RHI Magnesita India has entered an agreement to acquire the refractory business of Dalmia OCL Ltd having turnover of Rs 995 Cr and operating profit of Rs 95 Cr during FY22. In exchange, RHI will be issuing 2.7 Cr new shares in RHI Magnesita India, implying Rs 1,708 Cr of value based on prevailing price of RHI’s stock. Dalmia also has Rs 443 Cr in debt which implies the total value of the transaction is about Rs 2,151 Cr.

The company being acquired is running at lower utilisation and depressed margins of 10%. RHI’s management is confident of scaling up operations closer to full capacity of Rs 1,600 Cr and bringing efficiencies by modernising the plant to bring margins to 15-16% within a year. Considering the potential turnover and normalised margins, the deal shall be value accretive for existing RHI shareholders.

The other recently done acquisition of Hi-Tech chemicals is also expected to close within next 2-3 months. Hi-Tech’s FY22 sales were Rs 270 Cr along with a Rs 70 Cr pre-tax profit. This too is running at suboptimal utilisation and there is ample scope to ramp up sales. The consideration for this acquisition is Rs 621 Cr, however to be paid fully in cash.

Post the two acquisitions, the balance sheet of RHI would carry a peak debt of about Rs 1,300 Cr as opposed to Rs 100 Cr of net cash currently. This is on account of on-going capex of Rs 400 Cr in existing RHI along with its subsidiaries, funds required for paying Rs 621 Cr to Hi-Tech’s promoters, consolidation of Dalmia’s Rs 443 Cr debt and Rs 200 Cr of modernization capex for Dalmia’s plant (staggered). While optically the debt may seem excessive, but given the increased scale and net worth of the combined entity, it is reasonable at one time debt-equity, besides generating healthy operating cash flows to comfortably service the interest and retire the outstanding debt fully over the next 3-4 years.

Prior to the acquisition of Hi-Tech & Dalmia Refractories, RHI’s market share in India was about 22% which has now risen to 33% solidifying its leadership by massively increasing the gap further, compared to the second largest player.

The fact that Dalmia group did not demand cash, and rather negotiated for 14% equity in RHI in exchange for transferring their business to RHI, implies they continue to be bullish on refractory sector and the growth potential of this combined entity, which now has a whopping 33% market share. While, the valuation of RHI has been on the higher side, the execution too has been impressive which is why we have been lazy in reducing/exiting. Luckily, the decision to stay invested has worked well for us.

Link to Press Release:
https://www.bseindia.com/xml-data/corpfiling/AttachLive/451de72b-7453-4f15-8a15-7c13e5350b99.pdf