ORIENT REFRACTORIES
FV-Re 1
PE-27, IND PE-120
ROCE-38%,
RONW-25%
ZERO DEBT- (Paying tax close to 33%)
12 Cr Equity, 261 cr Reserve, Cash Balance-110cr
It’s not very often that we get stocks of well-managed companies promoted by MNCs, being
a cyclical but still doing well in downward cycles. Market usually attributes higher
valuations to stocks of well managed MNCs as these are in general professionally managed
firms with clean corporate governance practices.
Orient Refractories (ORL) is another MNC promoted company which at the moment
seems to be trading at reasonable valuations considering the promoter backing and the
operating performance.
Orient Refractories manufactures a wide range of Refractory and Monolithic products for
the iron and steel industry and its clients include large domestic integrated steel producers
and mini steel plants such as Steel Authority of India, Mukund Steel, Tata Iron and Steel
Company, RINL – Vizag, Sunflag Iron, Lloyd Steel, Usha Martin and the Jindal Group.
The Company has an in-house research and development facility that is recognized by the Government of India.
Refractory products Usages
Steel, Cement/Lime – 87%
Glass, and Non-ferrous metals-13%
The future prospects of refractory business depend on the growth in steel industry which in turn is highly correlated with economic growth.
Efficient Ratios
ROCE ratios of Orient Ref are pretty high compared to its peers. Orients is - 38 percent , while IFGL isat 10 percent and Vesuvius at 23 percent. This is due to lower cost of land ( of which 48 percent is
underutilized) , and use of local technology. Orient plans to increase its capex by 50 percent in the
next 3 years, but still we can expect ROCE ratios to remain high on the back of change revenue mix
( more exports). Orient also has the highest gross margins among peers due to lower RM cost as 80
percent is sourced locally and rest 20 percent imported from China. The company is generating
healthy cash flow and margins over the years in a cyclical business, this signifies a moat in the
business. it looks a good bet to ride in the reviving infrastructure and steel business. Besides strong
and steady growth, the cash flows from operations are in line with the reported profits.
Positives
1) Dividend has been increased hugely @2.5 per share compared 1.45 rs. per share last year.
Dividend payout stands at ~44% on a net profit of Rs. 68 cr for FY 16-17.
2) Zero debt
3) Huge cash of around 110 cr in balance sheet. They are giving back to share holders in the
form of increased dividend payouts.
4) Increasing the capacity of isostaic products from 9300 to 11700 tons per year with cost of
17 crore from internal accruals
Strong Parent
The parent RHI is the second biggest player in refractory materials. They are planning to
increase exports from Indian subsidiary gradually over the years. RHI AG,being the
promoter with 69.62% stake in ORL. RHI AG is a Vienna-based Austrian company with focus
on production, sale and installation of high-grade refractory products for the steel, cement,
glass, lime and nonferrous metals industries. Thus, the acquisition by Dutch US Holding makes
Orient Refractories a part of the largest and probably the best managed refractory products
manufacturer.
PRODUCTS
Triggers
1. The company is increasing it's production capacity from 9300 T to 11500 T by 2019 for
Isostatic Pressed products over next two years. It is claimed to be the most profitable
product category for the company.
2. The increase of market share of Electric Arc Furnace (EAF) route of steel production
is beneficial for ORL as their revenue share and production capacity is more suited
towards that. For records, in India 57% of steel is produced by EAF route compared
to world average of 27%.
FACTS
Glass and non ferrous industry also consume about 20% of world demand of
refractories. These sectors are also in an upward trajectory, boding well for ORL
a) Oligopolistic structure with 4 key players in the Indian market ensures discipline in
pricing environment. ORL is best among its peers.
b) Continuous push from government on infrastructure will lead to higher demand for
steel, there by helping in revival of medium and small steel companies. This uptick in
domestic steel production helped Orient Refractories Limited with higher refractory
orders.
c) ORL is the market leader for customized flow‐control products in domesticmarket
with a 600+ client base would help its strong sales growth.
d)Management is quite confident of sustainable sales growth for current financial year
because of demands coming from new clients due to revival in domestic steel
production
Risks
It's dependency on steel cycle. The unpredictability of steel cycle is not easy to
gauge and exit is needed ahead of the cycle turns otherway. Even though the ORL
track record says it did reasonably well in downcycle too and protected most of its
profitability and return metrics.
Orient Refractories has excellent fundamentals, superior track record and good corportae
governance, and future looks bright as steel industry is in upcycle. This can turn ito a very
good investment, if one can link all the dots to where it leads. I am very positive and upbeat
on ORL, and feel one can take position in it, with reasonable risk reward ratio. One can also
take position after watching the Q2 results scheduled on Nov 10,2017. Its a pure long term
play.
Q2 FY 17
Revenue- 148.41 cr vs 131.28cr
Net Profit- 20cr vs 16.83cr
EPS- 1.68 VS 1.40
Buy Range – (150-170)
Compiled and Created by – Chirag
FV-Re 1
PE-27, IND PE-120
ROCE-38%,
RONW-25%
ZERO DEBT- (Paying tax close to 33%)
12 Cr Equity, 261 cr Reserve, Cash Balance-110cr
It’s not very often that we get stocks of well-managed companies promoted by MNCs, being
a cyclical but still doing well in downward cycles. Market usually attributes higher
valuations to stocks of well managed MNCs as these are in general professionally managed
firms with clean corporate governance practices.
Orient Refractories (ORL) is another MNC promoted company which at the moment
seems to be trading at reasonable valuations considering the promoter backing and the
operating performance.
Orient Refractories manufactures a wide range of Refractory and Monolithic products for
the iron and steel industry and its clients include large domestic integrated steel producers
and mini steel plants such as Steel Authority of India, Mukund Steel, Tata Iron and Steel
Company, RINL – Vizag, Sunflag Iron, Lloyd Steel, Usha Martin and the Jindal Group.
The Company has an in-house research and development facility that is recognized by the Government of India.
Refractory products Usages
Steel, Cement/Lime – 87%
Glass, and Non-ferrous metals-13%
The future prospects of refractory business depend on the growth in steel industry which in turn is highly correlated with economic growth.
Efficient Ratios
ROCE ratios of Orient Ref are pretty high compared to its peers. Orients is - 38 percent , while IFGL isat 10 percent and Vesuvius at 23 percent. This is due to lower cost of land ( of which 48 percent is
underutilized) , and use of local technology. Orient plans to increase its capex by 50 percent in the
next 3 years, but still we can expect ROCE ratios to remain high on the back of change revenue mix
( more exports). Orient also has the highest gross margins among peers due to lower RM cost as 80
percent is sourced locally and rest 20 percent imported from China. The company is generating
healthy cash flow and margins over the years in a cyclical business, this signifies a moat in the
business. it looks a good bet to ride in the reviving infrastructure and steel business. Besides strong
and steady growth, the cash flows from operations are in line with the reported profits.
1) Dividend has been increased hugely @2.5 per share compared 1.45 rs. per share last year.
Dividend payout stands at ~44% on a net profit of Rs. 68 cr for FY 16-17.
2) Zero debt
3) Huge cash of around 110 cr in balance sheet. They are giving back to share holders in the
form of increased dividend payouts.
4) Increasing the capacity of isostaic products from 9300 to 11700 tons per year with cost of
17 crore from internal accruals
Strong Parent
The parent RHI is the second biggest player in refractory materials. They are planning to
increase exports from Indian subsidiary gradually over the years. RHI AG,being the
promoter with 69.62% stake in ORL. RHI AG is a Vienna-based Austrian company with focus
on production, sale and installation of high-grade refractory products for the steel, cement,
glass, lime and nonferrous metals industries. Thus, the acquisition by Dutch US Holding makes
Orient Refractories a part of the largest and probably the best managed refractory products
manufacturer.
PRODUCTS
Triggers
1. The company is increasing it's production capacity from 9300 T to 11500 T by 2019 for
Isostatic Pressed products over next two years. It is claimed to be the most profitable
product category for the company.
2. The increase of market share of Electric Arc Furnace (EAF) route of steel production
is beneficial for ORL as their revenue share and production capacity is more suited
towards that. For records, in India 57% of steel is produced by EAF route compared
to world average of 27%.
FACTS
Glass and non ferrous industry also consume about 20% of world demand of
refractories. These sectors are also in an upward trajectory, boding well for ORL
a) Oligopolistic structure with 4 key players in the Indian market ensures discipline in
pricing environment. ORL is best among its peers.
b) Continuous push from government on infrastructure will lead to higher demand for
steel, there by helping in revival of medium and small steel companies. This uptick in
domestic steel production helped Orient Refractories Limited with higher refractory
orders.
c) ORL is the market leader for customized flow‐control products in domesticmarket
with a 600+ client base would help its strong sales growth.
d)Management is quite confident of sustainable sales growth for current financial year
because of demands coming from new clients due to revival in domestic steel
production
Risks
It's dependency on steel cycle. The unpredictability of steel cycle is not easy to
gauge and exit is needed ahead of the cycle turns otherway. Even though the ORL
track record says it did reasonably well in downcycle too and protected most of its
profitability and return metrics.
Orient Refractories has excellent fundamentals, superior track record and good corportae
governance, and future looks bright as steel industry is in upcycle. This can turn ito a very
good investment, if one can link all the dots to where it leads. I am very positive and upbeat
on ORL, and feel one can take position in it, with reasonable risk reward ratio. One can also
take position after watching the Q2 results scheduled on Nov 10,2017. Its a pure long term
play.
Q2 FY 17
Revenue- 148.41 cr vs 131.28cr
Net Profit- 20cr vs 16.83cr
EPS- 1.68 VS 1.40
Buy Range – (150-170)
Compiled and Created by – Chirag
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ReplyDeleteThanks for sharing useful information. RHI Magnesita India is one of the top 10 refractory companies in India offering the industry’s most comprehensive range of products and Refractory Services or solutions for high-temperature processes.
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