INSUBCONTINENT EXCLUSIVE:
NEW DELHI: Orient Refractories, a smallcap company, seems to be firmly on a growth trajectory
Its return scorecard over the last five years reads a solid 880 per cent
And the firm is grabbing headlines again amid reports of its proposed plan of merger with unlisted RHI India and RHI Clasil
Last week, the company's board announced its merger with RHI India and RHI Clasil
All the three companies are part of the London Stock Exchange-listed RHI Magnesita group, the leading global supplier of high-grade
refractory products, systems and services.
Orient Refractories is 69.6 per cent owned by RHI Magnesita group while RHI Clasil, a
manufacturer and supplier of mainly alumina-based refractories for steel and cement industries, is 53.7 per cent owned by RHI Magnesita, the
company said in a release
RHI Magnesita believes that the merger of unlisted entities with the listed one will help simplify the corporate structure and consolidate
RHI Magnesita's operating entities to tap growth potential in the Indian market more efficiently and effectively.
Once the merger is
completed and necessary approvals come by, Orient Refractories is proposed to be renamed as RHI Magnesita India, which analysts feel will
have a better traction domestically and globally
Analysts firmly believe the move is a big positive for the company
However, they feel valuation of the entity may be a concern as the merger is being executed on a share swap basis.
The merger "will help in
enlarging product offerings, leveraging sales and distribution networks and optimising utilisation of resources due to pooling of
management, expertise, technologies and other resources", said Emkay Global Securities in its research report.
Not just that, the brokerage
added, the merged entity will be better placed to attract large deals even from tier-I steel producers
It has retained 'buy' rating on the stock with a target price of Rs 293
The combined company will have operating revenue of Rs 1,235.6 crore (on a FY18 proforma basis) with two production facilities and over 700
employees.
Orient Refractories is the manufacturer and supplier of refractory products, systems and services for the steel industry
A look at merger details- 7,044 shares of Orient of face value of Re 1 each for every 100 shares of RHI India of face value of Rs 10 each
-
908 equity shares of Orient with face value of Re 1 each for every 1,000 shares of RHI Clasil of face value of Rs 10 each
Post merger, the
total number of shares in Orient will go up to 161 million from the current 120 million.
The merger plan got the backing of Centrum
brokerage, which terms it as "the right step" and being value accretive in medium to long term
However, it believes valuations could have been better
as on date of merger announcement) to the two unlisted entities with implied valuation of 15.7 times P/E and 9.3 times EV/EBITDA on trailing
FY18 basis, which is aggressive, given the fact that FY18 financials have seen a sharp jump particularly for the trading entity (RHI India)
per cent, from 69.6 per cent, in the merged entity, which it is likely to sell back in the open market
"We believe that this could have been avoided had the valuations ascribed were lower," the brokerage added
Hence, it has downgraded the stock to 'Hold' with a target price of Rs 230
According to brokerage Anand Rathi, the merged entity will increase product localisation and exports
The entity may facilitate better management control of RHI AG, the parent
Orient Refractories has a track record of healthy financials
The company reported a 34.41 per cent jump in June quarter profit at Rs 21.91 crore against Rs 16.30 crore in the year-ago period
Revenue for the period stood at Rs 174.09 crore against Rs 150.50 crore in the same quarter last fiscal
The company has seen consistent rise in its net profit during the last three financial years.
Anand Rathi said the increase in long-term
growth prospects and greater export potential are likely to see a strong, nearly 25-30 per cent, earnings CAGR over the next five
years.
"Higher return ratios and zero-debt balance sheet make Orient Refractories a compelling investment to ride the domestic and global
steel production recovery," said Emkay Global Securities.
