The Hindu Business Line : Ramsarup Industries: Invest

INVESTORS with a long-term perspective can subscribe to the public offer of Ramsarup Industries (Ramsarup). At an offer price of Rs 60, the stock commands a multiple of five-six times its likely FY-06 earnings on a fully diluted equity base. This appears stiff compared to larger players such as Tata Steel and SAIL. However, considering the burgeoning opportunities in the power sector — Ramsarup's principal user segment — we believe the earnings growth is likely to support current valuations.

Ramsarup makes steel wires and bars, which find wide application in the construction and infrastructure sectors. It supplies steel wires to vendors of Power Grid Corporation (PGC) such as L&T, Kalpataru Power and KEC, as also to major State electricity boards. About 40 per cent of its revenues is accounted for by sales to the power sector. Being an approved vendor of PGC, this is likely to translate into repeat orders for the company, thereby bolstering its volume growth.

Ramsarup proposes to set up a structural mill with a capacity of 1,35,000 tonnes per annum for producing long products, which are used mainly in the construction sector. Apart from the structural mill, part of the proceeds of this issue is to fund the expansion and modernisation of the TMT mill (for producing steel and galvanised wires).

We take a positive view of the company's ability to cross-sell its new product offerings to its existing clientele, mainly in the construction sector. The Government's increased thrust on infrastructure, through budgetary allocation, along with a buoyant domestic economyare likely to see more orders flowing to the construction companies. Ramsarup is likely to be one of the beneficiaries of the boom in infrastructure spending. The company's performance over the past few years has been healthy. While revenues grew at a CAGR of about 50 per cent in the last three years, earnings rose over 60 per cent. The operating profit margin was in the 3-5 range — on a par with the industry average. It has been able to operate at 90 per cent capacity in wires and 60 per cent in bars and rods.

The benefits of the proposed project may, however, reflect fully in the earnings and the profitability only from FY-08. Till then, the earnings growth would be linked to its existing line of business, which, we believe, will remain fairly stable.

While the power division's contribution to overall revenues may be insignificant, it is likely to bring tax benefits to Ramsarup, resulting in cost savings over the next few years.

The company procures a substantial portion of billets (a key raw material) through the spot market. This is risky as it may not be able to pass on the increase fully, if any, to customers. This is more so as the degree of concentration is higher in the suppliers' market.

A key factor would be the state of the steel price cycle when the plant is commissioned (due date is October 2006); trends in 2007 and 2008 would be particularly crucial, as the new capacities are likely to be operated at full throttle only in FY-08. If the steel price cycle is unfavourable in 2007-08, it could lengthen the payback period for the Ramsarup project.

Offer details: On offer are 1,18,57,500 shares at Rs 60 per share; the net offer to public is 40 lakh shares. The offer opens on December 13 and closes on December 16 and Microsec India is the lead manager to the issue.

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