On the growth path

IPO REVIEW

Ramsarup Industries is expected to reap the benefits of the infrastructure boom.

Given the background of government's various initiatives in the power sector and its thrust on improving infrastructural facilities, Ramsarup Industries public issue is well timed.

The Rs 877 crore company is one of the leading producers of steel and galvanised wires in India. It is one of the few manufacturers to provide whole range of TMT bars and rods.

It also has a small presence in wind power business with a total capacity of 3.75 MW. The company saw its sales growing at a CAGR of 56.2 per cent and its profitability growing at a CAGR of 93.8 per cent in the period between FY02-FY05.

The company is coming out with a public offer of close to 11.9 mn shares of Rs 10 at a premium of Rs 50 each on 13th December. Out of the total issue of shares, 42.2 per cent is offered to public and 53.6 per cent is contributed by the promoters and the balance by SREI Infrastructure Finance Ltd.

The company, listed on Calcutta Stock Exchange (CSE), is offering its shares at a discount of about 36 per cent to its closing price as on 21st November 2005.

The issue price is valued at 2.9 times its annualised half yearly earnings for FY06. The valuation of the stock looks cheap as its peers namely Rajratan Global, Usha Martin, Rathi Ispat and Rathi Udyog are trading at its annualised half yearly earnings multiple of 18.1 times, 10.9 times, 4.4 times and 3.5 times respectively for FY06.

The company plans to utilise the proceeds of the issue for entering new business like structurals, expanding its existing product range of TMT, meeting working capital requirement and partly repaying debt and for general corporate purposes.

Catering to the infrastructure segment
Ramsarup Industries is one of the few manufacturers in India to provide the whole range of TMT products under thermal technology.

The company is also one of the largest steel wire manufacturers of high diameter TMT bars. Ramsarup Industries is a large supplier of steel wires, which are widely used in power transmission.

The company is expected to witness robust growth as its customers in the core sectors like power, railways, defense and construction and also housing are witnessing robust growth given the domestic infrastructural boom.

It has a wide clientele base spanning from power transmission majors (using its steel wires) like Power Grid corporation of India (PGCIL), L&T, Kalpatru Transmission and Power, KEC and Apar Industries and SEBs (State electricity Boards) to big construction companies (for TMT bars and rods) like L&T, Gammon India, Reliance Energy, HCC (Hindustan Construction Company) apart from also vendors of PGCIL engaged in manufacturing transmission towers like Jyoti structures, L&T etc.

Moving up the value chain
In order to move up the value chain and to offer a complete product range, the company plans to provide structurals like angles, channels and beams - an extension of its existing product range namely steel wires and TMT bars and rods-by setting up of a structural mill with a capacity of 135000 MTPA in Shyamnagar.

The company recently underwent expansion cum modernisation of its TMT facilities to provide higher diameter TMT bars (20-40 mm) which are in the higher end of the value added products. This will enable the company to optimise its existing capacity resulting in lowering of costs and higher profitability and also provide a wider range of TMT bars (8 mm - 40 mm).

Cause for concern
The company faces competition from the large number of unorganised players in the steel wires and TMT bars and rods industry due to its fragmented nature and key players like Tata Steel, Usha Martin, SPS Rolling Mills, Rathi Ispat in the organised sector.

According to a metal analyst of a leading Mumbai based brokerage firm, the prices of steel wires and TMT bars and rods have come under pressure and are unlikely to increase substantially in the near term.

However, the company is expected to have an edge over the other small players in the structural mill business as the company has superior technology and cost competitiveness to be successful while bidding for the tenders.

According to analysts, the prices of billets-raw material for TMT and structurals- have come down in line with the sponge iron prices (raw material for billets).

The company is partly insulated against any rise in the billet prices as it passes the incremental rise in raw material costs to the prices of finished products and also has variation clauses with customers like PGCIL, electricity boards etc.

The company sources billets from leading steel manufacturers like SAIL (Steel Authority of India), Tata Steel through annual MOUs (memorandum of understanding). It also has arrangements for power with CESC. Its group company, Ramsarup Lohh Udyog, is also setting up an integrated steel plant to produce 291000 MTPA of steel billets and cogeneration of power of 20MW at Kharagpur, West Bengal.

Impressive financials
The company has the highest book value, return on net worth and EPS among its mentioned peers as on FY05. For H1FY06, the turnover of the company has increased by 30.5 per cent to Rs 450.38 crore, which is 51 per cent of its total turnover in FY05. 
 

FINANCIALS
(In Rs crore)	H1FY06	H1FY05	% Chg	FY05
Net sales	450.38	345.11	30.50	877.55
Operating profit	29.29	15.77	85.70	40.29
Operating margin (%)	6.50	4.60	190bps	4.60
Net profit	13.01	6.34	105.20	13.68
Net margin (%)	2.90	1.80	110bps	1.60

The operating profit witnessed a growth of 85.7 per cent at Rs 29.29 crore and operating margins improved by 193 bps to 6.5 per cent with almost no change in the raw material costs.

Net profit increased by 105.2 per cent at Rs 13.01 and net margins improved by 105 bps at 2.89 per cent. Going forward, analysts expect the margins of the company to remain stable as the prices of finished products and raw materials move more or less in line with each other.

Issue closes: December 16, 2005