By Geetanjali Kedia

Loha Ispaat is entering the capital market on 11^th March 2014 with a fresh issue of 2.67 crore equity shares of Rs.10 each, in the price band of Rs. 77 to Rs. 80 per share. The issue will raise Rs. 206 crore and Rs. 214 crore at the lower and upper end of the price band, respectively. Representing 26.44% of the fully diluted post issue paid-up capital of the company, the issue closes on 20^th March.

Aryaman Financial is the BRLM. Having managed IPOs of companies such as Swajas Air and Midvalley Entertainment, this merchant banker is notorious for bringing ‘fundamentally weak’ companies at ’exorbitant’ valuations to the primary market. Loha Ispaat is no different! One wonders, when will such BRLMs learn from their previous vice and will stop helping issuers to rob the gullible investors?

Loha Ispaat is an intermediary in flat steel products (hot rolled, cold rolled coils, sheets and plates), calling itself a ‘Steel Service Centre’, acting as a stockist and link between steel manufacturers and consumers, by providing pre-processing services and reducing lead time. Simply put, it is a steel-trader. Since this does not involve much of ‘value-add’, the result is wafer-thin margins for the company (net margin of 2.1% and 1.9% clocked during FY13 and H1FY14 respectively).

Also, the business is very working capital-intensive. Most of the funds employed go to finance the debtor-and- inventory-heavy business. As of 30^th September 2013, outstanding debtors and inventory are stood at Rs. 696 crore and Rs. 901 crore, respectively, which amounts to 62 days and 80 days of sales, respectively. Inventory on hand increased from Rs. 707 crore on 31^st March 2013 to Rs. 901 crore, in just 6 months, with barely 18% rise in sales.

At 1.5:1, its debt equity ratio is also very high, due to total debt of Rs. 807 crore, on networth of Rs. 549 crore, as of 30^th September 2013. More than three-fourths of this debt is the high-cost short term borrowings, with blended interest rate for FY14, at close to 19%. Due to high debt servicing charges, interest burden on the profit and loss statement is huge - In FY13, on consolidated sales of Rs. 3,436 crore, net profit was just Rs. 70 crore, after deducting interest charges of Rs. 121 crore. During H1FY14, consolidated sales were Rs. 2,024 crore and net profit at Rs. 39 crore, with interest charge for 6 months at Rs. 77 crore.

Thus, rising debt levels to fund capacity expansion at existing facilities in Khopoli and Taloja in Maharashtra, is the culprit. Total debt increased from Rs. 340 crore as of 31^st March 2011 to present Rs. 807 crore, as of 30^th September 2014 – a rise of Rs. 460 crore in 2.5 years! Company is undertaking expansion at its existing Khopoli unit, having installed capacity of 9 lakh MTPA, which would augment to 21.82 lakh MTPA, post expansion, which started initial commercial production in September 2012. Taloja unit, on the other hand, has annual capacity of 1.05 lakh TPA and operates manual pickling of HR sheets and plates. A Cold Rolling Mill complex with a capacity of 30,000 TPA has also been commissioned, as a backward integration measure.

To meet the huge working capital needs for the expanded capacity, company is now tapping public funds. Issue proceeds will be utilized to fund working capital to the tune of Rs. 230 crore. Company has completed a pre-IPO placement of Rs. 27.6 crore at Rs. 78 per share, to credential-doubting names like Passage to India Master Fund, Progruss Investments and Pacatolus Opportunity.

When the capacity of the current plants is not fully utilized, one wonders on the rationale and timing to undertake expansion with borrowed money! Moreover, the steel consuming sectors such as auto, engineering, pipes / tubes and infra are also not demonstrating any green shoots.

At upper and lower end of the price band, company is issuing shares at PE multiple of 7.3x and 7x respectively, which is highly overpriced for a trading company, that too in a business, having high debt-equity ratio, coupled with wafer-thin margins and high probability of bad debts. A steel trader asking for PE valuation of 7 times, when integrated steel makers such as SAIL, JSW and Tata Steel, are ruling at PE multiples of about 10 times, is sheer loot.

Recommendation:

Fundamentals do not warrant a subscription to the IPO. A Must Avoid!