IPO Review: Prakash Steelage

 

 

Prakash Steelage may post healthy sales and profit growth after its capital expansion. Retail investors with a high-risk appetite can consider its IPO

IPO details

Company Name: Prakash Steelage
Issue Size: Rs 68 crore
Price Band: Rs 100-110
Issue Date: Aug 5 -10


MUMBAI-BASED Prakash Steelage is entering the capital market with an initial public offer of 6.25 million shares to raise around Rs 68 crore. Of its total proceeds, the company may use Rs 48.5 crore to fund its capacity expansion and the remaining will be utilized for the working capital requirement.

BUSINESS:

The company is in the business of manufacturing stainless steel tubes and pipes. These products are used in petrochemical, fertiliser, power and other corrosion resistance applications. The industry is highly competitive as there are a lot of organised as well as unorganised players are present in it.

   The company's plants are located in Silvasa and Umbergaon. With the IPO proceeds, the company plans to expand the capacity of its Umbergaon plant in Gujarat from the current 12,200 metric tonnes (mt) to 19,000 mt. The company also plans to improve its capacity utilization in the coming years. Exports accounts for just over 7% of the company's total revenues. It plans to increase its global footprints by adding more foreign customers apart from consolidating its domestic presence. Considering the government's increased focus on infrastructure facilities, Prakash Steelage is likely to see demand momentum for its products.

FINANCIALS:

Prakash Steelage clocked a revenue growth of 46% for the past five financial years. In the year ended March 31, 2010, the company posted net sales of Rs 435 crore, up 35% year on year. Net profit jumped 140% on account of higher margins and forex gains. Although the company reported positive operating cash flows this year, it has very high working capital requirement. This can hurt the company's growth plans in future.

CONCERNS:

In the past five financial years, the company had reported negative operating cash flows for 4 times, which adds to our concern regarding availability of free cash flows.

VALUATION:

At the upper price band, the offer price works out to be around 10 times the company's earning per share for FY10 adjusted for IPO equity dilution. This is lower than the industry average of about 15. The company's book value post IPO comes around 67.

   With a P/E of around 10 and price to book value of 1.64, issue looks fairly priced. Given the company's potential to grow and an increase in demand in the organised stainless steel manufacturing industry, Prakash Steelage can post healthy sales and profit growth after its capex cycle is over. Retail investors with high-risk appetite can consider the issue.