Low rate of returns from operations, tight pricing at peak cycle, group companies indulging in related businesses, presence of too many khokha companies in the stable, credibility issues, etc make it a poor investment grade.
Also, when a respectable stock like Tata Steel Long Products is available at a cheap P/E multiple of less than 8x, why should one pitch in Shyam Metalics at a P/E of around 23x?
|
SHYAM METALICS OFFER AT A GLANCE |
|
|
Offer Type |
Book Built |
|
Platform |
Main Frame |
|
Fresh Issue |
Rs 657 Cr |
|
Offer for Sale |
Rs 252 Cr |
|
Face Value |
Rs 10 |
|
Price Band |
Rs 303 – 306 |
|
Mkt/Bid Lot |
45 Nos. |
|
Implied M-Cap |
Rs 7805 Cr |
|
Implied Eq-Cap |
Rs 255.08 Cr |
|
Implied Free Float |
11.65% |
|
Lead Manager |
|
|
Registrar |
KFin Technologies |
|
Listing At |
BSE, NSE |
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INDICATIVE ISSUE SCHEDULE |
|
|
Opening : 14-Jun-2021 |
Closing : 16-Jun-2021 |
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Allotment : 21-Jun-2021 |
Refunding : 22-Jun-2021 |
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Demat Credit : 23-Jun-2021 |
Trading : 24-Jun-2021 |
The Offer
The 19-year-old Shyam Metalics and Energy Ltd (SMEL) is making an initial public offer of Rs. 909 cr which consists of a fresh issue of Rs 657 cr from the company and an Offer for Sale of Rs.252 cr from the promoters. The offer is being made through the book-building route with a price band of Rs. 303-306 for a Rs. 10 paid up share. The quantum of offer will thus work out to around 300 lakh shares.
Applicants should bid for a minimum lot of 45 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on June 24, 2021. Investment bankers ICICI Securities, Axis Capital, IIFL Securities, JM Financial and SBI Capital Markets are managing the offer and KFIN Technologies has been roped in as the registrar to the issue. The bidding opens on Monday, June 14 and closes on Wednesday, June 16, 2021.
Lineage
SMEL belongs to the Kolkata-based Shyam group chaired by Mahabir Prasad Agarwal who claims to have over three decades of experience in the steel and ferro alloys industry. Shyam-Agarwals have some peculiarities which are very common among fly-by-night operators. The group has floated lot of (more than 80) entities many of them sound like `khokha’ companies.
Further, many an established company of the group has common business interests like ferro alloys, steel products, etc. The group seems to be fond of mergers and amalgamations, changing of company names, and shifting of ownerships at convenient prices. Take the case of SMEL. This two-decade-old company has a subsidiary, Shyam SEL and Power Ltd, which is thirty years old. In other words, the child is older its parent!
SMEL was incorporated as Shyam DRI Power Ltd in 2002 and the name was changed to the present one in 2009. The Offer document presents Mahabir Prasad Agarwal, his son Brij Bhushan, and nephew Sanjay Kumar along with six group companies as promoters. But, the build-up of their shareholding has been very strange. The head of the group Mahabir Prasad, who was one of the original signatories to the memorandum with 7500 shares transferred 7000 shares to a group company, Shubam Capital within a month and his direct stake in the company is only 2525 shares out of the company’s total outstanding shares of 233,610,100.
Promoter-managing director, Brij Bhushan, who was also one of the original signatories to the memorandum with 7500 shares transferred 7000 shares to another company of the group within a month. Six years later (in 2009) Subham Capital transferred 39 lakh shares in favour of Brij Bhushan at a heavily discounted price Rs 2.50! Promoter-joint managing director, Sanjay Kumar, who too was one of the original signatories to the memorandum with 7500 shares transferred 7000 shares to group company Shubam Capital within a month.
In the years 2003, 2008 and 2009 SMEL made preferential allotments to various group companies at a price of Rs 100 a share. Strangely, some of these companies transferred 39 lakh shares in favour of Subham at just Rs 2.50 a piece in March 2008 and the same shares were eventually transferred to Brij Bhushan at the same discounted rate in March 2009.
Of the company’s present capital Rs 233.6 cr, nearly Rs 187 cr is bonus component. Out of the pre-bonus equity of Rs 46.72 cr a significant portion was issued in lieu of merger and amalgamation of group companies. No wonder the promoters’ average cost holding is less than Rs 5.25 a share and post-offer for sale this will become negative Rs 5.33!
As regards Agarwals’ indulgence in listed domain, though they hold a significant stake in Shyam Century Ferrous Ltd, they seem to underplay their presence and frequently shift their holdings. Shyam Century Ferrous is in fact a competitor to the Agarwal group company, Shyam Ferro Alloys Ltd, and its current performance is far from impressive though its peers are in an upbeat mood.
Key Management
SMEL’s board is virtually controlled by the Agarwal family. Whereas the father, Mahabir Prasad Agarwal (75), is the Chairman, his son Brij Bhushan Agarwal (48), a commerce graduate, is the Vice-chairman and Managing Director of the company. The chairman’s nephew, Sanjay Kumar Agarwal (45), a commerce graduate, is designated as the Joint-Managing Director.
Stakeholders
SMEL’s offer document presents three individuals and six closely-held companies as promoters who collectively hold 98.49% of the company’s present paid-up capital. Among the promoters, Subham Buildwell P Ltd holds the largest junk of 72,597,250 shares (31.08%) at an average cost of Rs.2.37 a piece. Narantak Dealcomm Ltd has 54,063,340 shares (23.14%) at a cost of Rs 10.39 a share. Subham Capital P Ltd holds 41,994,770 shares (17.98%) at Rs 2.54 a piece. Brij Bhushan Agarwal holds 23,284,820 shares (9.97%) at an average cost of just 75 paise per share. Kalpataru Housefin & Trading P Ltd holds 22,219,150 shares (9.51%) at a cost of Rs 8.04 each. Dorite Tracon P Ltd holds 15,196,665 shares (6.51%) at an average price of Rs 10.72 a share. Toplight Mercantiles P Ltd holds 698,750 shares (0.3%) at a cost of Rs 5.94 a piece. Sanjay Kumar Agarwal holds 31,580 shares (0.01%) at a cost of Rs 4.29 per share. Group head Mahabir Prasad Agarwal holds just 2,525 shares at Rs 2 each. Post-offer for sale, the nine promoters would collectively hold 221,853,556 shares (86.97%) at a negative (-) cost of Rs 5.33 a share!
Business Track
Shyam Metalics presents itself as an integrated metal producer focusing on long steel products and ferro alloys. It currently operates three manufacturing plants, one at Sambalpur in Odisha and two in West Bengal at Jamuria and Mangalpur. The aggregate installed capacity at the end of December 2020 was 5.71 mln tons per annum. The company is reportedly in the process of expanding its capacity from 5.71 mln to 11.6 mln tons by fiscal 2025. In addition to the capacity of steel products, the company is in the process of commissioning an aluminum foil rolling mill in West Bengal with an installed capacity of 40,000 tons per annum which is expected to be operational in fiscal 2022.
Financial Track
During the last six years SMEL’s performance has shown a mixed trend. From Rs 991 cr in fiscal 2014 the consolidated top-line more than doubled to Rs 2240 cr in fiscal 2015. Nevertheless, operating profit grew at a lesser pace from Rs 183 cr To Rs 286 cr as profit margin slumped from 18.5% to 12.8%. In fiscal 2016, revenue dropped to Rs 1902 cr and operating profit slipped to Rs 144 cr with margin sliding further to 7.6%.
During the fiscals 2017, 2018 and 2019, the company showed a steady growth. Revenue reached at Rs 4606 cr in 2019, operating profit stood at Rs 945 cr and operating margin climbed to 20.5%. However, in fiscal 2020, revenue dropped to Rs 4363 cr and operating profit slumped to Rs 645 cr, margin crashing to 14.8%. The near-two-decade old SMEL, which claims to be making operating profit since 2005, is yet to pay any dividend.
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Shyam Metalics Consolidated Financials (Rs in Cr) |
||||||
|
Period Ended |
Mar-20 |
Mar-19 |
Mar-18 |
Mar-17 |
Mar-16 |
Mar-15 |
|
Revenue |
4362.89 |
4606.40 |
3842.57 |
2403.37 |
1902.48 |
2240.06 |
|
Operating Profit |
645.58 |
944.74 |
703.46 |
272.84 |
144.43 |
286.14 |
|
OPM% |
14.8 |
20.5 |
18.3 |
11.4 |
7.6 |
12.8 |
|
Other Income |
32.42 |
78.17 |
77.83 |
77.40 |
29.94 |
86.64 |
|
EBIDTA |
678 |
1022.91 |
781.29 |
350.23 |
174.37 |
372.78 |
|
EBIDTA % |
15.4 |
21.8 |
19.9 |
14.1 |
9.0 |
16.0 |
|
Interest |
85.88 |
64.43 |
48.86 |
51.58 |
61.04 |
72.58 |
|
Depreciation |
296.65 |
194.58 |
215.05 |
212.57 |
230.07 |
208.82 |
|
Net Profit |
340.33 |
636.78 |
528.04 |
81.34 |
-76.85 |
103.20 |
|
Equity |
233.61 |
233.61 |
46.72 |
46.72 |
42.59 |
43.38 |
|
Reserves |
2592.37 |
2256.05 |
1807.27 |
1342.35 |
1323.73 |
981.04 |
|
Borrowing |
1272.44 |
656.05 |
480.38 |
593.3 |
629.25 |
866.52 |
Valuation
No private equity fund or institutional investor has so far invested in SMEL. The average cost of the Promoters’ pre-IPO holding works out to only Rs. 5.23 as a significant portion of the promoters’ stake has been acquired through mergers, amalgamations and cheap transfers. Since the promoter-selling shareholders are going to get a hefty price of more than Rs. 300, their average cost residual holding will be negative after the public issue.
Shyam Metalics is vying for a Market Capitalization of over Rs. 7800 cr. discounting its fiscal 2020 earnings nearly 23 times. A respectable peer company like Tata Steel Long Products which is already paying a dividend of 50% is having a market-cap of only about Rs. 4500 cr. though it has higher revenue and profits as compared to Shyam Metalics.
Shyam’s equity base will be much larger at Rs.255 cr. as compared to Tata Steel Long’s Rs. 48 cr. Shyam’s Operating Margin was only 14.8% as compared to 23.1% secured by the peer.
Shyam’s Offer Price discounts its EPS 22.9 times while Tata Steel Long is priced only 7.8 times. Shyam’s Price to Cash EPS works out to 12.3x as compared to Tata Steel Long’s 5x. In terms of Price to EBIDTA too Shyam’s multiple at 11.5 is three times of Tata Steel Long’s 3.8.
Shyam’s Return on Net Worth is only 12% as against Tata Steel Long’s 12.1%. Shyam’s Return on Capital Employed works out to only 9.3% as compared to Tata Steel Long’s 22.7%. Looking at the above ratios, Tata Steel Long is any day better than Shyam Metalics.
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How Shyam Metalics compares with select peers |
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|
(Amount in Cr) |
Shyam Metalics |
Tata Steel Long |
JSW Ispat |
Jindal Stainless |
|
Market Cap |
7805 |
4455 |
2705 |
4110 |
|
Revenue |
4363 |
4750 |
4150 |
9400 |
|
Other Income |
32 |
78 |
16 |
107 |
|
EBIDTA |
678 |
1177 |
714 |
1421 |
|
Interest |
86 |
235 |
276 |
251 |
|
Net Profit |
340 |
572 |
210 |
694 |
|
Equity Cap |
255 |
48 |
470 |
47 |
|
Reserves |
3687 |
2549 |
398 |
2924 |
|
OPM % |
14.8 |
23.1 |
16.8 |
14.0 |
|
Net Margin % |
7.7 |
11.9 |
5.0 |
7.3 |
|
ROCE % |
9.3 |
21.7 |
12.5 |
25.6 |
|
RONW % |
12.0 |
22.1 |
15.0 |
23.4 |
|
Face Value (Rs) |
10 |
10 |
10 |
2 |
|
Current Price (Rs) |
306 |
921 |
58 |
174 |
|
Book Value |
155 |
537 |
18 |
126 |
|
Price/Book Value |
2.0 |
1.7 |
3.1 |
1.4 |
|
Earnings Per Share |
13.34 |
118.18 |
4.48 |
29.33 |
|
Cash EPS |
24.97 |
185.79 |
9.35 |
41.63 |
|
Price/Earnings |
22.9 |
7.8 |
12.8 |
5.9 |
|
Price/Cash EPS |
12.3 |
5.0 |
6.2 |
4.2 |
|
Price/EBIDTA |
11.5 |
3.8 |
3.8 |
2.9 |
|
Dividend % |
0 |
50 |
0 |
0 |
|
Yield % |
0 |
0.5 |
0 |
0 |
Concern
• Steel is a cyclical industry which is generally discounted very poorly on the trading screen during the recession. SMEL is asking for a steep price when the industry cycle is at its peak. Hence, when the cycle takes a turn the price is bound to crash.
• Promoters’ penchant for floating too many companies, some of them in related line of businesses, puts their image in poor light.
• On the corporate governance front too their record is pathetic. Almost the entire company’s top management is party to certain criminal proceedings.
• The company and one of the directors have received notices from the Employees’ State Insurance Corporation for non-payment of contributions and non-submission of returns of contribution for periods between July 2010 and November 2013, aggregating to a total amount of Rs 1.9 cr.
• The company has received a demand notice in December 2017 from the office of the Superintending Engineer-cum-Electrical Inspector, Sambalpur for alleged failure to pay outstanding sums towards electricity and and interest thereon to the tune of Rs 33 cr.
• Ministry of Railways filed a suit against SMEL’s subsidiary and seven of its directors, including Brij Bhushan Agarwal and Sanjay Kumar Agarwal before the Kolkata High claiming inter alia recovery of a sum of Rs 129.11 cr, along with interest and an injunction restraining the subsidiary and its agents from loading iron ore through the Indian railways for wrongfully utilizing the concessional freight rate offered by the railways, in breach of the conditions prescribed in rate circulars issued by the railways.
• A criminal complaint was filed by the Bureau of Indian Standards against SMEL’s subsidiary before the Court of the Chief Judicial Magistrate at Burdwan, for violation of Section 11(1) of the Bureau of Indian Standards Act on the grounds that the subsidiary had manufactured certain items without mandatory certification.