First main-frame IPO after a long pause could prove to be a costly proposition!

Whereas as many as thirty-four IPOs have hit the SME platform in the current fiscal, there was hardly any public issue on the main-frame during the year. The only book-building IPO that hit the market during the fiscal, Scotts Garments, in April 2013 too was a miserable failure. The last successful IPO on the main-frame was the Chennai-based Repco Home Finance, in March 2013. Thus, Loha Ispaat Ltd (LIL) is the first IPO in 12 months to enter the main-frame of BSE or NSE.    

OFFER AT A GLANCE
Name	Loha Ispaat Ltd
Public Offer	Fresh issue of 267.05 lakh shares
Offer Price	Between Rs 77 and Rs 80
Offer Amount	Between Rs 206 cr and Rs 214 cr
IPO% on Total Equity	26.4%
Post-IPO Free Float	29.9%
Application Quantity	175 & Multiples of 175
Bid/Offer Opens	March 11, 2014
Bid/Offer Closes	March 20, 2014
Listing	BSE and NSE
IPO Rated By	CARE
IPO Grade	3 out of  5
Book Running Lead Manager	Aryaman Financial
Registrars	Bigshare Services

 

Present IPO

LIL’s present IPO is a fresh issue of 267.05 lakh equity shares of face value of Rs 10 made through 100% book building process with a price band of Rs 77 to 80 per share aggregating to between Rs 206 cr and Rs 214 cr. Aryaman Financial is acting as book running lead manager (BRLM) as well as ‘syndicate member’. The lead manager and its broking arm, Aryaman Capital Markets Ltd – who is also acting as co-syndicate member, have underwritten the entire issue. Almost the whole issue proceed is proposed to be utilized for the company’s working capital requirement.    

 

Rating & Rationale

CARE has assigned a grade of ‘3/5’ to LIL’s IPO indicating that the fundamentals of the company were average. The grading acknowledges the promoters’ long experience in steel and allied industry, their successful execution of the expansion project, large customer base and the favourable prospects for Steel Service Centre (SSC) segment in India. On the other hand, high working capital intensity, long inventory holding period, variation in the prices of steel, moderate debt coverage, low profitability due to limited value-addition, increasing competition in the SSC segment, etc. have softened the rating.    

 

Background

The Mumbai based LIL was promoted by a first generation entrepreneur, Rajesh Poddar (48). Poddar reportedly entered the steel trading business in 1985 through a partnership firm, Pragati Enterprises. He later incorporated Loha Ispaat (P) Ltd in 1988, which acquired the business of the partnership firm in 1990. This company subsequently diversified into operating as an independent SSC by purchasing raw materials such as hot rolled coils and cold rolled coils from steel manufacturers, processing and converting the same into various dimensions by de-coiling/recoiling, slitting, shearing, gas cutting, pickling, oiling, etc, and marketing its customized products to the end-users.

LIL commenced its processing business by commissioning slitting lines and Cut-to-Length (CTL) lines in 2001 and pickling line in Taloja in Navi Mumbai in 2004. Over the years, the company has expanded its capacity by installing additional CTL and slitting lines. The company claims to have already expanded its facility at Ransai from 9 lakh MTPA to 21.82 lakh MTPA at a cost of Rs 364 cr with a debt-equity of 2:1. The recent capacity expansion at its existing SSC is aimed to process steel of higher dimensions to cater to the potential market demand. In addition, LIL has effected a backward integration by setting up a CRM facility of 30,000 MTPA at Taloja.

LIL claims to have a well-diversified client base with more than 1,500 customers. The company also boasts of having a wide marketing network across the country, a majority of the sales coming from 12 states. LIL has established two international subsidiaries, Loha Ispaat Middle East FZC, Dubai, and Loha Ispaat Hong Kong, with the primary objective of sourcing high grade HR/CR coils, sheets and plates from steel mills located abroad at competitive prices and also to market LIL’s products internationally.

LIL purchases raw materials from large Indian steel manufacturers and customizes them through various processes. LIL is required to keep sufficient inventory of steel (for about 70-90 days) because of the high lead-time for procurement of steel from manufacturers and transportation of the finished products. As LIL has no long-term contracts with either the suppliers/customers, it is exposed to the volatility in steel prices.

 

Financial Track 

The company’s revenue has steadily grown from Rs 944 cr in 2009 to Rs 3411 cr in fiscal 2013. During the first six months of current fiscal, the company logged Rs 1958 cr. Except FY 2012, the company’s bottom line has consistently moved up. From Rs 23 cr in 2009, LIL’s net profit grew to Rs 70 cr in fiscal 2013. However, during the four years between 2009 and 2012, the company’s cash generation from operations was negative. Also, the company’s operating margin has never exceeded 7% till date.   

 

Prospects

The prospects of steel industry are strongly co-related to economic cycles. The demand for steel products largely depends on automotive, construction, infrastructure and consumer durables. LIL predominantly caters to automotive industry which is currently facing a slow down. However, the overall contribution of SSCs in India to the total steel production is very low as compared with other countries where SSCs account to 15%-30% of the total steel production. Thus, there is a huge untapped potential in this segment. For LIL, with the recent capacity expansion, the scale of operation is expected to grow significantly in the coming years. Nevertheless, considering the current economic slow down and high debt/working-capital borrowings, the company may find its goings tough in the near term.

 

Valuation 

For the fiscal 2013, the company netted an EPS of around Rs 10 on an equity of Rs 70.76 cr. LIL’s capital is now proposed to be increased to Rs 101 cr on which the current year’s profit yields an annualized EPS of less than Rs 7. The IPO price band (Rs 77-80) discounts the diluted EPS about 12 times.

LIL’s main competitors in the SSC segment viz. JSW Steel and Tata Steel are currently available around 6 times and 9 times their earnings respectively. When reputed names with long dividend records are currently available at cheaper rates, how can one justify a higher P/E for a non-dividend paying company whose credentials are yet to be tested by the investing public? 

 

Lead Manager Track

LIL’s IPO is lead-managed by Aryaman Financial whose clients’ post-listing record is pathetic. The investment banker has successfully managed more than 65 IPOs since mid nineties. Nonetheless, hardly a few are quoting above the offer price today. In fact more than 40 IPOs have vanished from the scene.

With regard to the last main-frame IPO managed by the investment banker, VKS Projects offered Rs 10 share at Rs 55 in June 2012. As if the going was good, the company came out with a 10:1 stock split and 5 for 2 bonus which indeed reduced the IPO cost to just Rs 1.57 a share. But, come 2013, the promoters’ stake went down, the company reported loss and the share price plunged below 50 paise, inflicting a huge loss of more than 70% on the IPO investors.