Maithan Alloys (NSE:MAITHANALL)

Investment style

I mostly invest in companies I find to be undervalued. More often than not, these tend to be companies that have a negative sentiment around them (news, poor earnings, etc.) or are in an unpopular or unfavourable industry. If I find the company has been unfairly beaten down in price (relative to its financials), it becomes a potential investment. The goal is to find a stock that will, over the long run, have limited downside and potential for high returns on investment. I'm prepared to withstand short-term price volatility if I can be confident that my investment over the long-term is well protected.

Maithan Alloys is one such stock. I initiated a position in the company on Monday (05/07/2022) at an average of 785. The stock currently makes around 10% of my portfolio.

About the company

Maithan Alloys is engaged in the business of manufacturing and exporting of all three bulk Ferro alloys- Ferro Manganese, Silico Manganese and Ferro Silicon. Ferroalloys are intermediates for the steel industry. It accounts for 1% of global manganese-based ferroalloys production and is one of the lowest cost-producers globally.

It is one of the largest domestic producers of manganese-based ferroalloys and in fiscal year 2022, became the largest manganese alloy manufacturer in India. Customers include prominent steel producers such as Steel Authority of India Ltd (SAIL) and Tata Steel Ltd in the domestic market.

Summary of financials

I use 3 year averages when evaluating a company's financials. This seems to give a better overview of the trend and smooths out one-off years of outperformance or underperformance. FY2022 was one such year of outperformance so I exclude it from my analysis altogether to be conservative in my evaluation of the company.

The company's 3 year average revenue, EBITDA, PBT, PAT and EPS have grown YoY except for FY2021. All these metrics more than doubled (some tripled) in FY 2022.

PAT margins stood consistently around 14% in the past few years and nearly doubled to 27% in FY2022.

Looking at the balance sheet, we see that the company has around 900 crore in cash and short-term investments (on a 2300cr market cap) with minimal debt (5.2cr). Net debt is -83cr. It has managed to bring down its debt levels drastically over the past few years.

Cash per share stands at 317.5. The company currently trades at 1.3x 3y average revenue, 9.7x 3y avg net income and 17.7x 3y avg OCF.

Book value per share and equity have both grown every year and the enterprise value is lower than the market cap as of today's close (owing to negative net debt).

ROE since 2015 has been greater than 15% yearly averaging at 24%. Most years the number stood at over or around 20% with a few years above 30%. Similarly, ROIC since 2015 has been greater than 14% yearly averaging at 28%.

At CMP, the company's P/Tangible Book stands at less than 1 while it has historically traded in the region of 1.45-2.75. The only other time it traded below a P/TBV of 1 was in FY2020.

It also boasts the lowest EV/EBITDA multiple (2) and Acquirers Multiple (EV/EBIT) amongst its peer group. That means you could buy the entire company and pay off all its outstanding debt with just 2 years' EBIT.

Promoter holding has stood consistently at 75%. DIIs have increased their stake by 0.11% in the last quarter to 0.62%, up from the 0.48% two quarters prior, though down 0.29% from the same quarter in the previous year.

FIIs increased their stake by 1.52% to 2.54% in the last quarter, up from the 0.67% two quarters prior, and up 1.29% from the same quarter in the previous year.

Valuation

I use valuations only as a tool to get a rough guide of value.

2022 was a stellar year but out of the ordinary. I don’t include 2022 numbers in my projection to get a more conservative and realistic valuation. Again, I use 3 year averages in my projections to smooth out earning volatility.

So 3yr average net income has compounded at 21.7% yearly since 2017. My estimates of future growth comes in at 16.8% (this is derived as a function of the company's retention ratio multiplied by its return on equity). Taking both historical growth and estimates of future growth, I use a 17.8% annual growth rate for the next 10 years for a conservative case and 18.8% for the base case. I use 1% as my terminal growth rate in both instances. If these growth rates seem optimistic, note that it would take the company 4 years at the above conservative rate starting FY2021 to hit net income at levels above those realised in FY2022.

Looking at past reinvestment by the company (Capex-depreciation+change in non-cash working capital), I assume the company will reinvest 15% of net income annually on a conservative estimate and 10% on a base case. Both these numbers are greater than recent historical numbers suggest.

For the discount rate, I use 20% for the conservative case and 16% for the base case.

Projecting out free cash flow to equity over 10years using these numbers I get a value of 986/share on a conservative basis and 1548/share as the base case. blending these two in a 60:40 mix nets a value of 1210/share indicating a 30%+ discount at CMP. This valuation falls in line with the multiples as a P/TBV move from <1 to the historical number of 1.5 or higher would net the same 50% upside. Keep in mind the projections use FY21 as the base year (worst year in recent history) and excludes entirely FY22 (best year on record).

Risks

The company isn't without risks. For one, the metals industry is cyclical and the recent crackdown on metal companies indicates a downswing to come which is definitely cause for concern. However, the company managed to perform well, and certainly better than its peers, in the last down swing in FY2016. It also benefits from much lower levels of debt and higher cash reserves this time around.

Another risk is that inventory levels had more than doubled in FY22 and are the highest in the company's history.

tl;dr

Maithan Alloys is the largest domestic producers of manganese-based ferroalloys, an input for steel manufacturers. It accounts for 1% of global manganese-based ferroalloy production and is one of the lowest cost producers. It has long-standing relationships with most of the country's top steel manufacturers. The company has excellent fundamentals and minimal debt. Due to fears over steel demand, the company's stock has fallen alongside other metal stocks. It is currently available at a P/B of under 1 and trades at an EV/EBIT multiple of 2. I value the company at ~1200/share. It currently trades at around 790. W’re possibly headed into a metal downswing and I have no idea what the share price will do over the next few quarters, but when sentiment changes as it usually does, I believe there to be a potential 50%+ upside to current values. I have 10% of my portfolio allocated to this stock.

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