Investment

Thesis 
March , 2017
Small-cap Focus

D. Bose
Maithon Alloys
BSE: 590078 | NSE: MAITHANALL | ISIN: INE683C01011
SECTOR: Mining & Minerals

Maithan Alloys Ltd is one of India's leading ferro alloy manufacturers with more than
20 years of rich industry experience. The Company's product basket comprises
diverse high-value manganese alloys that find application in high-growth sectors.
The Company pioneered the manufacture in India of multiple manganese alloy
variants used in automobile grade steel. The Company has a multi-location
manufacturing presence (in three Indian states) along with high port proximity
(Haldia, Vizag and Gangavaram) that has gained wide acceptance in Western and
Asian countries. Within India, the Company has emerged as a trusted supplier to the
growing manganese alloy needs of large Indian companies like SAIL, JSW, JSPL, JSL
among others. The company is present across nearly half the states in India and in
over 35 countries across the world

Buy Hold Sell

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Stock Screening
Following pre-defined screener has brought Maithon Alloys to our radar by 23 June,
2016 (CMP: 262.9 INR)

Profit growth > 30 and 

Profit growth 3Years > 0 and  
EVEBITDA < 15 and 
Pledged percentage < 5 and 
Debt to equity < 1 and 
ROCE3yr avg > 15 and 
Market Capitalization > 50 00 00 000
We didn't took notice until another screener (appropriately named as "High
Potential Companies - Promoter Confidence" surfaced the same company

Change in promoter holding > 0 and 

Promoter holding > 50 and 
EVEBITDA < 12 and 
Return on capital employed > 18 and 
Free cash flow > 0 and 
Debt to equity < 0.4 and 
Net profit > Dividend Payout

When promoters were buying shares back, we had to take a deeper look at the
company

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Sectoral Macroeconomics
Two manganese ferroalloys, ferromanganese (FeMn) and silicomanganese (SiMn), are
key ingredients for steelmaking. China is the leading world producer of manganese
ferroalloys (2.7 Mt), with output about much greater than that of the next three major
producers—Brazil (0.34 Mt), South Africa (0.61 Mt) and Ukraine (0.38 Mt)—combined. 
However, global steel production (especially China's) is expected to remain flat during
2015-2020. As steel production remains muted, Chinese FeMn and ferroalloy
producers had to down-regulate their production. Due to various reasons (pessimism
of steel industry, stricter
Global crude steel production environmental regulations, large
growth (CAGR;%) accumulated stocks from previous
growth periods), China's 
FeMn production disproportionally
dropped by 27% YOY as opposed
to steel production which is
contracted by 2% YOY. Moreover,
facing a headwind of 20% export-
tax on Chinese ferro-alloys,
domestic smelters could not
offload their material abroad,

With reduced FeMn import from Chinese producers, India, on the other hand is
experiencing a favourable demand-supply dynamics for its domestic steel industry - 

India’s GDP to grow by +7 % (IMF) over the next two years

‘Housing For All’ to drive housing demand thereby benefitting steel industry
2017 Budget outlay of ~ ₹ 4 trillion in infrastructure to drive domestic steel
consumption
India has become the 3rd largest steel producer in FY17
Steel Industry’s Outlook to increase capacity to 300 Mn T by 2030 to drive
demand for ferro alloys
India ranks 4th globally in terms of iron ore production

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Sectoral Macroeconomics
With declaration of India's National Steel Policy (NSP) - 2017, all domestic alloy
producers are going to be benefited. 

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Fundamentals
Share Holding Pattern positive Others
3%
Promoter ownership is high (70%) without any DII
0%
portion pledged to the financing organisations. FII
Additionally corporate ownership (mutual 0%
Public
funds etc.) is low which keeps more room for 15%
Corporate
price appreciation when this company comes 11%
Promoter
under their investment radar. 70%
I prefer to make an entry to a small-cap stock with high promoter holding and low
corporate ownership. Moreover, promoters are currently increasing their ownership
which is a strong growth indicator, especially for small-caps.

Valuation positive

With Debt/Equity ratio at 0.35 (low), P/E is a good valuation metric for the
company.
From 2014-2017, P/E stayed within 6 - 10 (and growing; generally, anything lower
than 15 is considered good as long as investment is otherwise good and it's not a
"value trap") with current value of 9. EV/EBITDA during the same span has grown
gradually to 5.85 from 3 and Price / Book Value (P/BV) has  grown from 0.3 to 2.59
EV/EBITDA

As the company is reducing debt level continuously, we expect EV/EBITDA to stay

range-bound at 5-6, with increasing EBITDA. We also expect P/BV to gradually grow
to 3-4. Overall it's an excellent valuation as long as we ensure that it's not a value-
trap (see next)

Profitability & Quality positive

RoA (Return on Asset) has grown leaps and bounds from 2015 onwards, standing
with current value of 22.6 % which is pretty good. 3-yr average of RoE (Return on
Equity) is 16.12% (CAGR of 20%) and RoCE (Return on Capital Employed) is 27.20% 

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Fundamentals
(CAGR of 19.1%). Assuming average cost of capital as 7%,
this is 20% 3-yr. Earning Yield (calculated as of Joel
Greenblatt; EBITDA/EV) stands at 17.11%. Compared to
its peers, Maithon Alloy is generating Free Cash Flow at
faster rate given its assets (FCF/A stands at a healthy 15
compared to its peers). More importantly FCF/per-share
have became positive at 2015 and growing since then.
EPS have grown continuously (with no sign of earning
manipulation as indicated by the Beneish M-score
stands at -2.79) with CAGR of 33%. Assuming the same
growth, and an average P/E of 8 (8=(6+10)/2), we value
the company at 8x86.7=693.6. With current market price
of 435.75, we are talking about a 60% return on
investment.

Debt positive

Company's debt to equity ratio stands at a healthy 0.35 and the ratio is being
reduced at a continual basis. Most of Maithan Alloy's peers have much higher D/E
ratio (ex. Indian Metals & Ferro Alloys Ltd. had a D/E value of 1.35 during the same
period) asserting the fact that commodity (Metals & Mining) business is capital
intensive and usually achieved by heavy debt financing. In order to maintain strong
FCF/A, high Net-Profit margin with a low D/E ratio, Maithon must be doing
something extraordinary unlike its peers. Looks like an "Asset Light Model" (as ref. at
the investors presentation, FY2016-17) adopted by management could be the
differentiator. It's a combination of in-house end-to-end project capability, long term
PPA with power plants and absence of any significant mining assets seems to
uphold the Asset Light Model, keeping debts at bay.

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Fundamentals
Stewardship positive

The founding (or promoter) family (Agarwalla Family) is holding around 70% of the
company with Mr. S. C. Agarwalla at the helm of affairs as the Chairman and
Managing Director. With 35 years of rich experience in Ferro Alloys industry, Mr. S. C.
Agarwalla Focuses on project setup, corporate planning and business development,
human resource development, planning & budgeting and related functions. Whole
Time Director and CEO,  Subodh Agarwalla has an engineering degree from IIT
Varanasi and a M. B. A from IIM Bangalore. President and CFO, Sudhanshu
Agarwalla, a M.B.A from XLRI Jamshedpur is leveraging his 13 Years of experience in
Finance, Marketing and Procurement in the Ferro Alloys Industry. Management has
been successful in increasing RoE at a CAGR of 20% maintaining a low debt/equity
ratio.

Competitive Advantage positive

Right on the heels of Stewardship, let's discuss whether Maithon Alloy has an
sustainable competitive advantage (SCA). The company is a major supplier of
ferroalloys to various national-level (Indian) steel manufacturers like - Jindal Steel
& Power, JSW, SAIL etc. 100% of these domestic suppliers are associated with the
company over 7 years, which is pretty remarkable. By the very nature of ferroalloy
industry, these companies usually enjoy high switching costs from the point of
view of steel producers, as these ferroalloys directly influence the steel production
imparting the final product with different characteristics. Consequently, such
longer-term contracts create patent-like "intangibles" which is kind of sustainable
competitive advantage. 

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