Prakash Steelage

Prakash Steelage is entering the capital market on 5^h August 2010 with a fresh issue of 62.5 lakh equity shares of Rs.10 each, in a price band of Rs.100 to Rs.110 per equity share. The company will raise about Rs. 63-69 crore via the issue, which constitutes 35.71% of post-issue paid-up capital and issue closes on 9^th August for QIB bidders and on 10^th August for HNIs and retail investors.

The company manufactures seamless and welded stainless steel pipes, tubes and U-tubes at 2 manufacturing facilities located in Silvassa and at Umbergaon in Gujarat, with total installed capacity of 15,600 MTPA. It is undertaking capacity expansion at its Gujarat unit with an investment of Rs.49 crore. The other objects of the issue include meeting working capital requirements and general corporate purpose.

The company has already arranged for Rs. 43 crore via debt and Rs. 5 crore through equity issue (preferential allotment to promoters) for meeting the objects of the issue. Of the total issue, Rs. 15 crore will be used towards capacity expansion, about Rs. 40 crore towards working capital needs and balance for general corporate purposes.

During FY10, the company earned revenue of Rs. 437 crore, of which, Rs. 219 crore was from sale of traded products. It earned net profit of Rs. 18 crore, earning net margin of 4.1% and EPS of Rs. 15.84. As of 31^st March 2010, the company's networth stood at Rs. 51 crore while it had total outstanding debt of Rs. 141 crore, largely working capital loans.

The company's profitability has been fluctuating due to foreign exchange gains and losses. During FY10, it earned Rs. 2 crore in forex gains, while in FY09, it suffered a loss of Rs. 6.6 crore due to currency fluctuations.

On the lower and upper end of the price band, the company is issuing shares at PE multiples of 6.3 and 6.9 times, respectively. Its larger listed competitor, Ratnamani Metals, having annual sales of Rs. 850 crore, net margins of 9.6% and debt-free status, is presently ruling at a PE multiple of 7.3 times.

Though not much disappointment on the growth and size of the company, but, Prakash Steelage is half the size of Ratnamani Metals in terms of turnover, earns net margins which are less than half of what Ratnamani presently makes, and has largely built its present manufacturing capacity only over the last 2-3 years. These factors must be discounted by atleast 15%, while valuing the company. Also, being a primary market issue, about 10% must be left on the table for prospective investors. Hence, a PE multiple of around 5.5 would have been justified for the issue, as against 6.3 - 6.9 presently. This translates into a fair value of share at Rs. 86. So, even at the lower band of Rs. 100, it is looking expensive.

Hence, investors can give this issue a miss, on the backdrop of expensive valuations.