Buy Rama Steel Tubes; target of Rs 141: Khambatta Securities

Rama Steel Tubes Ltd (RSTL) reported a strong set of figures in its Q4 FY16 financial results, attributable to the expansion during the year at Khopoli, Maharashtra. During the quarter, it reported significant growth in net revenue, EBITDA, EBIT and net profit. Net revenue grew 50% y-o-y (and 84% q-o-q) to Rs 734mn, aided by volume growth and a marginal rise in realisations. Volume growth at the Sahibabad plant was marginal while the Khopoli plant reported robust sales. The Khopoli plant’s volumes are not comparable as this is its first year of operation. In the last quarter, realisation improved because of improving demand and imposing MIP on steel products.

At the CMP of Rs 95, we continue with a “Strong Buy” on account of increasing demand, rising realisations, addition of value-added products and fresh capacity. At the CMP the stock trades at 12.6x FY17E and 8.1x FY18E standalone EPS of Rs 7.55 and Rs 11.69 respectively. Adjusting for the valuation of the subsidiaries, of Rs 24 a share, the stock is available at 9.44x FY17E and 6.09x FY18E EPS. Our valuation is based on the sum-of-parts methodology. The standalone valuation is Rs 117 a share based on 10x FY18E standalone EPS and the valuation of the subsidiaries is Rs 24 a share (The valuation of the subsidiaries was Rs 354mn after offering a 30% holding-company discount). Consequently, we arrive at a target price of Rs 141 a share which discounts 18.69x the FY17E and 12.06x the FY18E standalone EPS. At the CMP, we recommend a “Strong BUY” at a target price of Rs 141 a share, which implies 48% potential.For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses / rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.