Incorporated in 2002, Ratnaveer Precision Engineering Ltd. (RPEL) is in the business of stainless steel (SS) product manufacturing with its product portfolio spread across finishing sheets (63.7% revenue mix), washers (17.5% revenue mix), solar roofing hooks (2.2% revenue mix), scrap metals (10.3% revenue mix) and, pipes and tubes (6.3% revenue mix). The company operates its business through its four manufacturing units in Gujarat wherein Unit I is responsible for manufacturing SS finishing sheets, SS washers, and SS solar mounting hooks. Meanwhile, SS pipes & tube manufacturing takes place in Unit II, and Unit III and Unit IV are dedicated to the backward integration process. The company caters to the application needs of multiple industries which includes automotive, solar power, wind energy, power plants, oil & gas, pharmaceuticals, sanitary & plumbing, instrumentation, electromechanics, architecture, building & construction, electrical appliances, transportation, kitchen appliances, chimney liners, etc. In FY23, the company derived 80.8% of its revenue domestically by catering to manufacturers as well as traders/ stockists and end customers, while 19.2% was generated through exports through traders/stockists.
Objects of the issue:
The net proceeds from the fresh issue will be used towards the following purposes:
- Funding the working capital requirements of the company.
- General corporate purposes.
Investment Rationale:
Higher raw material realization through the company’s backward integration
As described above, the company has strategically devised its Unit III and Unit IV for the process of backward integration wherein Unit III is the melting unit wherein the scrap generated in Unit I and other scrap bought by third parties is melted to form stainless steel flat ingots. This in turn is further processed in Unit IV (rolling unit) so the flat ingots are then converted into SS sheets and sent back to Unit I to be utilized as raw material in the manufacturing process. Over the past three fiscals, the share of raw material generated through this process has expanded consistently to 11.03% in FY23 compared to 10.05% in FY22 and 7.85% in FY21, displaying an uptick in the company’s efficiency and implying reducing dependence on third parties for its operations. Another advantage of the company’s manufacturing units is that they are strategically well-located, with proximity reducing logistic-related costs and facilitating better transportation of products.
Diverse product portfolio offerings
RPEL began its business by manufacturing SS washers which it currently offers its customers access to over 2,500 SKUs which include inner ring washers, spring washers, nord lock washers, retaining rings, internal tooth washers, and external tooth washers of different sizes and specifications. Going ahead, the business seeks to increase its focus in this segment by including the development of circlips in its product line in this segment. Apart from this, the business also branched out in various other product offerings to manufacture SS finishing sheets, SS solar roofing hooks, SS tubes, and pipes catering to the demand of a wide set of customers and expanding its requirements in industries like automotive, solar power, wind energy, power plants, oil & gas, pharmaceuticals, sanitary & plumbing, instrumentation, electromechanics, architecture, building & construction, electrical appliances, transportation, kitchen appliances, chimney liners, etc. Additionally, the business increased its focus by introducing new product designs to cater to the requirements of its existing customers as well as garnering the attention of more customers and tapping onto newer geographies.
Valuation and Outlook:
As of 2022, the Indian stainless-steel sector is the second largest producer and consumer in the world, with a total manufacturing installed capacity of more than 6.5 mn tons of stainless steel annually. Despite this, the domestic per capita stainless-steel consumption remained low at 2.5kg in 2019 compared to the global average of 6 kg, thus creating attractive opportunities in the existing sector for companies like RPEL. Over the fiscals, the business has displayed a consistent improvement in its revenue performance along with expansion in its GP margins and EBITDA margins to 11.8% and 9.8% in FY23 compared to 8.8% and 6.8% in FY21, respectively. On the financial front, the ROE and ROCE increased to 29.1% and 12.6% in FY23 in comparison with 10.2% and 10.3% in FY21, respectively, while the debt/equity lowered to 2.2 in FY23 as against 2.7 in FY21. Considering the above factors and based on the upper end of the price band, the issue is valued at a P/E of 13x based on FY2023 earnings which we feel is fairly valued compared to its listed peers. However, it is to be noted that the business operates in a highly fragmented and competitive industry with low barriers to entry which makes its ability to sustain this consistent growth momentum a key monitorable. We, therefore, recommend a “SUBSCRIBE” for the benefit of listing gains for the issue.
