Long-Term Service Contracts And Capacity Expansion Will Drive Future Earnings Potential

Catalysts

About RHI Magnesita India

RHI Magnesita India manufactures and supplies refractory solutions that enable safer, more efficient operations for steel, cement and industrial customers across India and export markets.

What are the underlying business or industry changes driving this perspective?

• Sustained capacity additions and CapEx plans in Indian steel and cement, alongside government led infrastructure and housing spend, position the company to grow relative to underlying demand through its higher market share in steel, cement and industrial refractories, supporting multi year revenue growth.
• The shift from product only sales to long term, performance linked 4PRO and TRM service contracts deepens customer integration, raises switching costs and adds recurring service based income, which may help stabilize earnings and gradually lift EBITDA margins.
• Technology transfer of higher value products such as ANKRAL and Radex bricks and other group technologies into Indian plants, together with ongoing plant modernization, is expected to improve product mix, reduce unit costs and enhance net margins as utilization moves toward 80 to 85 percent.
• Integration of Ashwath Technologies, a higher focus on nonsteel industrial segments like glass and nonferrous, and increasing export volumes in flow control products diversify end markets beyond domestic steel cycles, which may reduce earnings volatility and support steadier growth in operating profit.
• Normalization of alumina prices, recipe optimization to offset higher magnesia costs, automation and productivity initiatives, and expected performance bonuses from large steel accounts create a visible margin recovery path toward 13 to 14 percent EBITDA. Together, these factors underpin a stronger earnings trajectory relative to current valuation.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming RHI Magnesita India's revenue will grow by 11.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 10.3% in 3 years time.
• Analysts expect earnings to reach ₹5.6 billion (and earnings per share of ₹21.86) by about December 2028, up from ₹1.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹6.5 billion in earnings, and the most bearish expecting ₹4.7 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 34.6x on those 2028 earnings, down from 60.5x today. This future PE is greater than the current PE for the IN Basic Materials industry at 30.6x.
• Analysts expect the number of shares outstanding to grow by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.3%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent overcapacity and aggressive pricing in commodity refractories from existing and new domestic players could structurally cap selling prices, making it difficult for the company to sustain double digit margins in the bricks and castables portfolio, and weighing on EBITDA and earnings growth.
• Squeezed profitability and low steel prices at Indian mills, combined with removal of safeguard duties and continued subsidised Chinese and Southeast Asian steel exports, may limit customers ability to absorb price increases or commit to higher volumes, constraining long term revenue growth and pressuring net margins.
• If capacity additions in Indian steel and cement ramp up more slowly than planned due to weaker utilisation or delayed projects, the company may not reach its targeted 80 to 85 percent utilisation. This could leave fixed costs under absorbed and dampen operating leverage and earnings.
• Raw material volatility in key inputs such as magnesia and alumina, along with adverse foreign exchange movements on dollar and euro denominated purchases, could offset planned recipe optimisation and cost savings. This may prevent EBITDA margins from stabilising in the guided 13 to 14 percent range and undermine profit growth.
• Integration and turnaround of the acquired Dalmia operations, including execution of high payback CapEx and technology transfers, may take longer or deliver lower than expected productivity and mix benefits. This could prolong the drag from higher depreciation and limit improvement in consolidated return on invested capital and profit after tax.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₹622.67 for RHI Magnesita India based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹697.0, and the most bearish reporting a price target of just ₹571.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ₹54.5 billion, earnings will come to ₹5.6 billion, and it would be trading on a PE ratio of 34.6x, assuming you use a discount rate of 14.3%.
  
• Given the current share price of ₹460.75, the analyst price target of ₹622.67 is 26.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.