Financial Daily from THE HINDU group of publications
Sunday, Jul 10, 2005
Financial Daily from THE HINDU group of publications Sunday, Jul 10, 2005 |
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Investment World
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IPOs Markets - IPOs Shri Ramrupai Balaji Steels: Avoid Radhika Kamath
Given the stiff valuation, the increasing competition, the high leverage and the softening prices of steel products, which is likely to continue in the near term, SRBS may not provide an attractive entry point through this IPO. SRBS is priced at about nine times its likely FY-06 earnings at the lower end of the price band and at about 10.3 times its likely earnings at the upper end of Rs 22. The valuation appears stiff vis-a-vis most of its peers, which trade at about five-six times. SRBS is a company of the Jai Balaji Group, which makes sponge iron, pig iron, steel rods and bars and serves the markets of eastern India. The company commenced its operations in 2002. It has been in the process of commissioning facilities to manufacture sponge iron, pig iron, and a rolling mill and proposes to go for vertical integration by setting up a captive power plant and a facility for manufacturing rods and bars. The revenues and earnings of the company jumped in FY-05, on account of higher realisations from the steel intermediates. But these are likely to be put to captive use once the new capacities become operational. The earnings growth in the near term is likely to be modest as realisations are unlikely to be as high as last year. This is because of the softening of steel prices in recent months, which is likely to continue in the near term. Further, most players are on an expansion spree and some of them have announced production and price cuts considering the glut in the market. Stiff competition, which is likely to continue in the medium term, may also put pressure on the prices. Any improvement in earnings, driven by volumes, is likely to be reflected only in FY-07 when the new capacity would be fully operational. A substantial portion of the project cost (over 60 per cent), which is funded by debt, is likely to take the company's gearing to levels higher than that of its peers. The interest outgo may act as a drag on its profitability until new capacities begin to contribute. The savings on account of installation of the captive power plant and the various fiscal incentives may get partially neutralised by higher input costs. The prices of iron ore and coal are expected to remain at higher levels in the near term, pushing up the production costs, and the company may not be able to fully pass on the increase in costs to customers. In the light of these factors, investors can avoid the offer. This recommendation is based entirely on the company's medium-term prospects and does not factor in the possibility of short-term gains on listing. Offer details: The company is offering two crore equity shares of which 1.9 crore would be available to the public. The price band is Rs 20-22. The promoters' stake, post-offer, would be about 69 per cent. The company proposes to use the proceeds from the offer to fund the capacity expansion programme. The lead manager to the offer is Microsec India. The offer opens on July 8 and closes on July 14.
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