Rapicut Carbides

1)      Rapicut Carbides is promoted by a group of experienced technocrats and is into the production of tungsten carbide products . Rapicut Carbides stands for "Rapid Cutting Carbides”. Its products include metal cutting tips, special and formed tips, wire drawing dies and wear parts. For the mining sector, it manufactures tungsten carbide drill steel inserts, coal auger and integrated drill steel rods. Its products find application in the automobile, mining, rock drilling, oil exploration and general engineering industries. RCL is diversifying its product-mix by adding other powder metallurgical products, like indexable inserts and more value added products. It will also manufacture extrusion rods, coupling sleeves, adaptors and cross bits mainly used in underground tunneling work. For the ball bearing and fastener industry, it will manufacture cold heading dies

2)    ROCE 3yr avg: 34.83%             Return on equity: 23.88%             Return on assets 3years: 37.32%

        The company has increased its sales from 10 to 40Crs in 10 years(cagr in sales of 17%).The company also increased its profits at 17% cagr for the last 10 years.The company had a net operating margin of 15-16%.

        This year the company faced two challenges. First, the mining sector from which majority of its revenues come from didn’t do well. Secondly, the main raw material tungsten is imported. Last year tungsten prices were at higher levels. This along with the rupee depreciation affected the operating margins. The company could do an OPM of only 12% last year

3)      75% of the revenues come from mining sector & its largest customer is Neyveli Lignite Ltd. which accounts for around 15% of the turnover. RCL’s customer base comprises companies including SAIL, TATA Steel, BHEL, Neyveli Lignite, Mineral Exploration Corporation, etc. Around 35% - 40% of sales are coming from PSU's. (The expected outperformance of PSUs under NDA govt could be a positive). The remaining 1/4th sales come from the Industrial Sector. 

4)      According to the management, there are only 4 cos. which are manufacturing Tungsten products in India.

       Sandvik - http://www.sandvik.com/en/

WIDIA - http://www.widia.com/widia/en/products_main.jhtml

        Electronica - http://www.electronicagroup.com/

Rapicut Carbides - http://www.rapicutcarbides.com/

Sandvik & WIDIA are MNC's. These cos. make tungsten tools & equipment whereas Rapicut only manufacturers consumables. So they don’t cause much competition to Rapicut and we can easily say that the company is operating in a niche area

5)      The comapny manufactures consumables for Coal, Granite and O&G sectors. These consumables have a short life span & after certain hours of usage, they need to be replaced. So the company’s product are in market demand like a consumer durable. The Import Duty on the products that Rapicut manufactures is 12.5%. So I dont perceive any threat from Chinese imports.

6)      The company has a good dividend payout ratio of over 20%and offers a dividend yield of 4%. The company has been a consistent dividend payer for the past 6 years and has continuously been raising the dividend paid

  

7)      The company is undergoing a CAPEX plan of 5 year (FY12-17) worth 5.5Cr. (75% is a term loan from SBI @ 12.5% floating and rest through internal accruals). This is the result why the interest expenses has increased 

8)      The company's registered office & factory property in Ankleshwar measures 3000 sq. meter (4 acres) and has a market value of approx. Rs.3 crs

9)      One of the promoters Chetan G. Cholera has bought 50000 shares of the company through open market purchase in the month of May. This shows the confidence of the promoter in the company’s potential

10)  The company has a low equity base of 5.37 cr that too after giving bonus 3:2 last year.This was the only instance of equity dilution in the past 10 years

This small cap company that consistently grew faced a temporary sluggishness. Even when the user industry was doing very badly, the company could maintain its sales. The fortunes of this company are tied up to the domestic mining sector & once the mining activities come back to full swing, the company will be back into its glory days.

 The tungsten(company imports 50% and rest sourced from local scrap dealers)  prices that were ruling high last year has started cooling. The rupee is also stabilizing. This would help the company improve its operating margins. At the current price of 38 rs, the EV of the company is below 25 crs and market cap is just 20 crs. That makes this company a good bet on India’s Industrial Sector Growth