We understood whole business of Ratnamani Metals, right from Product Mix, Revenue to Costing. However, Risk is one major consideration into any business and our area of focus through this blog. Especially businesses of such commodity and cyclicality, where risk of Operating Leverage, Capacity Utilization, High Debt Levels etc. are usually higher that it seriously impacts the business of any company. So, let us minutely focus on Major Risk Aspects that could impact RMTL’s Profitability, Revenue, and Costing and so on.
Try to first relate to Risk & Headwinds done in Industry Analysis as major risks comes from inherent industry risk. With reference to Industries Headwinds and Risks, we start analysing Risk only specific to this company i.e. Ratnamani Metals. I have compiled all the relevant risks to RMTL into one table as follows:
| Sr. No. | Factors to consider for Risk to RMTL: | Explanation/Details | Impact On: | Driving Force of Risk | Future Expectations/Probability. |
| 1 | Competition Threat (Especially International Companies from Japan, Korea, China, etc.) | SAW/ERW Pipes possess a threat to company if competitors run on overcapacities. Also, there is great competition from international parties for critical (SS Seamless & Welded) pipes & tubes requirement. | Realizations/Margins | Low Utilizations, Losses due to Operating and Financial Leverage. | Low – Because the cycles have turned up with higher capacity utilizations for all companies. Also, higher opportunity size gives demand visibility. However, Imports need to be under control to have less risk from international companies. The Anti-dumping duty expires on May 2021 but there is MIP to help protect outside competition. |
| 2 | Undifferentiated Products + Capital Intensive + Cyclical Industry | Apart from Alloy Products. CS SAW, CS ERW are highly undifferentiated. Also, huge capital amount is blocked. Above two are risky in cycle downturns and leads to high risk on company’s stability. | Op. & Fin. Leverage | Cyclical downturns. | Low – Recent improving utilizations and good demand visibility indicating cycles are lifting upwards. |
| 3 | Extremely Concentrated Business | Majorly 50%-60% of RMTL’s Pipeline Sales goes into Oil & Gas companies. Revenue is concentrated on two user industry i.e. Oil & Gas. But if need arises, RMTL can cater to many different industries. | Revenue @ Risk | Low Oil & Gas CAPEX. | Low – Governments vision to make from current 290 Mn TPA crude oil capacities to 450-500 Mn TPA will bring demand from Oil & Gas segment. Also, extension of Gas Pipelines is good demand traction. |
| 4 | Heavy Dependence on Raw Materials | RMTL’s about 65% of revenue goes into Raw Materials. Also, company is not able to pass on higher costs to buyer seen through Gross Profit Analysis. Hence, RM prices play important role. | Raw Material Costs | High costs of Sheets, Plates, Coils, Nickel, Moly, Titanium, etc. | High – Recent rise in steel prices from Jindal, SAIL and rise in Iron Ore prices from NMDC is bringing in risk. {This analysis of GP Margins can be referred to “Porter’s Bargaining Power” in Industry Analysis.} |
| 5 | Macroeconomic Variables | Many situations have arisen in past bringing risk to companies. 2008 Crises, Eurozone crises, over capacities over the world, US Shale Gas overproduction and recent COVID led to slowdown in economies around world. | Unknown Impact | Globally, Country Specific Risks. | Uncertain – However governments drive to make a $5 Trillion economy brings good economic stability up to 2024-25. |
| 6 | Single Manufacturing Location | Company is having plants in Chhatral, Kutch and Indrad. All located in Gujarat. Any severe political or natural impact in Gujarat can harm the company. | Going Concern | Natural Calamities and Political Tensions. | Uncertain |
| 7 | Capital Intensive + Economically Sensitive + Undifferentiated Business | Revenue majorly dependent on government expenditures. Hence, with a shakedown in economy the expenditures will reduce. So, undifferentiated business with high capital requirement will bring greater competition and can impact overall company’s business, revenues, margins, etc. | Multiple Impacts on Overall Business | India’s Country Specific Risks. | Uncertain |
| 8 | Competition from low cost countries | SS Seamless & Welded tubes are majorly imported by Indians. Countries like China, Japan, Vietnam and Korea are said to have cheaper alternatives. They possess a greater threat to RMTL’s business because the VAP it sells have huge margins which may lower down due to international competition. | Realizations/Margins | Cheaper Imports. | High – Anti dumping duty will expire from May 2021. And with higher demand expectation and lower capacity in-house, imports might rise even higher. |
| 9 | Depend on CAPEX of End User | Repeatedly RMTL have mentioned in their AR and interview that falling crude oil prices will lower investment of Oil & Gas companies impacting the company’s revenue indirectly. RMTL mentions 8%-10% of Oil & Gas CAPEX goes into Pipes & Tubes of all types. | Revenue @ Risk | Low Oil & Gas CAPEX. | Low – Governments vision to expand crude oil capacities, Natural Gas Pipeline, Water for all, etc. expansions will bring demand. |
| 10 | Heavy Product Dependence + High Market Share | For the high profit business i.e. SS Critical Pipes & Tubes, the market share is high at >40%. Any competition/new entry into this business will impact market share of company and its cream profitability. | Revenue @ Risk | Entry of new and competitive player. | Uncertain – Need to remain watchful for other companies to expand in SS Seamless & Welded Critical Pipes category. |
| 11 | No Product Innovation | There is actually no product innovation due to highly commoditized business in Pipes & Tubes. This is phenomenon overall. However, expanding the revenue stream to different industries is seen from RMTL. | Going Concern | Product innovation by other counterparts. | Low – Steel Pipes being basic commodity business the innovations is very limited to possess a real threat. |
| 12 | Revenue Driven by Government Initiatives & Expenditures | Industry and Company is very highly dependent on Government Initiatives and Expenditure to grow. AMRUT Scheme, National Gas Grid, River Linking Project, CGD, etc. are initiatives by government which helps company grow. | Revenue @ Risk | Fiscal Deficits leading to lower expenditures. | Low – Governments high expenditure and thrust to became a $5 trillion economy. |
| 13 | Industry Dynamics (i.e. Demand-Supply Cycles) | A higher supply leads to intense competition, lower revenues and margins. This have happened in the past where CS were running on overcapacities. No such instances seen in SS. | Revenue, Costing & Margins | Overcapacities or Supply. | Low – Recent improving utilizations and good demand visibility indicating cycles are lifting upwards. |
I hope the above table is sufficient enough to explain you all the major points regarding Risk which Ratnamani will face in future and the probability of it happening. As we see, majorly the outcome for future risks are low probability and hence company is in good position to grasp the upcoming tailwinds in the sector.
Following source will help in conjunction to table above to understand the points made even deeply:
- Industry Analysis – Understanding Demand-Supply Mechanism with Recent Capacity Utilization Levels.
- Industry Analysis – Opportunity Size for the Sector “Steel Pipes & Tubes”.
- Industry Analysis – Porter’s Force of Threat of Suppliers/Buyers for GP Margin Analysis.
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.