Rama Steel Tubes Equity Research

Date of Research – 19 January 2016

Price – Rs. 92.35

About the Company

Rama Steel Tubes Limited (“Rama Steel” or the “Company”) manufactures Galvanized Iron (GI Pipes) which are typically used in water, sewage, and oil and gas transmission and are also put to various uses in the infrastructure sectors. The company got approval for NSE listing on 17 August 2015 and BSE listing on 1 September 2015 and was formerly listed on the Delhi Stock Exchange (DSE). The Company operates through 3 manufacturing facilities:

Plant Capacity – 2 plants at Sahibabad (Uttar Pradesh) with capacity of 75,000 MT per annum and 24,000 MT per annum. 1 plant at Khopoli (Maharashtra) with capacity of 36,000 MT per annum. For the Khopoli plant the Company is planning to ramp up its capacity to 2,40,000 MT taking its overall installed capacity to 3,40,000 MT per annum.

Key Financial Figures

Standalone(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations189.26180.98196.25243.28 234.88 
Expenses186.04175.81190.49227.37 216.12
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 18.75  
Depreciation1.791.772.262.85 2.91 
Finance Costs5.414.565.276.18 7.61 
Other income5.573.612.651.75 3.49 
PBT1.592.450.888.63 11.33
Tax0.490.310.182.60 3.65
PAT (before Minority Interest and share of Associates) 7.68

Profitability Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Operating Profit Margin Ratio1.702.862.946.54 7.98 
Net Profit Margin Ratio0.581.180.362.48 3.27 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016 
Share Capital0. 
Reserves & Surplus15.5516.6518.7918.2017.33 
Net worth (shareholders funds)15.8016.9020.0420.6925.79 
Long term borrowings47.1639.8338.9052.9516.82 
Current liabilities6.8713.3715.7222.5560.80 
Total Liabilities69.8370.1074.6696.19103.74 


Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016 
Fixed Assets14.7515.4715.0718.1917.67 
Noncurrent Investments1.572.382.8612.7413.06 
Current assets53.5152.2556.7365.2670.93 
Total assets69.8370.1074.6696.19103.74 

Efficiency Analysis

ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016 
ROE / RONW1.586.5110.683.3823.34 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations (Rs. Cr.)189.26180.98196.25243.28 234.88 
Growth (%)22.05 %(4.37 %)8.44 %23.97 % (3.45 %) 
PAT (Rs. Cr.) 7.68  
Growth (%)340.00 %94.55 %(67.29 %)760.43 % 27.57 % 
Earnings Per Share – Basic (Rs. )44.5085.644.604.03 5.14 
Earning Per Share – Diluted (Rs. )44.5085.644.604.03 5.14 
Price to Earnings22.52 25.22 

Dividend History

The Company has not declared any dividend over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Rama Steel’s average current ratio over the last 5 financial years has been 4.47 times which indicates that the Company is able to meet its short term obligations.

Long term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Rama Steel’s average long term debt to equity ratio over the last 5 financial years has been 2.45 times.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations. Rama Steel’s average interest coverage ratio over the last 5 financial years has been 1.10 times.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Rama Steel reported a promoter holding of 60.98%. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.