IPO Size: Rs. 72 cr – Entirely fresh issue

• For working capital of Rs. 62 cr

Price band: Rs. 141-151 per share

M cap: Rs. 286 cr, implying 25% dilution

IPO Date: Tue 13^th Feb to Thu 15^th Feb 2024, Listing Tue 20^th Feb 2024

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Steel Pipes and Tubes Maker

Vibhor Steel Tubes is a 20 year old manufacturer, having 2 plants in Raigad (Maharashtra) and Hyderabad (Telangana) with an aggregate manufacturing capacity of 2.21 lakh MTPA. It has long-term supply agreement with Jindal Pipes for 1 lakh MT finished goods annually. Vibhor seems to be more of a 3^rd party manufacturer for Jindal Pipes under its brand ‘Jindal Star’, as nearly 90% of its Rs. 1,110 cr revenue is derived from this single customer Jindal Pipes.  

Greenfield Expansion

Company is setting up a 3^rd plant of 1.2 lakh MTPA capacity, in Odisha, for which land has been purchased for Rs. 1.6 cr via internal accruals. Plant and machinery is yet to be ordered for, but the estimated capex or source of funding – internal accrual or debt – is yet to be finalised.

Slim Margins

Given the low value-add in the business, gross margin is barely 9% with net margin ‘slimmer’ at sub-2%. In FY23, Rs. 1,113 cr revenue led to PAT of Rs. 21 cr (1.9% net margin) while in H1FY24, on Rs. 531 cr revenue, PAT was 8.5 cr, translating into 1.6% net margin.

Twin Reasons for Low Net Margins

Besides single digit gross margin, company has high non-operating expenses, keeping its net margins low:  

1. High Managerial Remuneration of Rs.6.5 cr annually, to 4 promoters/promoter group for FY23 is not commensurate with PBT of Rs. 28 cr. Unless this is curtailed, net margins may not rise going forward.
2. High Debt to Continue even post IPO: Surprisingly, IPO proceeds are not being used for debt repayment or planned capex. Net Debt equity ratio, post IPO, will be steep at 0.9:1, much higher than peers Rama Steel Tubes and Hi-Tech Pipes having about 0.5:1. Also, Vibhor’s credit rating of BBB+ reflecting its average fundamentals.  

Valued Lower than Peers

Annualising H1FY24 EPS of Rs. 6 leads to a current year PE multiple of 11x for Vibhor Steel, much lower than peers:

• Rama Steel Tubes clocks 2.7% net margin on Rs. 1,350 cr topline, and is trading at a PE of 62x
• Hi-Tech Pipes with Rs. 2,400 cr revenue and 1.8% net margin is at a PE of 45x.

Company will be a nano cap stock post listing and may be subject to pre-emptive surveillance measures like ASM/GSM by stock exchanges, which is a caution to potential investors.