Steeling with major expansion plans

FPO REVIEW

Rathi Udyog's expansion plans look encouraging, but iron ore and coal prices could be a cause for concern as it does not have mining rights.

Betting big on the buoyant construction activity, Delhi-based steel company Rathi Udyog is revisiting the capital market through an follow-on public offer.

The company, on the other hand, stands to gain substantially from cost savings through its upcoming captive power plant. The company's expansion plans look encouraging, but the iron ore and coal prices could be a cause for concern as the company, at present, does not have mining rights.

The company, which manufactures long products, is setting up a steel complex at Sambalpur, Orissa, with a production capacity of 1,50,000 TPA of sponge iron, 1,50,000 TPA of steel billets and a 20-MW power plant, which is estimated to cost Rs 209.65 crore. It has already completed the capacity expansion of the existing rolling mills from 95,000 TPA to 1,25,000 TPA.

The company has also completed installation of alloy and steel smelting facilities with a total capacity of 40,000 TPA at Ghaziabad. The expansions will entail an investment of Rs 277.77 crore, which will be financed through term loans of Rs 179.77 crore and the issue proceeds of Rs 98 crore.

The company will be able to substantially reduce costs once it comes up with its Orissa plant and the power cost will reduce owing to captive consumption. The company currently sources power at Rs 4 a unit, which will go down to 80 paise a unit. The current requirement is 25 MW and the plant will generate 20 MW, according to an analyst.

"The production at the Orissa plant will start by October 2006. It will strengthen our position in the construction steel segment, given the ongoing boom in construction and infrastructure," says CEO Udit Rathi.

The company manufactures rebars and wire rods that have applications in construction and industry. It started operations by manufacturing steel bars using TOR technology and later upgraded the product quality by adopting thermex technology in 2001.

"The company has presence in the northern region and has a market share of about 30-40 per cent. Since long products cannot be transported easily it has a locational advantage at Ghaziabad," says an analyst.

Moreover, the Commonwealth Games to be held in Delhi provide tremendous opportunity to all construction players. The company's clientele in the public sector includes AAI and NTPC and DLF, Gammon India and L&T in the private sector.

Rathi Udyog's net sales zoomed 269 per cent from FY01 to FY05, while it posted a rise of 44.49 per cent in operating profit at Rs 6.92 crore in FY05, compared with Rs 1.27 crore in FY01. Net sales for the nine months ended December 2005 were Rs 218.66 crore and the operating profit was Rs 11.92 crore.

On the pre-issue equity basis, for FY06 the multiple works out to be 2.2x at the lower end of the price band and 2.4x at the higher end. Its peers are trading slightly higher.

Surana Industries, for example, is trading at a multiple of 6.08x and Shri Ramrupai Balaji Steels at 5.21x. Bigger players trade higher, with JSW Steel at 4.95x and Tata Steel at 7.95x.

The issue will remain open for subscription from May 19 to May 25. Of the aggregate public issue of Rs 98 crore, the promoters' contribution would be Rs 40 crore and the net issue to the public is Rs 58 crore. The price band for the issue has been fixed at Rs 50-55.