IPO Review: Prakash Steelage

Prakash Steelage, which is into manufacturing and trading stainless steel welded and seamless pipes, has come out with an initial public offer (IPO) of Rs 63-69 crore to fund expansion plans and working capital needs. The company manufactures several products of stainless steel pipes, which find application in major industries, including power, oil & gas, chemical, pharmaceuticals and automobile. It generates about 15 per cent of its revenue from exports, which it intends to increase after the expansion.

Improving prospects

The company is the secondlargest player in the organised stainless steel pipe industry, which is about half the total size of the industry. At present, the per capita consumption of stainless steel is low in India at about 1.2 kg compared to six kg in China. This figure is even higher in other developed countries. However, consumption is growing, led by the ongoing investments in user industries as well as new applications of stainless steel considering its qualities and resistance to corrosion.

Changing dynamics

On the back of opportunities, the company's sales turnover has grown more than four-fold in the last four years, supported by an increase in installed capacity from 4,000 tonnes in 2006-07 to 15,600 tonnes in 200910. The company is in the process of increasing capacity to 19,000 tonnes by end-2010. The company expects to produce 16,000 tonnes stainless steel products in 2010-11 and 17,500 tonnes in 2011-12 as compared to 10,699 tonnes in 200910. This will help it reduce dependence on the trading business, which currently accounts for half its total net sales and commands operating margins of just about three per cent as compared to 17 per cent in the manufacturing business.

As a result of this, while total sales will grow 10-15 per cent over the next two years, the net profit will see a significant jump as a result of higher margins. Currently, the company's operating margins hover around 10 per cent as compared to the industry average of 15 per cent.

Outlook

Overall, the company's profile — its market share, capacity, clients, financial performance and growth prospects — look good, which should ensure healthy pace going ahead. High leverage (debtequity ratio of 1.2 times post-IPO) and cyclical nature of the industry are the key risks. At the upper price band of Rs 100-110, the issue is priced seven times its preIPO capital (10 times post-IPO equity) based on 2009-10, which is largely on a par with its closest competitor and the largest player in the segment, Ratnamani Metals (quoting at 7.5 times its trailing earnings). Even after assuming growth rates and oneyear forward earnings of both these players, the IPO looks fairly valued.