Moneycontrol
Aug 08, 2017 06:21 PM IST |

Rama Steel's new plant in Andhra to be functional by H2 2018, total installed capacity to reach 340,000 MTPA in 2 yrs

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Rama Steel's new plant in Andhra to be functional by H2 2018, total installed capacity to reach 340,000 MTPA in 2 yrs

COMPANY BACKGROUND

Incorporated in 1974, Rama Steel Tubes Ltd. (RST) transforms basic steel to tubes, galvanized products, structures etc. These are value added products for infrastructure projects and the new emerging sectors such as automobiles and oil pipelines. With experience of more than four decades in the steel component sector, RST has diversified business segments catering to domestic and export markets. It is a steel processor not a steel manufacturer.

PLANT CAPACITY

RST has three manufacturing facilities; at Uttar Pradesh, Maharashtra and Andhra Pradesh. It has two units at Sahibabad (Uttar Pradesh) with capacities of 75,000 MTPA and 24,000 MTPA, one at Khopoli (Maharashtra) with current capacity of 72,000 MTPA. For the Khopoli plant, the company is planning to ramp-up capacity to 240,000 MTPA, taking its overall installed capacity to around 340,000 MTPA in next 2 years. Management is expecting the new plant in the South at Lepakshi (Andhra Pradesh) to be operational in H2FY18, with initial capacity of 36,000 tonnes. This would help the company further enhance volume growth in the growing high demand region of the country. This would boost the company’s top line as well as PAT. Also, it has funded the expansion through internal accruals and a preferential allotment. Minimum debt has been taken, thus ensuring a high RoCE.

It has operations in the United Kingdom, the UAE, Sri Lanka, Ethiopia, Kenya, Uganda, Ghana, Kuwait etc. By recognizing the contribution of the company to exports, the Government of India has cleared it as an “export house”.

With commencement of production of additional capacities (from two new plants) along with higher capacity utilisation rates, margin expansion is expected to continue. As the management focuses on the value added products like Pre Galvanised Tubes along with strategic plan of increasing the capacity, number of dealers’, distributors network will not only improve top line but will also aide improve over all margins of the Company .

SOLAR POWER

Rama Steel Tubes has unveiled one of the lndia's largest solar energy projects of its kind in the ERW pipes segment at Khopoli plant. The Company has executed the entire project in less than 3months' time at a cost of INR 37.5mn. Working with Visa Power tech Pvt. Ltd, the sustainable energy developer, RST has mounted 24OO solar panels on the factory land at its Khopoli facility, Maharashtra – an area equivalent to 3.75 acres.

OUTLOOK & VALUATION

We believe sales volumes will grow following the additional capacity, and expect realizations to improve further as demand from the construction sector seems improving, though marginally, helped by the strengthening economy and a favourable raw material situation. We expect that the company’s additional capacity, its focus on tapping opportunities in the high demand market of Southern India would further enhance volumes.

At the CMP INR 133, the stock trades at a P/ E multiple of 17x/ 14x FY18E/ FY19E EPS. With its focus on expanding to cater to the high demand market, its operating efficiencies and value added products, we expect better results from the company in future. We recommend a BUY on the stock with our price target of INR 200 (21x FY19E EPS), a 50% upside.

PROFITABILITY

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RETURN RATIOS

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Report prepared by

Share India Securities Limited

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