Kridhan Infra
Readymade Steel has entered the capital market on 27th June 2011 to raise Rs. 34.75 crore via a public issue of 32-39 lakh equity shares of Rs.10 each, in the price band of Rs. 90 to Rs. 108 per share. The issue, comprising dilution of about 29% (at the upper band) of the company's post issue paid-up capital, closes on 29th June.
The company produces ready to use steel, pre-fabricated column and beam cages, used in construction activities for roads, power plants, ports, airports, housing, bridges, metros and mono rails projects. With an installed capacity of 27,000 MTPA at Khopoli in Maharashtra for processing of steel and supplies, company supplies to customers such as L&T and Nagarjuna Constructions. However, its business comes from a few concentrated clients, as 4 customers accounted for ~89% of FY10 sales, while 6 customers accounted for ~95% of 9mFY11 revenues.
Moreover, it has to offer higher credit period to its customers, to encourage use of its product readymade steel, which is yet to get popular among users. Debtor days of 157 days for 9mFY11 and 192 days for FY10 are very much on the higher side, indicating severe pressure on working capital for this local steel player. In absolute terms also, debtors of Rs. 47 crore, as of 31-Dec-10, up from Rs. 17 crore, as of 31-Mar-10, due to rising business activity, is large.
For FY10, company clocked sales of Rs. 32 crore, up from Rs. 5 crore in FY09, when the manufacturing facility commenced commercial production. Net profit for FY10 was barely Rs. 43 lakh, indicating wafer thin margins of 1.3%. During 9mFY11, company reported growth in sales and net profit to Rs. 82 crore and Rs. 2.3 crore respectively, leading to EPS of Rs. 3.06 on equity of Rs. 7.74 crore, as of 31-Dec-10.
The company is expanding the Maharashtra facility by 63,000 MTPA to 90,000 MMTPA and is setting-up new facilities near New Delhi and Raipur of 50,000 MTPA each with total investment of Rs. 61 crore. Of this, Rs. 6.6 crore has been raised through pre-IPO placement in Jan and May 2011, at Rs. 75 and Rs. 90 per share respectively, while Rs 15 crore will be raised via 5-year term loan from bank at 14.50% interest rate. About Rs 34.75 crore is proposed to be raised via the IPO, while balance funds to be met via internal accruals.
As per the proposed schedule of implementation, Maharashtra facility is expected to be completed by July 2011, while New Delhi and Raipur projects are expected to get completed by Jan 2012. However land parcels for these 2 new projects have yet to be identified, hence these new locations are bound to get delayed beyond FY12-end.
As of 31-Dec-10, company's net worth was Rs. 11.71 crore and debt of Rs. 16 crore, leading to a debt-equity ratio of 1.4:1. To complete the planned projects, company's debt will rise further to Rs. 21 crore, while promoter holding will fall from 88.8% to 68.9%, assuming price to be discovered at upper end of price band. At upper price band of 108 (in the 20% wide band of 90-108), shares are being issued at a PE multiple of 27 times, based on expected FY11 earnings. Even if we consider FY12E earnings when only the Maharashtra facility will get operational for part of the year, PE remains very high in high-teens, which is again very aggressive for a steel processing company.
Limited operating history, rapid surge in sales in the past 21 months, IPO grading 2/5 indicating below average fundamentals and the BRLM being Arihant Capital (well-known for bringing poor companies to primary market), all weigh down the issue heavily. The company is seeking listing only on BSE and not on NSE, the latter having more stringent listing norms. Thus, post-listing low liquidity and thin trading volumes is bound to affect the stock price.
Fundamentals do not warrant a subscription to the IPO. Avoid!