Electrosteel Steels Ltd. is entering the capital market on with a public issue of 22.55 crore equity shares of Rs.10 each, in the price band of Rs.10 to Rs.11 per share. Issue also has a green shoe option of upto 3.38 crore equity shares.

It seems that the company and its promoters are taking a leap beyond their capacity, raising fears of the company and its promoters falling flat on their noses! At least that is the inference which one can draw from the past experiences of some leading industrial groups in 94-96, like Jindals, Essar, Lloyd, Usha Ispat, Ispat Industries etc.

The company is setting up a 2.20 million TPA steel plant with total capital outlay of Rs. 7,362 crores. This is being financed by term loans of Rs. 5,447 crores and equity capital of Rs. 2,068 crores, post Green Shoe Option. Excess fund being mobilized, of Rs.153 crores, shall be used as margin money for Bank Guarantees and general corporate purposes. Of the total capacity of 22 lakh TPA, 5 lakh tonnes are for wire rods, 7 lakh tones are for TMT bars, 3.3 lakh tones are for D1 Pipe, 2.7 lakh tones are for billets and 4 lakh tones are for pig iron.

Total debt of Rs. 5,447 crores, has been sanctioned by 30 banks, of which, Rs. 2,442 crores has been disbursed by these banks till , as stated on page 67 of RHP. However, financial statements presented by the company, as at , shows amount drawn of secured loans, at Rs. 2,514 crores. Such financial anomaly irks, especially in an offer document!

Also the process of pre-IPO allotment of equity shares by the company has been continuous and was made, as late as, upto and . This may be the reason that lot of pre-IPO tired allottees are seen offloading the shares held by them in private deals, as evident from the transactions taking place in the Kolkata market, in the last couple of months. Low promoter stake of about 34% also does not instill much confidence.

Infact, promoters of the company, Electrosteel Castings, an existing listed company, does not have depth any financial muscles to set up such a big project. This company had a topline of Rs. 1,670 crores, on consolidated basis, for FY10, with PAT of Rs. 235 crores and cash profit of about Rs. 300 crores. Debt in the books of the company, as at that date was close to Rs. 500 crores, with net worth of the company being placed at around Rs. 1,600 crores and market cap of close to Rs. 1,500 crores, as on date.

The company claims to have been set up, as a part of backward integration strategy of its promoters, but has done without having raw material ownership in this company. Promoter, Electrosteel Castings are owning the mining blocks of iron ore and coking coal in the state of Jharkhand and have agreed to supply entire iron ore requirement of the company and 30% coking coal requirement, for a period of 20 years, from the date of commencement of commercial production by the company, on cost plus twenty per cent. This implies that delay on part of promoting company to start mining will have direct negative impact on the feedstock security of the company, as also, inefficient working and higher cost of production at mining are to be borne by the company. Also, this kind of arrangement is never viewed as comforting by the market and analysts, especially when it is entered with the group companies.

This company will have many competitors like promoter company, Usha Martin, SAIL, Tata Steel etc. but can ideally get compared with Usha Martin Ltd., which had a topline of over Rs. 2,500 crores for FY10, on consolidated basis, with PAT at Rs. 168 crores and net worth of over Rs. 1,600 crores on tiny equity base of Rs. 30 croers, resulting in an EPS of Rs. 6.50. Debt of Usha Martin, as on date, was close to Rs. 1,200 crores only.

Though the company hopes to start commercial production from October 10, it is bound to get delayed, considering the progress of the project, which may happen by March 11, till it stabilizes with the commercial production

High equity base of the company at over Rs. 2,000 crores, low promoters stake of 34%, stiff competition in the sector, low financial capability of the promoters, high debt equity ratio of close to 2.5:1 are all risky and unfavourable features of the issue.

One should not get lured by the low price tag of the issue, as it can even slip below its face value, in the event any delay or losses being posted by the company in the initial period,  chances of which are high and likely.

Considering these, avoid it, as better IPOs are available in this crowded IPO market.