Strong enough?

IPO REVIEW

Tata Metaliks5.50 Sathavana Ispat7.70 Sesa Goa7.80 Jindal Steel & Power7.90 Lanco industries10.40 VISA Steel (pre-issue)

28-31

 The company plans to utilise the proceeds for brownfield expansion of its existing manufacturing facilities into an integrated 5 lakh tonnes per annum special and stainless steel plant at the KIC.  In the Brownfield expansion four units will come onstream one by one, the first one would be ferro chrome plant for 50,000 tonnes which is expected to be commissioned in September this year. Then a 25 MW of Waste Heat Recovery Power that will be from the coke oven and blast furnace waste heat which will be done by March 2007.  By September 2007 the company hopes to commission 3 lakh tonnes of DRI (Direct Reduced Iron) along with 25MW of waste heat power and finally by December 2007, will complete 5 lakh tonnes stainless steel and special steel plant.  The company will manufacture only long products like rods and wires, which are always in a short supply in the market.  Also, the location advantage gives the company space for substantial margin improvement as the raw material sources are closer and secondly it will be an integrated producer. A time over run can easily result in a cost overrun as well in a capital intensive industry such as steel.  The prices of steel, have cooled from their peak levels and there are signs of a slowdown in demand in the near term. Steel prices, after having shot through the roof in 2004, have fallen about 30 per cent from their highs by now.  Production cuts by several global and domestic players in the last quarter and an inventory build-up are casting serious doubts on the company's mega expansion plans.  However, the company's management is bullish on the market because the main product of company is special steel, 80 per cent of which goes into automotive and automobiles sector where the growth is 16 per cent per annum.  The company achieved sales of Rs 252 crores and EBITDA (earnings before interest, tax, depreciation and amortisation) of Rs 13.2 crores during FY05. The sales grew to Rs 297 crores and EBITDA improved at Rs 27.9 crores during the nine months ending December 2005.  Tata Steel is quoting at a multiple of six times its expected FY07 earnings, its larger counterpart SAIL is trading at about 4.5 times on a consolidated basis.  Smaller companies like Lanco industries, Sathavana Ispat and Tata Metaliks are priced 6-10 times and as compared to this, VISA steel is priced at 41-45 times current year earnings based on fully diluted equity. Even based on pre-issue equity the stock is hopelessly expensive at 28-31 times.  Issue Opens: 23rd February
Issue Closes: 27th February