Prakash Steelage IPO Review

Investors could consider giving the Prakash Steelage IPO a miss considering the company's limited product profile and susceptibility to pressure on realisations due to volatile stainless steel prices. The issue is priced between Rs 100 and Rs 110, which translates into a post-issue P/E of 9.8 to 10.8 times 2009-10 earnings compared to seven times earnings for the more diversified, less-leveraged and larger Ratnamani Metals. Investors may find better hedged bets in the sector in the form of diversified pipe producers that have a wider product line to tide over blips in demand and superior margins.



Prakash Steelage has the capacity to produce 15,600 tonnes of stainless steel pipes every year through facilities at Umbergaon and Silvassa. Stainless steel pipes are produced using an alloy of steel containing chromium and other metals making it highly resistant to corrosion.

The company's pipes find application in a variety of industries, including oil and gas, power, pharmaceuticals, paper, and chemicals. The company has taken on significant amounts of debt since 2006 to expand production capacities from 4,000 tonnes per annum (tpa) to the current 15,600 tpa.

IPO usage

This IPO will fund another 3,400-tonne expansion at the Umbergaon facility which the company expects to operationalise by October 2010. A portion of the proceeds will also go towards and working capital requirements. The company's sales have grown at a compounded rate of 40 per cent a year and net profits are up 5.6 times since FY-07. In 2009-10, it made a net profit of Rs 17.8 crore on sales of Rs 438 crore, with about 6.5 per cent of the sales going to the overseas market.

The company's operating profit margins have swung in a range of 4.72 to 10.3 per cent, with lower raw material prices helping margins in 2009-10. The company's post-offer debt:equity ratio will be at 1.3:1, while the company's EBIT covered debt three times over in 2009-10.

The company's business brings with it limited pricing power. A spike in raw material prices may not be fully passed on to buyers. However, the weak outlook for stainless steel (input) prices may result in better margins this year. Capacity utilisation during the last fiscal stood at 70 per cent, which is inline with industry numbers.

Demand outlook

Demand for stainless steel pipes is likely to remain robust, thanks to capacity additions in the merchant power segment. Oil and gas exploration and pipelines are expected to improve later this year as spending on the same improves with crude oil and natural gas prices. One key risk facing the sector is that maintaining or improving capacity utilisation figures could prove challenging in the event of a global slowdown.

The company also plans to move into production of higher quality stainless steel pipes and intermediate hot finished pipes, both of which should bolster the company's margins. The offer document mentions that the company has been investigated by the income-tax department for undisclosed income of the promoter group and the tax liability following reassessment remains unclear.

via BL