Readymade Steel India Limited (RMS) is tapping the capital markets with its IPO to raise Rs 3474.53 lacs in a price band of Rs 90-108. The issue opens on Monday the 27th of June and closes on Wednesday the 29th of June.
This is one more of those IPO’s who have chosen to not have a road-show to discuss and highlight the company. Is it to avoid embarrassing questions about the valuation or is it a convenient way to generate higher interest through curiosity is something one would never know.
| Price Band | Rs 90 – Rs 108 |
| Offer size in shares | 38,60,589 Equity Shares at Rs 90 to 32,17,157 Equity Shares at Rs 108 |
| Issue Size | Rs 3474.53 lakhs |
| QIB’s | 19,30,294 Equity Shares at Rs 90 to 16,08,579 Equity Shares at Rs 108 |
| Non Institutional Investors | 5,79,088 Equity Shares at Rs 90 to 4,82,574 Equity Shares at Rs 108 |
| Retail Investors | 13,51,206 Equity Shares at Rs 90 to 11,26,005 Equity Shares at Rs 108 |
| Book Running Lead Manager | Arihant Capital Markets Limited |
| Issue Opening Date | Monday 27th June |
| Issue closing date | Wednesday 29th June |
| IPO Grade | CARE grade 2/5 indicating below average fundamentals |
| Paid -up Capital Pre IPO | 85,01,200 Equity Shares |
| Paid -up Capital Post IPO | 1,23,61,789 Equity Shares at Rs 90 to 1,17,18,357 Equity Shares at Rs 108 |
| Market Cap post listing | Rs 111.26 crs at lower band to Rs 126.56 crs at higher band |
| Bid Lot | 60 shares |
| Bidding Amount for Retail | 1800 shares at Rs 108 or Rs 1,94,400 per application |
Business
RMS is in the business of processing of steel used in the construction industry. The main product is reinforcement bars into various shapes and sizes like cranked bars, stirrups, verticals, column/beam cages etc. Traditionally in the construction activity, the process of cutting and bending steel and fabrication of cages was done on the construction site through manual process resulting in huge wastage of materials, increased requirement of labour and space at the construction site. RMS does the processing of steel through use of automated machines and delivers ready to use cut and bend steel rods, prefabricated cages and other steel products required for construction activities. This process is faster, more efficient and uses lesser material as there is virtually no wastage in the process.
The product offerings include ready to use steel primarily re-bars to be used in the construction activities in various sectors like roads, power plants, ports airports, housing, bridges, metros, monorails etc. The product offerings are aimed at overcoming the time and space constraints of construction activity of the clients in Western India. The plant is located in Khopoli.
This business could be compared with the business of Ready mix concrete (RMC) which began in the mid ‘90s. Today one cannot imagine a project coming up without the use of ready-mix concrete. IT is believed that going forward the business of readymade steel would be like ready mix concrete.
The present capacity at Khopoli is 27,000 tons per annum which is proposed to be expanded to 90,000 tons. The two new facilities near New Delhi and at Raipur would be of 50,000 tons each. This translates into a combined enhanced capacity of 1,90,000 tons which would be an expansion of seven times the existing capacity.
Objects of the issue
The objects of the issue are as follows: –
- To part finance the cost of enhancing the capacity at our existing facility at Khopoli and the cost of setting up new facilities near New Delhi and Raipur.
- To meet the pre-operative expenses including issue expenses.
- To meet margin money requirements of working capital
- To meet the general corporate purposes.
Project Cost of the expansion
| Enhancement of capacity at Khopoli | Rs 1013 lacs |
| New Delhi | Rs 1662 lacs |
| Raipur | Rs 1587 lacs |
| Pre-operative expenses including issue expenses | Rs 826 lacs |
| Margin money requirement for working capital | Rs 1033 lacs |
| Total Project Cost | Rs 6121 lacs |
The company has done a pre-ipo of 7,61,000 shares and raised Rs 656.48 lacs. The company has also been sanctioned a term loan of Rs 1509.57 lacs.
Financials
The turnover of the company has increased from Rs 450.69 lacs in March 2009, to Rs 3223.82 lacs in March 2010 to Rs 8144.51 lacs in the nine months ended December 2010. The net profit after tax was Rs 18.561 lacs, Rs 42.53 lacs and Rs 232.05 lacs respectively.
| Rupees in Lakhs | year 2009 | year 2010 | 9 months |
| Dec-10 | |||
| Products Processed Sales | 450.69 | 3223.82 | 8144.51 |
| Trading Sales | 38.79 | 13.61 | 16.38 |
| Total sales | 489.48 | 3237.43 | 8160.89 |
| Other Income | 11.66 | 8.96 | 0.70 |
| increase/decrease in stock | 153.50 | 558.49 | 332.12 |
| Total Income | 654.64 | 3804.88 | 8493.71 |
| Total Expenses | 627.63 | 3728.49 | 8125.40 |
| Profit before tax | 27.01 | 76.39 | 368.31 |
| Taxes | 8.40 | 33.86 | 136.26 |
| Net Profit After Tax | 18.61 | 42.53 | 232.05 |
| NET MARGINS | 2.84 | 1.12 | 2.73 |
Comparisons
There are no direct competitors of the company who are engaged in the similar line of activity. However there are some new entrants who have entered the same business in Western India where the company is currently selling its products. There would be many new entrants entering this sector going forward and there would be competition in the business. This is a conversion unit and there would be competitive margins which would be earned by the industry.
Valuations
Based on the net profit for the nine months ended December of Rs 232.05 lacs, if one were to annualise the same the net profit for the year ended March 2011 would be Rs 309.4 lacs. If one were to assume the lower end of the price band of Rs 90, the fully diluted equity would be 123.62 lac shares, which would correspond to an EPS of Rs 2.5 per share. At the upper end of the price band of Rs 108, the fully diluted equity would be 117.18 lac shares, and the EPS would be Rs 2.64.
The price earnings multiple based on fully diluted equity and annualised earnings based on December 2010 would be 36 times at the lower end of the price band and 40.91 times at the upper end of the price band.
Conclusion
There is no way that one can justify a price earnings multiple of between 36 times and 40.91 times. The company is going in for an expansion of seven times its existing capacity which is by no means small or simple to achieve. The expansion and successful implementation of the expansion and achieving a high capacity utilisation would take some time to achieve. The turnover would certainly increase but margins in this business of conversion would always remain low.
It makes sense to stay away from the issue even though it seems a new concept. The size of the issue and the asking price earnings multiple make investment risky. The only saving grace could be listing gains as we have seen in the past that many small cap stocks generate listing day gains because of “friendly” intermediaries before disappearing into the distant horizon.
I would advise people to avoid the issue.
SEBI Disclaimer: – I do not intend to apply for the issue.
