Gyscoal Alloy

Gyscoal Alloys is entering the capital market on 13^th October 2010 to raise Rs. 50 to 55 crore via a fresh issue of 77 lakh equity shares of Rs.10 each, depending on the price discovered. The issue, priced in the band of Rs. 65 to Rs. 71 per share, constitutes 48.65% of the fully diluted post-issue paid up capital of the company and closes on 15^th October 2010.

The company manufactures different grades of stainless steel products, including angles, bright bars, black bars, flats, hexagonal and round corner squares (RCS). It proposes to increase its melting capacity from existing 18,000 MTPA to 1,18,000 MTPA, with an investment of Rs. 58 crore.

Promoters have brought-in Rs. 10 crore in December 2009, via a preferential issue of 15.4 lakh shares at Rs. 65 per share. Entire proceeds of the IPO will be used to finance the capacity expansion and to meet the long term working capital requirements of Rs. 5 crore. The company states in its RHP that all the IPO proceeds will be deployed in FY11 itself. However, this seems too optimistic a target and looks good only on paper.

Firstly, undertaking an expansion in a nature of over 5 times, of its existing size seems too large a challenge, purely from the execution point of view. Secondly, prospectus states September 2011 as the project completion time, which is a day dreaming. The company is yet to place orders for entire plant and machinery worth Rs. 44 crore required for the project. Thus, time and cost escalations seem imminent.

Ramping up production and business activity will definitely be a big challenge for this company, as, presently with barely 18,000 MTPA of capacity, it is heavily dependent on few customers and suppliers for its business. In FY10, top 10 customers accounted for 94% of total income while top 10 suppliers accounted for 67% of total purchases. Thus, company barely seems competent to generate business for additional massive capacity rise.

On the financial front as well, there is not much to talk about. On revenues of Rs. 152 crore for FY10, PAT margin was a mere 3.2% at Rs. 4.9 crore of net profit, resulting in an EPS of Rs. 6.05. For Q1FY11, it reported PAT of Rs. 1.5 crore on revenues of Rs. 40 crore, resulting in quarterly EPS of Rs. 1.88. Post-IPO, equity will almost double from present Rs. 8.13 crore to Rs. 15.83 crore. For its present size of operations, total debt of Rs. 38.45 crore, as on 30^th June 2010, is also high.

At the lower and upper end of the price band, the company is issuing shares at PE multiples of Rs. 10.7 and 11.7 times respectively, as against a fair PE multiple of around 4 to 5 times for this size and type of the company.

Investors should not get carried away by the fact that promoters have made a preferential allotment to themselves at Rs. 65 per share, 9 months back. The issue is expensive, besides other key challenges being faced by the company, including doubt on timely execution capabilities, poor financial performance and limited business partners.

We advise investors to avoid this issue.