Prakash Steelage IPO Analysis

Prakash Steelage was incorporated by Prakash C Kanugo, a first generation entrepreneur, as a private company in 1991 in Mumbai mainly for trading in stainless steel sheets, coils and plates. In 1997 it was converted into a public limited company following the setting up in 1996 its first plant in the Union Territory of Dadra and Nagar Haveli, with a capacity of 4000 MT per annum, for manufacturing of welded & seamless stainless steel pipes, tubes and U-tubes. In 2007 the company started its second unit at Umbergaon, Gujarat, with a capacity of 8200 MT with total capacity reaching to 12,200 MT.



Prakash Steelage is an ISO 9001-2008 certified company and a government recognized Star Export House, though the export turnover is not quite significant (6.5% of net revenue in FY 2010). In the domestic market the company has competitors like Ratnamani Metal, Suraj Stainless, Rajendra Engineering and Mechanical Industries.

Demand for stainless steel seamless pipes and tubes is mainly derived from important sectors like hydrocarbon, petrochemical, power generation engineering, sugar, dairy, pharmaceutical, chemicals & fertilizers, infrastructure, automobile and railway sectors. The stainless steel welded pipes and tubes find application in petrochemical, fertilizer, power and nuclear plants along with other corrosion resistant applications.

To meet the increasing demand, the company started backward integration cum expansion of manufacturing facilities at its existing unit in Umbergaon to 19000 tonnes. Out of incremental 6800 MT capacity the company installed 3400 MT of capacity in FY 2009. The company is also creating facilities for Hot Finishing Hollows (10,000 MT ) to ensure backward integration.

The net revenue for FY 2010 grew 50% y-o-y to Rs 438.58 crore while net profit surged 142% y-o-y to Rs 17.81 crore. However, it is to be noted that the revenue from manufactured products increased 36% y-o-y to Rs 217.72 crore and that from trading business increased 68% y-o-y to Rs 219.38 crore (where the gross margin is 3% and net margin is 1.5%). The OPM for FY 2010 improved 230 bps to 10.1%.

The company intends to enter the capital market to raise money in the range of Rs 62.50 crore to Rs 68.75 crore by issuing around 62.50 lakh equity share of face value of Rs 10 each in the price range of Rs 100 to Rs 110 per share. Till 30 May 2010 the company had deployed Rs 49.25 crore on expansion (including Rs 20 crore working capital requirement), which it sourced as Rs 5 crore by allotting equity shares to promoters at Rs 40 per share and the balance from secured and unsecured loans (including interest free loan from promoters). Out of the proceeds from the issue Rs 19-20 crore will be used for capex and balance will go towards working capital, general corporate purpose and issue expenses.

Strengths

* The company plans to foray into certain new products like Duplex, Super Duplex and Super Austenitic pipes / tubes (these are high in the value chain and distinguished on the basis of the materials used). Further, backward integration will help in margin improvement and raw material procurement security.

* Presently the domestic demand for seamless steel pipes and tubes is 26,600 tonnes p.a., which is expected to go up to 60,000 tonnes by FY 2016 at a CAGR of 14.5%, while that for stainless steel welded pipes and tubes is expected to go up to 253,000 tonnes by FY 2016 from 95,000 tonnes presently at CAGR of 17.8%. Being the second largest player, the company is poised to tap the growth potential.

Weaknesses

* The promoter and company were found guilty of concealment of income. In February 2009, the income-tax authorities carried out search and seizure operations in the company's premises. During this operation, promoter Prakash C. Kanugo made certain disclosures in relation to undisclosed income of about Rs 15 crore on behalf of himself and his related individuals/group companies/concerns including Rs 7.11 crore for the company. The assessment proceedings for the respective assessment years are still in progress so the tax liability that may arise on this account is presently unascertainable.

* The company experienced negative cash flows at operating level for FY 2009, 2008, 2007 and 2006 of Rs 12.06 crore, Rs 30.34 crore, Rs 5.36 crore and Rs 0.39 crore, respectively.

* Capacity utilization level was low in past three years – 35.3% in FY 2008, 55.7% in FY 2009 and 68.6% in FY 2010. However, the management expects capacity utilization of 85% and 93%, respectively, in FY 2011 and FY 2012 at increased capacity.

* As major portion of the capex has already been done, the company may use part of the proceeds from the issue for repaying the interest free unsecured loan given by the promoters for funding the capex, which will not reduce any interest burden of the company.

Valuation

At the price band of Rs 100 to Rs 110 per equity share (Rs 10 face value) with EPS of Rs 10.2 for FY 2010, the P/E works out to 9.8 times to 10.8 times, respectively. Among peers, Ratnamani Metals, the largest player in the industry, has P/E of 7.2.