bulk material handling equipment. The company under takes execution, supervision and commissioning of industrial and infrastructure projects, manufacture of heavy machinery for process plants in ferrous and non-ferrous industries and turnkey projects.
Mukand’s alloy steel is widely used in the automobile and auto component industry for products such as fasteners, bearing transmissions, crankshaft, steering components, suspension springs, fuel injection equipment, including common rail diesel injection systems, braking systems, drive axle mainly velocity joints, seamless tubes etc.. The Company also exports its stainless steel products to developed and developing countries such as : The United States of America, Germany, Italy, the Netherlands, Switzerland, United Arab Emirates, Japan, Korea, Hong Kong, Taiwan, Vietnam, to mention a few.
Company’s JV with Sumitomo Corporation to manufacture and market cold finished bars & wires is performing well for the last 3 fiscals and is expected to continue in same fashion for the coming years. Company’s total capacity is at 81000 MTPA of cold finished bright bars and wires of which at present company utilizes the capacities to the tune of 4000 MT per month. The company reported sale of Rs.473.6 cr and PAT of Rs.8.8 cr in FY17 compared to Rs.541.5 cr and Rs.4.2 cr respectively in FY16.
Even after having good operational capacities, dedicated workforce, good turnover and reasonable operating margins, company has been pushed into the red in terms of its net margins. This is mainly on account of the humongous debt outstanding in company’s book. To turnaround this and to gain benefits from cross-national relations, company has chalked out various plans to bring down the debt levels and expand its margins.
JV With Sumitomo Corporation – A boost to Alloy steel business:
Mukand’s alloy steel business, is the largest contributing segment to company’s business. Company has decided to transfer this business to one of its wholly owned subsidiary, Mukand Alloy Steel Pvt. Ltd. (MASPL). Mukand has entered into a joint venture with leading Japanese company Sumitomo Corporation (SC). Transfer of business to happen wef Apr 01, 2017. SC is to buy 49% stake in MASPL at an enterprise value of Rs.2820 Cr i.e. roughly Rs.1400 Crs will be paid to Mukand for being the only other shareholder in MASPL. This cash flow is vital for Mukand as it plans to bring down the debt using the said funds. Further, Mukand is optimistic about the synergies the JV will witness on account of this JV given SC’s reach in the world market.
Debt reduction to make balance sheet leaner and increase earnings:
As on FY17, a total of Rs.2880 Cr of debt is outstanding on company’s balance sheet and the average cost of debt is ~14% p.a. Even though company has been posting consistently EBITDA margins of more than 12% and EBIT margins of more than 9% in the previous 3 fiscals, company ends up gaining nominally or losing in PAT terms. This goes to show that a turn down in the interest cost number can lead to a considerable surge in the PAT number for the company.
Management plans to bring down this debt by 49% stake sale in MASPL to SC. Further, company intends to monetize a large part (50%) of its land holdings out of 200 acres it holds at Thane which can fetch roughly estimated conservative figure of Rs.400 crs which can also be used to pay off the debts. The Company has pending claims of Rs.288.42 crore excluding interest as at 31.03.2017. These claims are also expected to be received by the company progressively over next 1-2 years which again will reduce the financial burden of the company. Thus conscious efforts on the part of the company to reduce the financial leverage would benefit the company in realizing the actual operational efficacies of its business which currently gets used up in meeting the financial burden it faces to cover its debt payments.
Transfer of Industrial Machinery business:
Industrial machinery division forms part of company’s EPC and engineering business segment. Company has chalked out a plan to hive off this business from its standalone operations and operate it using a wholly owned subsidiary. Company is looking out for another strategic partner for this business to bring down further debt levels and give further direction and push to this business. Talks in respect of this are at an advanced stage with some parties.
Cost reduction and operational efficiency capex:
Mukand has overall expended Rs.400 crs in the previous fiscal/s to improve the operational efficacies of the business and in turn reduce the costs. With these capex, company had started realizing cost benefits which were visible in the operational margins which expanded by about 180-250 bps as compared to the previous fiscal. In the alloy steel business, this along with SC’s business marketing and networking expertise, company is expected to realize margins better that those in other segments of the company.
GST to be advantageous for Mukand:
GST is the next positive trigger for the company which is expected to bring down company’s overall costs by 50 to 100 bps (% of sales) as per management. With the advent of GST it shall be easier for the company to claim credits for various state and central taxes (including import duty) paid by it against each other. This shall help company bring down the overall cost of the company’s business as a whole. This will help it place its stainless and alloy steel’s prices more competitively and bid more competitively for new EPC and machine building projects.
The stock currently trades at 10.5x FY19E EPS. For a 70 year old company from a reputed family group, the valuations are decent especially considering the fact that it has embarked on a number of initiatives to correct the financial and operating structure. We feel investors could buy the stock at the CMP and can be added on dips. Any development on finalization of JV partner for the industrial machinery division could lead to further rerating of the stock.