The company faces stiff competition from existing players and is yet to clock any revenues; the promoter group has a number of pending litigations against it and high debt remains a concern
Incorporated in 2006, Jharkhand-based steel manufacturer Electrosteel Steels Ltd (ESL) is entering the capital market to raise between Rs368.77 crore at the lower end of the price band and Rs405.65 crore at the upper band through a 100% book building issue. The company is promoted by Electrosteel Castings Ltd (ECL).
ESL currently procures 30% of its coking coal requirement from its Parbatpur (Jharkhand) unit and 70% from other sources.
The company is setting up a plant near Siyaljori village in Bokaro district of Jharkhand. The proposed plant will have a blast furnace, basic oxygen furnace, billet caster and will utilise the hot rolling route. It will produce 1.2 million tonnes per annum (MTPA) of long steel products, comprising 0.5MTPA of 5.5-12.0mm diameter wire rods in coil form and 0.7MTPA of reinforcement bars in straight lengths and bundled in the range of 8-32mm and plain rounds up to 60mm diameter. The plant will have a 0.33MTPA DI (ductile iron) pipe production facility in the same complex and will be provided with hot metal from the blast furnaces. The plant will also have production facilities for 0.27MTPA of commercial billets and 0.40MTPA of pig iron.
It has acquired 1,804.70 acres of land for the proposed plant for future expansion plans.
Promoter ECL has four manufacturing facilities of which two are located at Khardah and Haldia in West Bengal, one at Elavur in Tamil Nadu and a coal washery plant at Parbatpur in Jharkhand.
Issue
Price: Rs10-Rs11 per share
No of Shares: 3,68,772,000 equity shares with a green-shoe option of up to 15% of the issue
Issue Size: Rs368.77 crore-Rs405.65 crore
Issue Duration: 21st September-24th September
Listing: BSE and NSE
IPO rating: Three, average fundamentals (CARE)
Book Running Managers: Enam Securities Pvt Ltd, SBI Capital Markets Ltd and Edelweiss Capital
Post-listing details
Pre-Issue Promoter and Promoter Group Holding: 38.70%
Post Issue Promoter and Promoter Group Holding: 34%
Post Issue Equity Capital: Rs2,034 crore
P/E ratio: NA (Company has not posted any profits)
Highest in the industry: 55.3
Lowest in the industry: 5.4
Average industry (Composite) P/E: 10.80
Concerns
There are 61 litigations against the company's promoters with Rs912.38 crore riding on these cases. On 24 December 2009, SEBI passed an order imposing a penalty on promoter company ECL and the individual promoters of ECL for violating insider trading rules. The company procures equipment from China for which it appoints Chinese contractors for integration. However, due to the visa guidelines issued by the Indian government, many of these Chinese contractors had to leave the country causing a slowing down of the projects.
Competition
As a new entrant, ESL faces fierce competition from existing players in the DI pipes industry like ECL, Jindal Saw, Tata Metaliks and Electrotherm, which have market share of 53%, 27%, 13% and 7% respectively.
In the steel production territory, it competes with both private and public sector companies. For the financial year 2009 public sector companies such as SAIL, RINL, etc. had a market share of 28% while private sector companies such as Tata Steel, JSW Steel, JSPL etc. had a market share of 72%.
Operations
The company has not yet commenced commercial activities and hence has not posted any revenues so far. Commercial operations of the company's projects are not scheduled to commence until 1 October 2010.
Licenses
The company requires various licenses from central and state governments to commence its projects. It needs environmental approvals from the Ministry of Environment and Forests, and chimney height approvals from the Ministry of Defence and Ministry of Civil Aviation, and ESL is waiting for a mining lease license approval from the Ministry of Environment and Forests for its proposed iron ore mine at Kodolibad, Jharkhand.
Strengths
ESL was promoted by its promoter ECL to set up a 2.2 MTPA integrated steel and ductile iron spun pipes project in Jharkhand. In order to focus on backward integration, ECL has set up ESL for implementing the integrated steel and DI pipe plant. The company's promoter ECL will supply iron ore and coking coal to ESL on a cost plus 20% basis for a period of 20 years.
The company' promoter ECL is in the business of manufacturing CI Spun Pipes for over four decades and DI Pipes since the last 15 years. ESL's integrated steel plant is located in Siyaljori in Bokaro district (Jharkhand), just 22 km from Bokaro. This belt has a supply of low-cost manpower pool and raw materials, such as dolomite, quartzite, ferro alloys and additives, which reduces its transportation and procurement costs.
Financials
The company made a pre-IPO allotment to Franklin Templeton Private Equity Strategy of 5.58 crore shares at a price of Rs10. IL&FS Financial Services too bought 7.50 crore shares in two tranches in the year 2009 at the same price.
— Moneylife Digital Team