May 18, 2020 PICK OF THE MONTH VOL-6, NO-10 Industry ...reports.progressiveshares.com/ResearchReports/FR_180520201852020… · Revathi Equipment Limited BUY May 18, 2020 PICK OF THE

OVERVIEW: Industry:

The global mining equipment market is anticipated to grow at the CAGR of

8.27% (as per the business wire report). This growth is attributable to the

growth in mine exploration and the fact that new mining activities have

been initiated by countries such as Australia, India, Canada and Russia.

There is also a transition seen towards economic and efficient mining

equipment that would have fewer environmental concerns and thereby

prove to be one of the driving forces for newer machinery.

Indian Mining Sector: India is blessed with abundant mineral resources

and mining has been a major contributor to the GDP. As per a report by

KPMG, every 1% incremental growth in mining, results in approximately

1.2-1.4% incremental growth in industrial production and 0.3% incremental

growth in GDP. According to World Atlas, India is the third largest coal

producer as well as consumer in the world on the basis of verified coal

reserves. In 2018, India ranked fourth and second respectively, with regard

to iron ore production and crude steel production. India produces

approximately 95 different minerals.

To achieve the target of India being USD5tn economy; the CII aims to

acquire 3% of GDP from the mining sector by 2025, laying emphasis on

exploration, extraction and management of minerals. Eyeing the significant

scope for new mining capacities, various companies have enhanced their

efforts to increase exploration.

Minerals in India are disparate, uneven and spread over five belts with

some areas being rich in minerals and rest devoid of the same. Although

the resources are abundant there is no uniformity as such, for eg-: 5 states

account for 45% of the value of minerals produced (excluding atomic

minerals).

CMP: Rs.291 TARGET PRICE: Rs.391 TIME : 12 months

SNAPSHOT

52 week H / L Mcap (INR mn)

526/250 892.4

Face value: 10

BSE Code NSE CODE

505368 REVATHI

Annual Performance

(Rs mn) FY18 FY19 FY20E FY21E

Total Revenue 1,619 2,107 1,760 1,832

EBITDA (6) 146 149 157

EBITDA (%) (0.4) 6.9 8.5 8.6

Other Income 39 41 48 49

Interest 34 18 8 9

Depreciation 18 16 22 30

PBT (19) 152 167 168

PAT (18) 132 117 117

Equity ( Rs mn) 31 31 31 31

EPS (INR) (6) 43 38 38

Ratio Analysis

Parameters (Rs mn) FY18 FY19 FY20E FY21E

EV/EBITDA (x) (147.5) 4.6 4.4 4.2

EV/Net Sales (x) 0.6 0.3 0.4 0.4

M Cap/Sales (x) 0.6 0.4 0.5 0.5

M Cap/EBITDA (x) (144.2) 6.1 6.0 5.7

Debt/Equity (x) 0.2 0.0 0.0 0.0

ROCE (%) 1 9 9 8

Price/Book Value (x) 0.6 0.6 0.5 0.5

P/E (x) TTM (49.9) 6.8 7.6 7.6

Shareholding Pattern as on 31st March, 2020

Parameters No of Shares %

Promoters 22,25,953.0 72.58

Institutions 103 0.00

Public 8,40,887 27.42

TOTAL 30,66,943 100.00

Quarterly Performance

Parameters (Rs mn) Mar-19 June-19 Sept-19 Dec-19

Sales (Net) 819 350 362 415

EBITDA 109 15 14 65

EBITDA (%) 13 4 4 16

Other Income 22 8 12 21

Interest 0 2 3 1

Depreciation 5 4 5 7

PAT 98 10 11 54

Equity ( Rs mn) 31 31 31 31

Page No 1

Revathi Equipment Limited

May 18, 2020 PICK OF THE MONTH VOL-6, NO-10

Please Turn Over

BUY

Source: Annual Report

Note: All the data is calculated as per Market Price on 15th May, 2020

Industry: Industrial Machinery

Exhibit 01: Minerals Produced in India

Source: IBEF, Progressive Research


Exhibit 02: Share of States in Mineral Production




BUY

OVERVIEW: Industry (contd.)

The majorly mined minerals are also known as the segments of Metal and Mining in India:

Coal and its Applications:

With abundant coal depositories, there is significant scope for coal mining in India. According to IBEF, coal production in India

grew at a CAGR of 4.47% to 739.3mn tonnes from FY08 to FY19. In 2018, GOI opened doors to the private sector and set a mining

target of 1.5bn tonnes shared between Coal India Limited (1bn tonnes) and others (0.5bn tonnes). However, this target has been

revised to 1bn tonnes by 2023-24. Indian government has opened mines for global players as well and thus one can expect an uptick

in production.

Coal and Power Generation: Coal plays a vital role in electricity generation worldwide. In India, majority of the power

generated is through coal and as per IBEF forecast, power generation is anticipated to grow at CAGR 6.5% during FY18-23.

Coal-fuelled power plants contribute about 38% of global electricity.

Coal and Steel: Coal, as much as 70%, is used in the production of steel with iron ore and others. Demand for steel in India

would be linked to growth of construction and infrastructure sectors. The huge untapped opportunity can be gauged with the

fact that India’s per capita steel consumption was 65.2kg in 2017 compared to the global average of 214.5kg.

Coal and Cement: Energy, where coal is a major from on energy is required to produce cement . Growth in the cement

industry arising due to various infrastructure projects would also drive the growth of the mining sector.

Coal and Transport: Coal to Liquid (CTL) is being used as an alternative to conventional fossil fuels in many countries

such as China and Africa. Electric vehicles will also require power, thus aiding the demand for electricity and indirectly

coal.

Coal Combustion Products: These are by-products from the burning of coal and they are important in concrete production.

Coal combustion products include fly ash, bottom ash and boiler slag etc. These products also serve as green and better

alternatives such as usage of fly ash over conventional cement reduces emission of green-house gases. Iron and Steel: As per Bloomberg, India plans to spend USD1.5tn on energy, roads and railway projects over 5 year tenure. India is

a large exporter of Iron and Steel, but due to tremendous growth in manufacturing and infrastructure sector, the demand for iron and

steel has increased, making India a net importer of the same. India’s biggest iron ore miner, NMDC, has proposed to raise

production by 50% and also plans to invest Rs23bn in capital expenditure. Ministry of Steel aims to more than double the steel pro-

duction capacity to 300mn tonnes by 2030-31.

Aluminium and Bauxite: As per Ministry of Mines in 2018, India has the 7th largest bauxite reserves of around 2908.85mn tonnes.

Aluminium production process starts with the mining of bauxites, an aluminium rich mineral in the form of aluminium hydroxide.

Aluminium is the second most used metal in the world. As it is lighter than steel, its demand is increasing in many industries ranging

across aerospace to construction. NALCO, a leading Indian company in aluminium, has planned an investment of USD3.72bn for

increasing its alumina, aluminium and power production capacities and is thus set to join the club of million-tonne producers in the

metal segment by 2020. India’s export of aluminium grew to USD12.89mn in 2019-20 (till Sept’19) while total production grew at

CAGR 10.55% during FY10 to FY19 (Feb’19). Consumption of aluminium in India grew to 2.08mn tonnes in FY18 and is expected

to reach to 5.30mn tonnes by FY21.

Base Metals: Base metal market consists of lead, zinc, copper, nickel and tin. Copper demand depends on industries like electrical

and telecommunication, building and construction, automobile etc. The growing demand in the power sector is also aiding growth in

demand for copper. In the case of Zinc, per capita consumption in India is 0.5kg as compared to that of China (5kg) which also

indicates that there is potential for growth of zinc as well.

Precious Metals: Precious metals include gold, silver, palladium and diamond. India produces gold in lower quantities as compared

to other minerals as it has only has 3 producing sites, namely Hutti, Uti and Hirabunddini. There are very small silver deposits in

Rajasthan. Palladium is white material, majorly used in exhaust systems in cars, helping turn toxic pollutants into less-harmful

carbon dioxide and water vapour. It is also used in electronics, dentistry and jewellery.

Page No 2 Please Turn Over



Exhibit 03: Metals and Mining Segments




BUY

OVERVIEW: Industry (contd.)

Pandemic V/S Mining Sector:

Like no other exception, the metal & mining sector also has come to a standstill amidst the pandemic that has engulfed the globe.

The world’s major commodity consumer; China is gradually getting away from the clutches of the virus. Interest rates are cut,

reserve requirements for banks is reduced to stimulate new lending. All of this will flow into the domestic infrastructure

requirement, rather than new investments to be taken up. This would give an impetus to the iron ore industry and all this will fructify

when no new cases are reported from China and virus in contained. On the other hand, the supply side of commodities exporting

countries pose the challenge of balancing the economic stress, slowdown in demand and containing the spread of the virus.

There is a surplus of many metals owing to weakness in demand, leading to inventory pile up. A fall in prices is considered to be

favourable, but not when it is associated with a fall in demand as it will cap price recovery.

Mining operations have been halted all across which has hampered the production and thereby the supply. This could be offset to

some extent by the exchange inventory pile up witnessed. There is a huge fall in the prices of different commodities across the

industries. With the restrictions on the mining companies, there is production shut down, halt on capex growth and investments,

delay in project works. This is indeed a matter of concern for the miners and thereby the companies that supply mining equipment.

While the disruption of the mining industry cannot be predicted, mining technologies, automation to reduce dependency on labour

would be the next important shift in the mind of the industry. This would give impetus to the companies that supply equipment with

a technological edge for better acceptance going forward.

About the Company:

Revathi Equipment Limited (REL) is in the business of manufacturing industrial equipment such as Blast Drill Holes, Jackless

Drills, Water Well Drills, Exploratory Drills and Hydro-fracturing units for activities such as mining, construction, exploration etc.

With the expertise of having manufactured and sold more than 1000 drilling rigs in over 4 decades, REL is the pioneer in blast hole

drills and water well drills. It is a part of the Renaissance Group and was founded in 1977. The company also offers after sale

service to its customers, in the form of Maintenance and Repair Contract (MARC). REL’s manufacturing facility is located in

Coimbatore, Tamil Nadu. Semac Consultants Private Limited as its subsidiary and Semac and Partners, LLC as its step down

subsidiary.

1)The Business Segments:

The business of the company is bifurcated into three major segments:

• Equipment

• Spares and Services

• Exports

(a) Equipments: Drilling Solutions:

REL manufactures and markets Blast Hole Drills (Rotary and DTH, Diesel / Electric driven) for mining applications, Jackless Drills

for Construction and Mining applications, Water Well Drills (upto 1000mtrs depth and beyond), Hydro-Fracturing Units and

Exploratory Drills (upto 1300mtrs depth). The drilling rigs are used extensively in mines such as coal, copper, gold, iron, zinc,

phosphate, bauxite, lignite, limestone, etc. REL has manufactured and sold more than 1000 drilling rigs, over 4 decades, to

customers worldwide. It also offers customers a comprehensive Maintenance and Repair Contract (MARC), enabling them to

outsource the maintenance of all their drilling equipment.


Exhibit 04: Bifurcation of Drilling Solution

Source: Progressive Research





BUY

INVESTMENT RATIONALE:

(i) Mining:

REL offers a variety of rig drills for the mining industry. A significant portion of the company’s revenue flows from this division.

The drilling equipment fabricated by REL are efficient, safe and are utilized in the mining of coal, zinc, iron, limestone and copper

among others. The drills are crawler-mounted, diesel engine / electric motor driven, hydraulically-operated, Rotary / DTH. These

drilling rigs are adjustable according to the prerequisites of the client and enabling the customer to choose and pay for the

specifications required in the rigs.

(ii) Construction:

REL produces jackless drill rigs for the construction sector. These rigs are rugged and tough by design and are utilized in activities

including construction of roads, dams and quarrying. The 102mm diameter is a standout among these drills as it has hydraulic

control making it exceptionally productive for its price and also fuel efficient.

(iii) Water Well:

For the drilling of boreholes, the company offers a range of hydraulic top-drive and table-drive rigs. These rigs are designed in a

way that they can sustain harsh and brutal environment conditions.

REL offers a range of hydraulic top-drive and table-drive rigs for borehole drilling. In association with Foremost, Canada, REL also

offers dual rotary drill rigs with simultaneous casing capability (from 12” to 40”) for drilling in fractured / unconsolidated

formations. Additionally in association with GEFCO, USA; REL offers drill rigs suitable for hard rock, unconsolidated, alluvial

formations (with depth capability beyond 1000meters).

(iv) Exploring:

REL offers versatile drills that are capable of performing DTH, diamond coring and reverse circulation methods for surface

applications. These drills are suitable for deep hole drilling (upto 1300mtrs depth) with a combination of NQ, HQ and PQ diameter

core, for both wireline and conventional drilling. Other products including crawler or truck mount versions, onboard compressor are

also available.

(B) Spares and After Sale Services:

Spares and Services contribute a major part of the revenues of REL. For the supply of spares, the company has a wide network in

place with dealers and also assistys via direct supply. IT provides spares for Foremost and GEFCO products in India. After sale

service is also provided for Foremost and GEFCO products such as mid-rehabilitation, condition based monitoring, reliability

improvement. The company additionally undertakes MARC, AMC and FMC contracts for its own products.

(C) Exports:

REL has its presence in 6 continents, including some of the biggest mines in USA, Brazil, Australia and Indonesia. But currently

exports form a small part of the revenues. However, the company is gradually taking steps to expand its presence through exports of

its products into new markets majorly within Asia, though it has also supplied some equipment to Europe, South America and

Africa. In addition, it is also participating in exhibitions, visiting potential customers in target markets, building distribution network

and entering into partnership or JVs with local players and partners. In a short time frame, REL expects to have repeat and enhanced

business from these new areas.



Exhibit 05: Types of Equipment by REL

Source: Quarterly Reports, Progressive Research




BUY

INVESTMENT RATIONALE (contd.)

2) GOI Initiatives:

Some of the initiatives by the government can prove to be a positive for the company as and when implemented.

(i) New Amendments: In 2020, the government has approved ordinance to amend the Mines and Minerals (Development and

Regulation) Act 1957 and Coal Mines (Special Provisions) Act 2015. This amendment has opened up the sector to players outside

steel and power and additionally it has removed end-use restrictions. This move will attract private companies, bring in more FDI in

the coal and mineral sector and in turn create an efficient market for the same. This can also lead to reduction in the imports of coal,

as India has sufficient coal reserves.

(ii) National Mineral Policy 2019: The policy aims at developing a sustainable mining sector. It has proposed to grant the industry

status to mining. It encourages the use of coastal waterways and inland shipping for evacuation and transportation of minerals and

dedicated mineral corridors to facilitate the transportation of minerals. It also provides for maintenance of database of mineral

resources. Additionally it encourages investment in R&D and use of technology in the mining sector, while proposing to harmonise

taxes and royalty with international standard.

(iii) Mine Auctions: With the intention to stop coal imports by 2024, GOI will offer around 200 blocks for commercial coal mining

in the next 6 years, thus opening up the Indian coal sector. At peak, these mines have a total production capacity of approx. 400mn

tonnes. In Odisha, auction for 20 blocks took place in January, 2020 and was indeed successful.

3)Venturing into New Industries:

REL continues to develop new models, which would help penetrate deeper into some of the other markets like cement and steel.

Some of these models have already been introduced into the market, wherein the product has been well received and should gain

market share in this business going forward. For eg: REL developed products for the water well industry and supplied to customers

like Central Ground Water Board. On the other hand, the products developed for the construction industry were much smaller in unit

value and not that profitable, and so were discontinued.

4) Widening Clientele Base: REL serves to a reputed clientele base including Ambuja Cement, DECO, Jaypee Group, Tata Steel and leading PSUs such as Coal

India and NALCO. Capital expenditure of 11 state owned power and coal companies will increase by 7.2% to Rs68,435cr in FY21.

60% of this expenditure is expected to be undertaken by Coal India, NTPC and Power Grid Corporation. As REL has exposure to

the coal sector, especially Coal India, this increase in expenditure will boost RELs revenues. Additionally in FY20, Coal India has

initiated procurement of large mining equipment which it expects to be delivered in FY21. Apart from this, NALCO also has

planned capital expenditure for expansion of alumina. While another client, Hindustan Zinc, has an investment plan of USD2bn over

the next five years, thus increasing capacity from current 0.8mn tonnes to 1.5mn tonnes. Further it has expanded into newer

industries such as water-well and has provided equipment to the Central Ground Water Board.

5) The Key: Coal India Limited:

As per recent updates, the government has no intends on scaling down

Coal India’s output target of 710MT for the current fiscal. Coal is

estimated to account for half of India’s power generation in 2030 despite

a boom in solar and wind energy projects. In the long run, the

contribution of coal in the overall energy mix could go down, but in

absolute terms coal production is anticipated to grow. Given the current

scenario, adoption of renewable energy will be slow in India as it

requires huge capital investment and public awareness among others.

Energy transition takes generations. According to Energy Information

Agency, US, for energy purpose, India will majorly be dependent on

coal. About 80% of India's domestic coal production comes from CIL,

thereby enjoying the monopoly status. Even with the sector opening up

to private organization; Union minister of Coal and Mines expects CIL’s

share to be at 60-65% while rest to be of private organizations.

Additionally the cuts in imports will act as a booster to the company. CIL

has set a target to produce 1,000MT coal by 2023-24. REL is also

exploring the possibility of entering the new unexplored market in

Africa, Middle East. REL has many representatives working in these

territories. It is pitching products against world and market leaders and

trying to compete with the advantage of low owning and operating cost

compared to them. This will bring a lot of prospects for REL in the

years to come.



Exhibit 06: Industrial Energy Consumption, India

Source: EIA, US




BUY

Financials: After a tough FY18, due to the roll out of GST and

lower number of orders from CIL, the company witnessed a

turnaround in FY19. The revenues and PAT for 9MFY20 stood at

Rs1,126mn and Rs80mn respectively with EBITDA margins of

8.5%, which are back on track led by the conscious cost saving

efforts. The bigger chunk of business, the drilling solution

business is fairly stable. After the acquisition of Semac, the debt

had trebled, but in FY19, the company is virtually debt free due to

prudent working capital management. The design build business

of Semac has also gained momentum with revenues of about

Rs800mn in FY19, as compared to nil in FY16. In terms of peers,

REL’s main competitor is Atlas Copco Group, by large making it a

duopolistic market. Between the Revathi group and Atlas Copco,

CIL allocates 50-60% of the orders to the Level 1 bidder (based on

lower quotes) and the remaining is passed on to other companies.

This to a great extend brings assured revenues and limits price-based competition, helping sustain its market position.

The mining equipment industry is working capital intensive, thus interest on working capital is expected to continue in the course of

the company. Due to volatility in order placement and delay in payments by PSUs, REL generally maintains higher inventory.

Additionally it maintains substantial spares to meet MARC requirements. Cumulatively, these lead to higher working capital.

CRISIL has reaffirmed its ratings on the bank facilities and short term debt programme of REL at 'CRISIL BBB+/Stable/CRISIL

A2'.

Risks and Concern:

Renewable Energy: With the growing environmental concerns about coal and organizations taking a greener step and moving away

from the sector and preferring renewable energy such as wind and solar, one can expect growth in terms of volume of coal generated

but not in terms of coal’s contribution to the energy sector as a whole.

Government Policies: Unfavourable changes in government policies and stringent mining norms pose a threat to the company.

Concentration Risk: With bulk of orders coming from CIL and major dependency on coal, one client catering to one sector is a risk.

The company is consciously trying to diversify this risk by developing newer products and entering different markets.

Market Risk: due to business cycles

Outlook and Recommendations:

REL has a range of offerings in the mining equipment industry catering to the diversified needs across different industries. The

company is present across the value chain from equipment to spares and services. It is making attempts to spread across different

industries and widen its clientele base. In the current scenario of uncertainty across all domains of business, it is indeed going to be

difficult to predict the normalcy of demand supply. However in recent announcements, GOI has approved commercial mining in the

coal sector on revenue sharing basis. Additionally an infrastructure development of Rs50,000cr is to be created and coal gasification

will be incentivised through rebate in revenue share. Nearly 50 coal blocks will be available for auction soon and GOI has removed

distinction between captive and non-captive mines. With these reforms, the mining sector and specially coal sector has received a

big boost, though implementation is important. Allowing sale of surplus and unused minerals by new mining lease facility and

relaxed FDI norms will encourage private players. With clear intentions to give impetus to this sector, one can be certain that coal

mining is here to stay. As gradually the demand pick-up happens, we feel that the company should be better positioned with the

rationales mentioned to garner the benefits going forward. We initiate a BUY on the stock with a target price of Rs391 over a 12

months horizon.

Page No 6

Exhibit 07: Debt to Equity

Source: Annual Reports, Progressive Research


Exhibit 08: Price vs. Sensex

Source: Ace Equity

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Documents

May 18, 2020 PICK OF THE MONTH VOL-6, NO-10 Industry ...reports.progressiveshares.com/ResearchReports/FR_180520201852020… · Revathi Equipment Limited BUY May 18, 2020 PICK OF THE