Recently, Saurabh Mukherjea, Founder of Marcellus Investment Managers shared his enthusiasm for RHI Magnesita, a small-cap investment that he believes holds significant potential. RHI is into manufacturing of a diverse range of refractory and monolithic products used in the steel and iron industry.

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Mukherjea's interest in RHI Magnesita stems from the company's dominance in the refractory space. Just as he previously built a successful position in GMM Pfaudler, he sees similarities in RHI's market position. The refractory industry plays a crucial role in the steel sector, as it supplies essential components for steel furnace operations. RHI Magnesita boasts an impressive 40 percent market share and delivers robust 35 percent return on capital employed (RoCE). This dominance sets the stage for a strong investment case, as it positions the company as a critical ancillary supplier to the steel industry.

India's economic outlook is another factor that fuels Mukherjea's optimism about RHI Magnesita. He anticipates a steady gross domestic product (GDP) growth rate of 7-8 percent over the next decade. Historically, the steel sector tends to grow in tandem with GDP expansion. While steel companies may face challenges in generating significant free cash flows, the overall sector is poised for growth. RHI Magnesita stands to benefit from this growth, given its pivotal role in the steel industry's operations.

Source: Company, Nuvama Research

Marcellus Investment Managers' Founder Saurabh Mukherjea picks out RHI Magnesita as a 'good small cap' investment. Find out why#markets #StockMarket #trade #investment #macro #midcap #RHI #steel @MarcellusInvest pic.twitter.com/TBrn85L8Iz

— CNBC-TV18 (@CNBCTV18News) September 3, 2023A third element that Mukherjea considers in his investment thesis is the ongoing consolidation within the refractory industry. Recently, RHI acquired Dalmia's business, a move that has contributed to a 33 percent boost in RHI Magnesita's stock price. While he acknowledges that the current year might not be as exceptional as the previous one for the company, Mukherjea takes a longer-term perspective. RHI Magnesita's dominant position, significant market share, strong RoCEs, and the potential to consolidate smaller players within the industry provide a clear path to success.

As of recent market performance, RHI Magnesita experienced a more than 4 percent increase in the past month.

RHI Magnesita India is a leading manufacturer of a diverse range of refractory and monolithic products tailored for the steel and iron industry. The company serves a broad customer base, spanning both the domestic Indian market and international markets. Approximately 70 percent of its product portfolio is dedicated to the steel sector, while the remaining portion serves various industrial sectors such as cement, glass, and non-ferrous industries, among others.

RHI, headquartered in Gurugram, maintains a robust manufacturing presence across India, with manufacturing facilities located in Bhiwadi, Vishakhapatnam, and Cuttack. Furthermore, through strategic acquisitions such as Dalmia OCL and Hi-Tech, the company has expanded its operations into Jamshedpur and the West and South Indian markets, enhancing its geographical footprint.

Also Read | Refractory company RHI Magnesita raises Rs 900 cr via QIP route

(Edited by : C H Unnikrishnan)