Shyam Metalics IPO: Growth outlook outweighs valuation concern, say experts

Shyam Metalics and Energy Ltd (SMEL), an integrated metal producing company with focus on long steel products and ferro alloys, has opened its Rs 909 crore initial public offer (IPO) at a time when the domestic steel firms are eyeing price hikes and investments worth Rs 76,500 crore.

“Domestic steel prices are still at around a 20-25 per cent discount to the international price and are around 15-20 per cent lower than the landed cost of imported steel. Due to this, domestic steel players continue to remain optimistic about the increase in steel prices in future as well,” Brickwork Ratings said in its report. READ ABOUT IT HERE

Going ahead, as domestic steel demand appears robust at 5-6 per cent CAGR through FY25, as per rating agency Crisil, most of the analysts recommend investors subscribe to the issue.

About the issue

The nearly two decade old company has opened its three-day public offer (between June 14 and 16) at a price band of Rs 303-306 per share. Of the Rs 909 crore that the company aims to raise, Rs 657 crore could come via fresh issue (21.5-21.7 million shares) and the remaining Rs 252 crore could come via OFS.

“Of the net proceeds, Rs 470 crore will be utilized to repay or prepayment of debt availed by the company. Residual funds will be used for general corporate purposes,” the company said in its draft red herring prospectus (DRHP).  

About 50 per cent of the net issue shall be allocated to qualified institutional buyers, while rest 15 per cent and 35 per cent is reserved for non-institutional bidders and retail investors, respectively. Three lakh shares are reserved for eligible employees. By 1 PM, 51 per cent of the issue had been subscribed on Monday.

Brokerage recommendations

Geojit Financial Services | Subscribe

Between fiscal year 2018-20 (FY18-20), SMEL’s revenue grew at a CAGR of 8 per cent while net profit de-grew by 19.7 per cent CAGR due to expansion plans and Covid-19 related disruptions. Going forward, it’s expected to double its current aggregate installed metal capacity from 5.71 MTPA (as of December 31, 2020) to 11.60 MTPA by FY25.

Further, the company’s diversification to pig iron, ductile iron pipes and aluminium foil will result in augmentation of profits and further de-risking of the revenue streams, the brokerage said.  

“SMEL is the least leveraged among its peers with debt to equity ratio (D/E) at 0.3x in 9MFY21 and with debt to EBITDA at 1.3x. The proceeds from the offer will be used to pay their debt obligations which will further de-leverage their balance sheet and increase their profitability,” it said in its IPO note.

Choice Broking | Subscribe with Caution

At higher price band of Rs 306, SMEL is demanding a trailing twelve month (TTM) EV/EBITDA multiple of 8.6x, which is at premium to the peer average of 6.4x. Despite factoring in an exponential rise in EBITDA in Q4FY21, the company still appears to be overvalued in relation to its peers. That said, with favorable macros for steel consumption, cautious view on the international steel prices and higher demanded valuation, the brokerage has assigned a “Subscribe with Caution” rating for the issue.

Reliance Securities | Subscribe

The IPO is valued at 2.4x of 9MFY21 book value and 12.8x of FY21 annualized earnings, which look to be reasonably valued. However, considering improved visibility of demand recovery in domestic as well as international markets led by strong focus on infrastructure development and steady pricing scenario, financial performance of SMEL is expected to improve significantly in the coming quarters.

“Further, strong balance sheet along with best-in class leveraging positioning offers an edge to SMEL. Additionally, operating cash flow (OCF) yield at 8.4 per cent as on 9MFY21 looks to be impressive and expected to improve further with higher cash flow generation in the ensuing quarters. Hence, we recommend SUBSCRIBE to this issue,” it said.

Ventura Securities | Subscribe

The brokerage expects revenue to grow at 36.5 per cent CAGR to Rs 11,106 crore over the period FY20-23. EBITDA and net earnings over the same period are also set to grow at a faster pace of 44.7 per cent CAGR to Rs 1,956 crore and 49.8 per cent CAGR to Rs 1,144 crore, respectively.

Besides, EBITDA/tonne and operating margins are expected to improve to Rs 12,895/tonne (growth of 65.7 per cent over FY20) and 17.6 per cent (+280bps over FY20).

“We value the stock at Rs 436.4 (FY23 EV/EBITDA 6X) on the post issue equity and initiate coverage with a SUBSCRIBE. Our price target represents an upside potential of 42.6 per cent over 18-24 months from the IPO price,” it said.

HDFC Securities | Not Rated

According to the analysts at the brokerage, loss of any of SMEL’s suppliers or a failure by its suppliers to deliver some of its primary raw materials such as iron ore, iron ore fines, coal, chrome ore and manganese ore may have an adverse impact on its ability to continue manufacturing process.

Further, the steel industry is characterized by volatility in the prices of raw materials and energy which could adversely affect SMEL’s profitability, they said highlighting key concerns around the company’s financial stability.