Not so steely

IPO WATCH: Balaji Steels

Shri Ramrupai Balaji Steels' valuation is expensive compared to steel majors.

If you are looking for valuation plays in the commodity sector, especially steel, then the ongoing IPO of Shri Ramrupai Balaji Steels (SRBSL) is not for you.

The price band for the issue has been fixed at Rs 20-22, which means, based on the FY05 EPS of Rs 2.99, it has a P/E of 6.68 on the lower end of the price band, and 7.35 on the upper end.

When leading steel companies like Tata Steel (trailing 12-month P/E of 5x), SAIL (3x), Jindal Steel and Power (5x) still continue to be attractively valued, the only reason for investing in SRBSL may be the possible growth arising out of the company's relatively low base.

SRBSL, part of Rs 500-crore Kolkata-based Jai Balaji group, entered the capital market on July 8, 2005, with an IPO of 2,00,00,000 equity shares of Rs 10 each through a 100 per cent book-built route to part-finance its Rs 285 crore project for a vertically integrated steel plant in Durgapur, West Bengal.

The plant will consist of manufacturing facilities for MS billets, coal washery and a 40 mw captive power plant.

The plant's steel melting shop has a capacity to manufacture 176,418 tonnes per annum (tpa) of billets while the washery has a capacity of 216,000 tpa. It is expected to be commissioned by August 2005. The issue closes on July 14, 2005.

It would constitute 30.31 per cent of the company's post-issue paid-up capital.

Financial institutions and banks have already sanctioned term loans amounting to Rs 187 crore and regular working capital facilities of Rs 34.20 crore to the company to part finance the project.

Jai Balaji group has the largest sponge iron capacity in West Bengal. The group has an installed capacity of 345,000 tonnes of sponge iron and about 363,000 tonnes of semis and rolled products, making it a large player in the steel industry in eastern India.

The Jai Balaji group has more than two decades of experience in steel manufacturing and has been involved in setting up different steel projects in West Bengal and Orissa.

The group products mainly consists of sponge iron, pig iron, TMT bars, mild steel and alloy rounds and flats.

SRBSL has already commissioned facilities to manufacture 1.20 lakh tonne per annum of sponge iron, 80,500 tonne of pig iron and a rolling mill with a capacity of 80,000 tonne per annum.

The company's final product - TMT bars, which are sold under 'Balaji Shakti' brand - are used in the housing and the infrastructure sector. The sale of its products, including

TMT and wire rods, is expected to thrive in the years to come.

Recently the company has been granted permission by the Indian Railways to set up a railway siding facility which should help in managing logistics, reduce wastage of raw materials apart from a lowering of transportation costs.

Raw material costs as a percentage of sales amounted to 38 per cent in FY05. Another plus is that the factory premises located near the source of raw materials in Orissa.

Incorporated in 2002, the company recorded sales of Rs 242.22 crore for FY05, up from Rs 38.31 crore in FY04. However, almost 55 per cent of the revenues came from trading activities rather than from company's own manufacturing facilities. 

FINANCIALS
(In Rs Cr)	FY05	FY04	% change
Net sales	242.22	38.31	532.26
Other income	0.42	0.04	-
Operating profit	32.95	2.53	1202.37
OPM (%)	13.6	6.6	700bps
Net profit	12.39	3.26	280.06
NPM (%)	5.12	8.51	-339bps
EPS (Rs)	2.99	2	-

Net profit improved more than 280 per cent to Rs 12.39 crore. One good thing going for the company is the fiscal incentives that it enjoys from the West Bengal government (incentives under the West Bengal Incentive Scheme 2000 for mega projects).

The company is eligible for various incentives, including sales tax reimbursement for the next 15 years up to 100 per cent of the capital cost.

It will also benefit from the five-year reimbursement of 50 per cent of PF and ESI and exemption from electricity duty.

The company carries in its book total debts worth Rs 83.89 crore, though long-term debt to equity ratio at 0.81 per cent looks comfortable.

While the company is bullish on the opportunity in the eastern Indian markets, it remains to be seen how it copes with the high prices of main raw materials like iron ore, coal, coke, etc.

Analysts note that any downturn in the steel cycle may hit smaller companies like SRBSL more than the bigger ones. The company hopes to ride on the back of expected growth in demand and consumption for steel (demand growth is estimated at 6-7 per cent).

However, with steel prices currently heading southwards, the company's margins could come under pressure. "Considering the comparatively small size of the company in terms of revenues and capacities, the issue does not warrant a premium," notes Bhavin Chedda, analyst with domestic securities firm, Pioneer Intermediaries.