Electrosteel Steels Limited (ESL) was formerly known as Electrosteel Integrated Limited is tapping the capital market with its IPO to raise Rs 259 crs to 285 crs in a price band of Rs 10-11. The issue had opened on Tuesday the 21st of September and closed yesterday for QIB’s. The issue closes today for HNI’s and retail investors. The QIB portion has been subscribed 5.86 times.
| Price Band | Rs 10 – Rs 11 |
| Issue size in Rs | Rs 259.34 crs at Rs 10 to 285.28 crs at Rs 11 |
| Offer size in shares | 25,93,43,616 shares including green shoe option of upto 3,38,27,428 shares |
| QIB’s | 60% or 15,56,06,169 shares |
| Non Institutional Investors | 10% or 2,59,34,362 shares |
| Retail Investors | 30% or 7,78,03,085 shares |
| Post Issue Capital | 203,45,35,023 without green shoe or 206,83,62,451 with green shoe |
| Marketcap post issue without green shoe | Rs 2034.53 crs at Rs 10 and Rs 2237.99 crs at Rs 11 |
| Marketcap post issue with green shoe | Rs 2068.36 crs at Rs 10 and Rs 2275.29 crs at Rs 11 |
| Book Running Lead Manager | Edelweiss Capital Limited |
| Enam securities Private Limited | |
| SBI Capital Markets Limited | |
| Isssue Opening Date | Tueday 21st September |
| Isssue Closing date for QIB’s | Thursday 23rd September |
| Isssue Closing date for HNI’s and Retail | Thursday 24th September |
| IPO Grade | 3/5 by CARE Limited indicating average fundamentals |
| Bidding Lot | 600 shares |
Business
As the name suggests ESL is in the business of steel making. It has been promoted by Electrosteel Castings Limited and is setting up a 2.2 million tons per annum (mtpa) integrated steel and ductile iron spun pipes project in Jharkhand. ESL has obtained mining blocks of iron ore and coking coal in the state and this makes the companies project an integrated one. The parent has been in the business of manufacturing cast iron pipes for over four decades and ductile iron pipes for the last 15 years indicating strong parentage of ESL.
The project of ESL comprises of blast furnace, basic oxygen furnace, billet caster and would use the hot rolling route to produce 1.2 mtpa of long rolling products comprising of 0.5 mtpa of 5.5-12.0 mm diameter wire rods in coil form and 0.7 mtpa of reinforcement bars in straight lengths and bar rounds upto 60mm diameter. ESL would also have a facility for 0.33 mtpa of ductile iron pipes. ESL would also produce 0.27 mtpa of commercial billets and 0.40 mtpa of pig iron taking the total capacity to 2.2 mtpa.
The project of ESL is a Greenfield project being set up at a total cost of Rs 7,362 crs which is being funded by debt of Rs5,447 and equity of Rs 1,915 crs. Equity contribution of Rs 1,665.7 crs has already been invested in the project. The company has already acquired land of 1804.70 acres which would be sufficient for the current and future expansions.
Commercial production of the blast furnace is expected from 1st October but there could be a delay of about a quarter and the full project would be commissioned in a phased manner in the next 6 to nine months. In short one could say that revenues for the financial year 11-12 would be roughly for six months working at fully ramped up capacity and the company would have a full year of normal capacity in 2012-13.
Objects of the issue
The objects of the issue are as follows: –
| 1. | Part finance the construction of integrated steel and D.I.pipe plant having a capacity of 2.2 mtpa in Jharkhand |
| 2. | Margin money towards bank guarantees |
| 3. | General corporate purposes |
| 4. | Create a public market for equity shares by listing securities of the company on Stock exchanges |
The company has made a pre-IPO placement of 14,32,55,812 shares to GPC Mauritius and Franklin Templeton in August September 2010 at a price of Rs 10.75.
Financials
There are no financials for this company as it has not yet started commercial production. However its parent Electrosteel Castings Limited reported net revenues of Rs 1580.77 crs for the financial year ended March 2010. Its net profit after tax was Rs 234.24 crs and the earnings per share on a fully diluted basis were Rs 6.78. The share closed at Rs 47.65 on the BSE on 23rd September, which means the share is trading at a price earnings multiple of 7.02.
Risks
The company has received all clearances for the coking coal mine and is in the final stages for the iron ore mine where the forest diversion proposal has been submitted. Once this clearance is received the signing of the mining lease will be entered into. This could be a risk where the same is delayed by a few months.
Investment rationale
ESL is setting up this project where the key promoter is Electrosteel Castings Ltd and there is equity participation from Stemcor MESA DMCC. Stemcor is an international player and has been in the business of international trade and marketing of steel for over 50 years. Stemcor has invested in the company and currently holds just over 22% of the pre-IPO capital. ESL has entered into a tie-up with Stemcor for supply of major equipment, supervision of the implementation of the project, marketing and sales of the products manufactured by ESL for a period of three years from the date of commercial production.
Such strong parentage of ECL and tie-up with one of the large players like Stemcor and the fact that project is just about nearing commercial production is good enough to subscribe to the issue. The added icing on the cake is that this issue which is priced between Rs 10-11 is almost at par and the total issue size which would be in the region of approximately 285 crs at the top end of the price band would be just about 3.87% of the project cost and 12.5% of the equity.
I believe this is a great opportunity for investors to put in their money and reap substantial returns in the medium and long term. I recommend investors to subscribe to the above issue.
SEBI Disclaimer: – I intend to subscribe to the above issue.
