Electrosteel Integrated IPO Review

Investors could skip the initial public offering of Electrosteel Integrated, which is priced at Rs 10 to Rs 11 per share. Based on the final expected borrowing to become operational, the company's enterprise value per tonne stands at Rs.33,000/tonne with 75 per cent of this accounted for by debt.



Much larger and integrated players such as SAIL and Tata Steel trade at Rs 60000/tonne and Rs 36000/tonne respectively. Even after the fresh equity issue, Electrosteel Integrated will remain highly leveraged (around 2.8 times debt-to-equity). Any weakness in realisations or expected volumes could throw the company's bottomline into disarray, given the high debt servicing involved.

Electrosteel Integrated plans to raise between Rs.225 crore and Rs.248 crore through this offer.

If the greenshoe option (15%) is exercised, the amount raised will be between Rs. 259 crore to Rs. 285 crore.

Production Plans

Electrosteel Integrated plans to produce 1.2 million tonnes of long products (TMT Bars and wire rods), 3.3 lakh tonnes of ductile iron pipe plant and 2.7 lakh tonnes of billets annually, in addition to 4 lakh tonnes of pig iron at a plant in Jharkhand where it has acquired 1,800 acres of land.

It expects to operationalise a blast furnace (for making liquid steel) by October 2010, and a majority of its capacity is expected to come on stream by June 2011.

Estimated capex for setting up the plant is around Rs 7,360 crore which will be funded mostly through debt (Rs 5,440 crore of which Rs 2,700 crore has been raised so far) and the balance through equity (Rs 1,920 crore).

The company has a marketing and technical tie-up with UK steel trading firm Stemcor, which will hold just under 20 per cent in the company, post-listing.

Modus Operandi

The company is aiming to be a partially integrated steel producer procuring iron ore on a cost plus basis (fixed costs plus 20 per cent) from its parent Electrosteel Castings with which it has a 20-year agreement.

Similar arrangement is in place for 30 per cent of its coking coal requirements. Electrosteel Integrated will source 120 MW of power from its captive power plant. All three sources are within a 230-km radius which should help keep freight charges low. The rest of the coal and power, and its limestone requirements are expected to be sourced from domestic or international sources at market prices.

The coking coal mines of its parent have been operationalised and the iron ore mines are awaiting clearance from the Environment Ministry following which the mines are expected to come on stream by April 2011.

Potential demand

While the first complete year of production for Electrosteel Integrated will be FY2012-13, the company could operate at 30-40 per cent utilisation levels in FY2011-12.

Demand for steel in India is slated to grow at over 9 per cent every year for the next five years. The robust demand is expected to come from a variety of sectors such as infrastructure, real-estate, automobiles, consumer durables and capital goods.

For Electrosteel Integrated which plans a sizable ductile iron pipe capacity, demand is expected to be strong, thanks to the government's plans to spend Rs 80,000 crore over the next five years to improve waste management and water lines.

However, long products such as rebars and wire rods, when commissioned in late-2011, are likely to enter a competitive and well supplied market, which may result in pricing pressures.

Risks

A lot of new steel capacity is expected to come on-stream in the next few two-to-three years. For instance, SAIL is expected to add capacity of over 10 million tonnes per annum, Tata Steel over 3 million tonnes, and JSW 3 million tonnes, taking total capacity in India to an estimated 100-110 million tonnes from the current 70 million tonnes.

Failure by the parent Electrosteel Castings to obtain necessary environment clearance for its iron ore mines could result in Electrosteel Castings having to procure all of its the raw material at market prices, and a consequent high cost structure.

Other risks include pledge of almost 71 percent of the parent company's 34 per cent stake (post-dilution), and insurgency in the areas of the company's operations.

via BL