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| Jai Balaji's public issue looks expensive compared to the other listed sponge iron manufacturers
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| The boom in the steel industry has benefited all manufacturers in the steel chain from raw material manufacturers to value-added producers.
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| And sponge iron is one sub-segments which has witnessed a significant jump in profitability with its prices more than doubling over the last 12-18 months.
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| Taking advantage of the positive outlook, Jai Balaji has lined up a Rs 10 crore IPO. Does the IPO warrant the attention of retail investors?
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| Why this issue: Of the total issue proceeds of Rs 10 crore, 58 per cent is earmarked for setting up a pollution-control unit and 37 per cent towards incremental working capital arising from the growing business.
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| The pollution-control equipment, according to the prospectus, will further allow the company to set up a captive power plant.
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| Simply put, the company needs funds to carry on operations since lack of a pollution-control equipment can result in government litigations and lack of adequate working capital can hamper operations. Clearly, public issue is a means to establish credibility.
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| The business of business: Even though the company is perceived to manufacture sponge iron, the main contributor to revenues is steel ingot at 79 per cent in FY03 with sponge iron contributing the rest.
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| The operational performance for the company over the last few years is not one that will encourage an investor to invest in the IPO.
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| For instance, since FY02, while revenues have risen 198 per cent due to capacity additions, operating margins have tanked from around 16 per cent in FY02 to 9.83 per cent in FY03 and improved marginally to 12 per cent in 1QFY04.
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| There are two main reasons for this. First, the lack of a captive power plant severely hampers cost efficiency for a steel manufacturer since power constitutes around 60 per cent of operating expenses.
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| Secondly, increasing cost of raw material like coal and iron ore, of which, the company does not have a captive source. The company does plan to set up a captive power plant in six-eight months, which could improve its operating performance going forward.
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| However, the extent of benefit cannot be ascertained accurately as the power plant is still some time in the future.
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| Valuations: As per a valuation comparison, based on FY03 data provided in the prospectus, the odds are stacked up against the company.
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| Compared to return on net worth (RONW) of 15 per cent for Jai Balaji, Jindal Steel and Power had RONW of 31 per cent, Monnet Ispat of 21 per cent and Tata Sponge Iron 32 per cent.
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| Against these, the P/E ratio for the respective companies were: Jai Balaji 4.51 times (based on issue price), JSPL 3.6 times, Monnet Ispat 2.9 times and Tata Sponge Iron 3.8 times.
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| With the recent run-up in prices of all the sponge iron makers, the company's relative valuations have become the lowest.
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| Another important point to be noted is that 4 per cent of the total 32.5 per cent held by the company's promoters was acquired from other shareholders of the company at Rs 1.5 in April 2003.
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| Even though the capital has a lock-in of period of one year, it gives an opportunity for the promoters to profit from any upsides in Jai Balaji's stock price after the lock-in period lapses.
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| This is likely to keep the post-issue stock price within a range. The issue can be considered a speculative one. |
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