The way we estimated Revenue of the company, similarly we need to do it for costs. We have performed overall costing analysis of Industry before, here we will do it more precisely for RMTL. Let us focus on major costs of RMTL which forms >1% of the revenue. These costs totals to roughly 84% of the entire revenue. The costing heads which we are going to focus, are as below:

We will pick of each of these costs individually and at the end do a compilation of all. Hence, in the end we will get rough idea of what current cost is and the estimation of future. Let us start one by one.

• Material Cost (i.e. COGS)

Cost of Goods Sold is the only major cost which forms approx. 62% to 69% of the revenue. Hence, it is extremely important but unfortunately, there is not much give away for this part. The Raw Material cost have over the years somewhat remained constant. Even if company achieved higher scale through VAP across years, costing have not much changed.

The above leads to one simpler assumption i.e. Is material cost as % of revenue to be taken flat for future years as well? I would have assumed same for future had company not extended its capacity. We have new capacity for Other Alloy Category and CS Category.

We know that, Other Alloy Products form part of VAP serving to niche market earning realizations extremely high. This leads to material cost as % of revenue low. Hence, it is important to analyse this particular aspect. Have a look at the data point.

Comparing i.e. for the year 2020 v/s coming year i.e. 2021, the mix of product categories will change. The proportion of Other Alloy will increase marginally by mere 1%. When production starts and assuming even capacity utilization amongst these two categories, the COGS as % of revenue will definitely change but impact will not be much relevant. Seeing recently, the COGS as % of revenue at about 65%, I will take the similar stance for future as well. So, on prudence basis, I would estimate the costing remain constant on average at 65% from 2021 to 2025. This translates to Expected figures as % of Expected Revenue as follows:

• Power & Fuel Costs.

Power & Fuel as % of sales have reduced consistently over the years. Especially you see from 2014 to 2015, the cost have significantly fell. In 2015, from RMTL’s Annual Report (Energy Conservation Section), we can clearly see that company has set up windmill which generates power of 17.50 MW. This windmill was setup for captive use. This has led to reduction in power & fuel costs. From 2015 onwards, the power & fuel cost as % of sales have been pretty stable. As of 2020, RMTL’s lot of power requirement comes from renewable sources generated internally and this is justified by that fact that company still sells excess renewable power to others which gives revenue of 6.44 Cr.

But, with additional capacities operating from 2021 onwards, the power requirement will definitely go up. The main question is, will the excess power which company sells, and if used internally will be enough to meet its requirement? If it is not enough, company will buy them from outside and the scenario prior to 2015 will come back partially.

Company is adding extra 50% of its current capacity. This will require a significant amount of power for coming future. Hence, firstly the power cost will increase but by how much? I cannot estimate the exact figure here but could only logically try to assume that 50% of difference between 2014 and 2015 will add on to current costs. I.e. 0.31% of additional power requirement. 50% being the figure of capacity addition. Hence, from 2021 onwards, 2% power & fuel costs as % of revenue would be suffice and conservative as well, leading to costing as below:

•  Management & Employee Costs.

Total expenses on employee and management has always been above 5% and touching up to 6%. However, it should not be seen as plain as above. Management Salary includes commission to promoters (which are on net profit basis) as well as salary. Hence, to do a detailed analysis, we need to understand a detailed breakup of salary and commission as well.

To start with, let me show you an important breakup and its analysis of Management Salary. Have a look at the snap below:

From the above, it is quite clear that management takes 10% of net profit as their commission. Also, right from 2011 to 2020, the net profits for company have always been around 10%. Therefore, a simple calculation to estimate management commission includes taking net profit as 10% of sales and management commission as 10% of net profit.

Along with this, a small and negligible amount includes salary to promoters, which has growth at CAGR of 15.72%. Hence, although irrelevant amount as costing factor, we would consider that this salary will continue in future and grow at 15.72% p.a.

Now, we are left with employee salary. Taking CAGR of growth of employee salary it comes to 12.31%, which is expected to continue. However, there is additional capacity which is coming up. This additional capacity will require additional staffs to operate plants. Although management has indicated that these new capacities will be very lean and has high automation, still we will make an attempt to find additional costs which will be incurred on additional employees. New capacities include C.S. of 1, 70,000 MTPA and Other Alloy Materials of 20,000 MTPA. On operation of these plants, additional employee cost will be applicable and with management indication I assume that additional employee costs will only be 3% of the revenue. Hence, to find an estimation of employee costs from these new plants, look at calculation below:

Hence, from the above, we can easily find the total management and employee costs for future years as follows:

• Freight Costs.

This is again important costs especially in case of SAW Pipe companies. SAW Pipes are bulky and hence the cost of transportation goes very high. This is the reason we need to estimate freight costs for RMTL on the basis of production mix between SAW Pipes & Other non-bulky pipes. We have estimated revenue from CS as well as Other Alloy Materials before. Taking that as base along with some other companies’ reference points, we calculate/estimate future freight costs. Have a look at the current freight cost of company:

This was the past, but with new capacities coming up for future years the freight cost as % of sales will not be the same. Hence, we try to find freight cost as % of estimated revenue taking reference of Purely SAW and Seamless companies as below:

Hence, taking the above as reference, we would calculate freight cost as % of sale of RMTL. Look at the below calculation for the same:

• Interest

This is yet another part to consider and it is purely based on management intention to repay loan and to take new loans. As of now, with new capacities near operational, all the maximum loans would have been taken. Hence, a short term + long term loan for H1 FY2021 (Actual Basis), comes to around 296 Crores. As per September quarter results the interest is coming to 10 Crores. Hence, we assume same to continue for H2 FY2021 as well. Also, current loan out of 296 Crores stands at Rs. 106 Crores. Hence, going forward in FY 2022, current loan will be paid. So this leaves us with net loan of 190 Crores from 2022 onwards. Current portion of long term debt will be paid gradually in future years but loan for working capital requirement will also increase. Hence, let us assume this net loan of 190 Crores to continue up to 2025 which turns the interest cost as below:

• Tax Rate

Company has always been tax payer and had paid good tax rate of above 4% on revenue. But for 2020, the tax rate fell below 4% for the first time since 2013. The reason is due to new tax regime allowing companies to be taxed at 25%.

Taking 25% tax rates going forward, and assumption of net profit margin at 10% translates the tax as % of revenue at 2.70% as below:

• Conclusion & Compiling Data.

The above is also converted to Common Size as below:

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.