IPO Size: Rs. 171 cr

• Entirely Fresh Issue for brownfield expansion

Price band: Rs. 195-207 per share

M cap: Rs. 683 cr, implying 25% dilution

IPO Date: Wed 26^th Jun to Fri 28^th Jun 2024, Listing Wed 3^rd Jul 2024

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

Chhattisgarh based Steel Company

Vraj Iron & Steel manufactures Sponge Iron, M.S. Billets and TMT iron bars at its 2 manufacturing facilities, in Raipur and Bilaspur in Chhattisgarh. Company procures key raw materials from close proximity - iron ore lumps from NMDC and coal from South Eastern Coalfields Limited (Coal India), reducing transport cost for these bulk inputs.  

Capex for Backward Integration

Sponge iron and billets capacity utilisation stood at 90% and 80% respectively, whereas TMT bars capacity is still under-utilized, at 47% for FY24. Company is expanding sponge iron and MS billets capacity at Bilaspur plant, both of these products being used to make TMT bars, which fetches higher-realisation and marketed under brand ‘Vraj’.

Capacity to Double in 1 year

Company is undertaking Rs. 165 cr capex, part of which has been funded through Rs. 70 cr bank debt (which is to be entirely repaid from IPO proceeds). Balance capex will be met through IPO proceeds and internal accruals.

By Q4FY25E, sponge iron capacity will double to 2.36 lakh TPA from 1.2 lakh TPA currently, while MS billets capacity will rise 2.6x to 2.1 lakh TPA, from 0.6 TPA at present, by Q1FY26E. Captive power plant capacity is also being increased from 5 MW to 20 MW by Q4FY25E. Thus, aggregate capacity of 2.3 lakh TPA at present, will jump to 5 lakh TPA by Q1FY26E.

Improving Margins

Of Rs. 516 cr revenue in FY23, sponge iron accounted for 52%, TMT bars 35% and MS billets 10%. EBITDA stood at Rs. 81 cr, leading to 16% EBITDA margin, whereas net profit was at Rs. 54 cr, leading to 10% net margin.

In 9MFY24, revenue was at Rs. 301 cr, with Rs. 65 cr EBITDA as margin expanded to 22%, leading to net profit of Rs. 45 cr, and net margin of 15%. EPS stood at Rs. 18 and Rs. 22 for 9MFY24 and FY23 respectively.

Company has a small equity of Rs. 25 cr (face value Rs. 10 each), with net worth of Rs. 188 cr. It has clocked healthy RoE of 32%. Gross debt stood at Rs. 49 cr as of 31.12.23, Rs. 33 cr of which comprised loan for capex, which is to be repaid post IPO. Net debt, was only at Rs. 12 cr, as of 31.12.23.

Attractively Valued

Annualising 9MFY24 EPS of Rs. 18 leads to a PE multiple of only 8.6x on FY24 basis, which is seen attractive, despite commodity price risk. While FY25E profit may not grow significantly on a YoY basis, FY26E is expected to nearly double YoY. Larger peers like cash-rich and fully integrated Godawari Power is ruling at a PE multiple of 17x, whereas Sarda Energy, with captive iron ore, coal and power facilities, is ruling also trading at a PE of 19x.

Chattisgarh based peer MSP Steel & Power, with 10 lakh TPA capacity (including 1.1 lakh TPA TMT bars and 1.8 lakh TPA structural products) is ruling at an enterprise value of Rs. 1,750 cr. Vraj’s market cap of Rs. 683 cr and enterprise value of Rs. 661 cr for expanded capacity of 5 lakh TPA in next 9 months, thus makes it undervalued.

Even though it will be a micro-cap stock, there exists room for valuation upside.