Ratnamani Metals & Tubes Limited have consistently earned Economic Profit over the years. It is not easy to do so because when companies earn such higher profits, competitors dive in fast to enjoy similar profitability. With likes of huge companies like Tata Steel, SAIL, JSW Steel, Jindal Steel, etc. it is easy for them to enter the type of business RMTL is doing. But, despite the presence of bigger companies the niche Pipes & Tubes which RMTL are producing have not seen entrants. RMTL are enjoying many advantages over its competitors which is helping them generate higher profits consistently and it is sustainable. The test of sustainability is performed through MOAT Analysis.

MOAT or Competitive Advantage is simply what your company has (product, technology, etc.) and others will never have. This means, it is not possible for other companies to copy what you do and if they want to do so, it will take very long years to crack it. Does RMTL have similar kinds of competitive advantage which makes them consistently profitable? Let us first check out how RMTL have fared over longer periods in profitability front before we judge the MOAT which it possesses.

You can see from the table of Economic Value Added (EVA) that, RMTL have always added value for its shareholders. Due to business facing cyclical issues, the EVA is not consistently higher. But, despite facing cyclical downturns, RMTL have always added EVA (except 2017-18). When companies earn long term EP, it is generally first hint for presence of MOAT or competitive advantage.

Let us understand the advantages which currently RMTL possesses which is helping them generate EVA. The list of advantages or MOAT which RMTL is currently enjoying are:

1. Location Advantage through Mobile Plant.
2. Switching Cost because of critical products & critical applications.
3. Intangible Asset in form of Licences & Certifications.
4. Consistent development of new niche market products in product pipeline.

Many aspects above are already explained through my explanations. Let us brush up a bit more.

Location Advantage is a good source of MOAT and it is enjoyed by everyone. Almost all competitors’ plants are situated near market area or near the port. However, RMTL have some unique location advantage over others i.e. its Mobile Plant. The Mobile Plant can be erected and reinstated at any location depending upon the client’s project. Due to this uniqueness, clients and RMTL are at win-win situation in many fronts. Over the years now, mobile plant is being operated by RMTL and no other company have started it. It is surely a source of MOAT, which brings better orders for itself.

One source of MOAT which I think is actually sustainable for longer periods is Switching Costs. And this MOAT is created due to presence of another MOAT (self-reinforcing MOAT) as explained below:

There are many types of Pipes & Tubes categorized based on their quality, grades and standards. Each type and grade has different chemical composition. These chemical composition are required for different applications and areas like: critical application require more content of carbon element for harder steel, SS Pipes & Tube of different grades are required for exposure to moisture to prevent rust, etc. But, how can clients trust the Pipe & Tubes manufacturer that material provided by them are as per their required grade and sizes? That is where the certifications & standards comes in. There are many institutions involved in certifying the products and plants, they actually do an inspection of plants, products and production process of companies. After inspection is satisfactory, approval is granted and a certificate is provided stating that the product manufactured by RMTL confirms to standards and quality as required. You can see various certification granted to RMTL here: http://www.ratnamani.com/quality_certifications.html.

With advantage of certification and licences on backing of RMTL, they are able to access clients for their requirement at ease. Obtaining certification is not a big deal for companies as all the industry peers have such certificates. But, RMTL possesses certificates for products which are very critical and not easy to get approved. Also, RMTL is providing these types of products to clients from 1985 i.e. 30+ years. Experienced RMTL has gained trust of clients and proved to provide timely delivery of quality products with lowest failure rates. This made RMTL develop a huge network of clients spread across many user industries.

RMTL are today, under approved supplier list of many huge giants. As explained earlier, with such huge clients under them they get repeat orders + referenced clients at ease. Also, making new clients becomes lot easier for RMTL. It simply takes time, and a lots of time and efforts to build that network of clients. All these makes RMTL amongst the few producers of the certain products across world. This feat is very difficult to achieve by any new entrant.

With limited number of producers and question of quality of products required for critical applications, the Switching Costs for clients are higher. This is very important source of MOAT and it is sustainable. Clients do not have other option but to go to RMTL for their quality products requirements. Pipes & Tubes supplied by RMTL are used in very critical application. They really can’t afford to have even a single failure of Pipes or Tube as the consequences are very drastic and may involve death. This again adds to the advantage of RMTL. They have been supplying quality for years and the trust seems to be set amongst clients. The clients might be very reluctant to switch to other suppliers even if there are lower costs on offer, simply due to trust on quality of products RMTL supplies which are used for very critical purposes.

Hence a deadly combination of Certifications & Licences + Trust + Years of Experience in delivering Quality + Network of Clients + Critical Application of Products, leads to very strong MOAT for the company.

Company has consistently added product to its categories over the years. With continuous product development, it give another major source of MOAT for company i.e. Product Development. These new developed products adds on to higher Profitability. Taking about product development, below are the list of important product developments which company has added to its basked right from its inception. (Source: Investor Presentation)

No.	Year	Product
1	1985	SS Pipes & Tubes.
2	1995	CS SAW Pipes.
3	1999	Welded SS Tubes for Automobiles.
4	2003	Instrumentation Seamless Tubes.
5	2004/05	Duplex Steel Seamless Tubes.
6	2006	SS Welded Pipe in Super Ferritic Grade & Super Austentic Grade.
7	2007	Condenser Tubes.
8	2008	Hot Extruded Mother Pipes.
9	2009	3 LPE Coating, Welded Titanium Tubes.
10	2012	High Diameter ERW Pipes from 16 NPS to 18 NPS.
11	2013	HSAW Diameter increased from 100 NPS to 142 NPS.
12	2013	Heat Exchanger Tubes.
13	2014/15	Nickel Alloy Tubes.
14	2016	Higher Nickel Grade Pipes & Tubes.
15	2016	Incoloy & Inconel Pipes & Tubes.
16	2016	Smaller diameter instrumentation tubes.
17	2021	To set up hot extruded facility up to diameter of 10 NPS.

Hence, with so much of product development, RMTL are constantly able to generate higher profits. Small yet critical adjustment like manufacturing of higher diameter pipes & tubes and lowering the diameter opens the opportunity for higher sales and profits. The latest hot extruded facility development of up to 10NPS (earlier 8 NPS) is yet another product development which is actually an Import Substitute. Hence, with this product development RMTL is first company in India to provide such Pipes & Tubes. This will definitely bring higher realizations and higher profit margins.

Thus, companies drive to constantly develop products is yet another source of MOAT which is definitely sustainable. Because of this MOAT, RMTL has been able to achieve a 40% market share (as per few reports) in Critical Pipes & Tubes category in India. As a recap, have a look at the share of profit from Critical Pipes & Tubes category of RMTL, profitability is result of MOAT’s with company:

Hence, I conclude by saying that, company has MOAT’s which are SUSTAINABLE for longer years.

Thank You!!

 

Disclaimer: Views are personal and presented through independent research. By no means there is any stock advice. Also, presented content is for learning purpose only. I might be wrong in presenting data and inaccurate data, let me know if you find any discrepancies.