Readymade Steel is asking hefty premium on notional paper profits!
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OFFER AT A GLANCE |
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Name |
Readymade Steel India Ltd |
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Offer Quantity |
32.2 to 38.6 lakh shares of Rs 10 each |
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% on Total Equity |
27.5 to 31.2% |
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Offer Amount |
Rs 34.75 cr. |
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Offer Price |
Rs 90 to Rs 108 |
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Bid Quantity |
60 & Multiples of 60 |
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Bid/Offer Opens |
June 27, 2011 |
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Bid/Offer Closes |
June 29, 2011 |
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Rated By |
CARE |
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Rating |
2/5 |
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Lead Managers |
Arihant Capital |
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Registrars |
Bigshare Services |
The IPO
The present IPO is a fresh Issue of Equity Shares of Rs10 each aggregating to Rs 34.75 cr. The offer is being made in the price band of Rs90 – Rs108 a piece. Thus, the issue quantum would be between 32.2 lakh and 38.6 lakh shares depending on the offer price which translates into about 28% to 31% of the company’s post-IPO equity.
Issue Objective
The main objects of the IPO are to part-finance the capital expenditure towards expansion of existing factory at Khopoli (Raigad Dist.) and setting up of two new facilities near New Delhi and Raipur.
Parentage
This is the maiden public venture of the 35 year-old main promoter of Readymade Steel India Ltd (RSIL) who has reportedly engaged in steel distribution business over a decade. RSIL was originally formed as a joint venture by Singapore-based CSC Holdings Ltd, Bangalore-based Krishna Triveni Ltd and Mumbai-based Krishna Trading Corporation – a proprietary firm of Anil Dhanpat Agrawal. However, in 2007 Agrawal bought-out the entire stake of the other two promoters.
Business
The company is engaged in the business of producing readymade steel (RMS). RSIL processes mainly thermo-mechanically-treated (TMT) bars and converts them into various ready-to-use shapes like cranked bars, stirrups, verticals, column/beam, cages, etc. The company provides customized, prefabricated steel products which find application in various infrastructure projects like roads, ports, bridges, mono-rail, airports, buildings, etc.
Not-so-impressive track
The company initially set up its facilities in Bangalore. However, with the scraping of the joint venture agreement it ceased the Bangalore operation in 2008 and shifted its base to Khopoli, in Raigad District of Maharashtra. In the first full year of operations (of the present facility having a capacity of 27000 tpa) RSIL reportedly achieved a capacity utilization of more than 85%. Nevertheless, its customers were very limited in numbers (just six) and more than a half of the sales were yet to be realized at the end of its accounting period!
At the end of FY2010 RSIL’s bottom line was at just Rs 43 lakh and earned reserves were only Rs 73 lakh as compared to its equity capital of Rs 7.55 cr. On this strength, the company is contemplating to raise additional equity of around Rs 5 cr at an exorbitant premium of more than Rs 37 cr!
Valuation
Though RSIL has strictly no listed peer to compare with, the construction steel (TMT Bars) industry’s discounting in general and the company’s financials in particular give a feeling that RSIL’s offer is steeply priced. When well established TMT bar manufacturers are having price-earnings ratio in single digits, investing in RSIL at a P/E of more than 20x is too risky to bet on.
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DISCOUNTING OF CONSTRUCTION STEEL (TMT BAR) STOCKS |
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DESCRIPTION |
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M-CAP |
P/E |
P/BV |
P/FV |
P/R |
OPM |
PRICE |
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(Rs Cr) |
% |
(Rs) |
||||
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TMT Bars Composite |
8 Cos |
961 |
14.5 |
0.4 |
5.0 |
0.1 |
8.9 |
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Rajratan Global |
|
77 |
8.9 |
1.3 |
17.7 |
0.5 |
13.7 |
176.85 |
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Tulsyan Nec |
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68 |
7.5 |
0.6 |
4.5 |
0.1 |
6.7 |
45.40 |
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Gyscoal Alloys |
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20 |
5.2 |
0.2 |
1.3 |
0.1 |
7.2 |
12.56 |
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Rathi Bars |
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13 |
5.1 |
0.2 |
0.8 |
0.1 |
3.2 |
8.05 |
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Readymade Steal |
Hi-band |
127 |
27.0 |
9.9 |
10.8 |
0.8 |
5.9 |
108 |
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Lo-band |
111 |
22.5 |
8.2 |
9.0 |
0.6 |
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90 |
Prospects
RSIL has proposed to expand its existing capacity at Khopoli from 27,000 tpa to 90,000 tpa, besides setting up of two new units with a capacity of 50,000 tpa each in Delhi and Raipur at a capital cost of more than Rs 50 cr. The company promises to commission the additional capacity at Khopoli by July 2011 and the two new units by January 2012.
Though the RMS industry is nascent in India and RSIL’s present customer base is very small, with increased spending by the Government and private sector companies on various construction and infrastructure projects coupled with increasing acceptance of readymade steel, the demand outlook for companies like RSIL is positive for the medium to long term. However, the immediate term seems to be full uncertainties.
Concerns
- RSIL’s collection period is on the higher side – more than a half of the turnover is not realized at the end of the last two accounting period, which raises serious doubts about the credibility of the company’s bottom line
- Though reported profits for the past two years, net operating cash flow is negative
- Small customer base – just six customers accounting for 95% of the turnover
- Poor operating margin – less than 6% in last accounting period
- Likely good of cost and time overrun – though RSIL promised to complete the Delhi and Raipur projects by January 2012, according to the offer document, it is yet to even identify the land for the projects
- Project of Rs 63 cr has been appraised by Union Bank which merits financing only up to Rs 15.10 cr
- Retired senior executive of the only funding bank (UBI) is employed by the company
- Though the project has been appraised by UBI, the deployment of the IPO proceeds has been left to the discretion of the company management
- Frequent change of directors – some of them leaving in less than six months of joining the board
- Previous auditors leaving on the eve of the IPO
- IPO graded by CARE as `below average fundamentals’
- Risks associated with promoter’s maiden public venture