RMTL is in business of steel pipes & tubes, which is prone to cyclicality. Valuations for these kinds of business are slightly different than usual. For cyclical businesses, the revenue and profit projection can only be done for a mid-term future. We cannot predict, how the cycles will play and hence not be able to estimate revenue and profits for long years. Therefore, the valuation for these kinds of business works on exit multiples, i.e. here PE Ratio.
So to start with, just a quick combined data recap:
From above, average EBITDA levels for CS Products (9.03%) and Other Alloy Products (31.86%) are intact. Hence, we will get the EBITDA Amount by the end of 2025. To value a company based on P/E Exit Multiple we need Estimated PAT and Historical P/E Ratio. Therefore, let us find out these two.
- Estimating PAT of RMTL:
- Depreciation & Fixed Asset:
CWIP here is found based on historical reinvestment to maintain the fixed asset, which is taken at 10% of Fixed Asset. Depreciation is taken at 16% with similar logics.
- Interest & Borrowings:
Short term borrowing is for Working Capital needs which is in direct relation with Revenue of the company. Hence, based on average borrowing, 3% of revenue is considered as short term borrowings. Long Term Borrowings have a payment of approx. 31 Cr. each year and accordingly adjusted for every year.
Hence, from above. We arrive at the PAT of the company as follows:
- Historical P/E Ratio of RMTL:
We find historical P/E Ratio to understand how it will play out in future. As history is guide to the future, based on historical P/E ratio we will understand exit multiple. Based on this exit multiple, the value of Ratnamani will be taken out.
- Valuation:
Now that we have PAT and P/E Ratio of RMTL. We arrive at valuation at follows:
Hence, even with highly optimistic scenario of P/E ratio, the CAGR for period of 5 years is only at 13.3%. Considering the average P/E ratio, we are not even beating the Fixed Deposit Rates.
Conclusions:
RMTL as a company is great. With robust growth over the years and wonderful opportunity arising from industry structure, the company is doing nice. However, currently the value of company is extremely high to justify entry. Based on value found above, one should wait till the stock is available at attractive rates i.e. around Market Cap of Rs. 6,500/- Crores to at least make a decent returns of CAGR at 16.3% on high P/E Multiple over 5 years till 2025.
Hence, as of now. The company is not investible.
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.