Shyam Metalics and Energy coming with an IPO to raise upto Rs 918 crore

Shyam Metalics and Energy

• Shyam Metalics and Energy is coming out with a 100% book building; initial public offering (IPO) of 2,99,99,999 shares of Rs 10 each in a price band Rs 303-306 per equity share. 
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on June 14, 2021 and will close on June 16, 2021.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 30.30 times of its face value on the lower side and 30.60 times on the higher side.
• Book running lead manager to the issue are ICICI Securities, Axis Capital, IIFL Securities, JM Financial and SBI Capital Markets. 
• Compliance Officer for the issue is Birendra Kumar Jain.

Profile of the company

The company is a leading integrated metal producing company based in India with a focus on long steel products and ferro alloys. It is amongst the largest producers of ferro alloys in terms of installed capacity in India, as of February 2021. It has the ability to sell intermediate and final products across the steel value chain. As of March 31, 2020, it was one of the leading players in terms of pellet capacity and the fourth largest player in the sponge iron industry in terms of sponge iron capacity in India. It was also one of the leading integrated steel and ferro alloys producers in the eastern region of India in terms of long steel products, as of March 31, 2020. It has a consistent track record of delivering operating profitability, and since the commencement of its operations in Fiscal 2005, it has delivered a positive EBITDA in each of the Fiscals.

The company primarily produce intermediate and long steel products, such as, iron pellets, sponge iron, steel billets, TMT, structural products, wire rods, and ferro alloys products with a specific focus on high margin products, such as, customised billets and specialised ferro alloys for special steel applications. Its TMT and structural products are sold under the brand ‘SEL’ and logo. It also undertakes conversion of hot rolled coils to pipes, chrome ore to ferro chrome and manganese ore to silico manganese for an Indian steel conglomerate. It is also currently in the process of further diversifying its product portfolio by entering into the segments, such as, pig iron, ductile iron pipes and aluminium foil.

Proceed is being used for:

• Repayment and/or pre-payment, in full or part, of debt of the company and SSPL, one of its subsidiaries.
• General corporate purposes.

Industry overview

India is the second largest producer of steel in the world with nearly 6% share of global steel production. Over the last decade, India steel demand growth has outpaced world’s average except for a brief period from 2010 to 2013 that was impacted by slowdown in key end-use segments in the domestic market. However, post 2013, domestic demand has invariably exceeded global demand which was marred by slowdown in China (which accounts for half of global steel demand). In contrast India’s steel demand growth has remained modest driven by soft growth in auto and building and construction (B&C) segments. As per World Steel Association, global steel demand is expected to contract by 2.4% in 2020 and drop to global steel 1.725 billion tonnes due to the Covid-19 crisis. However, demand is expected to recover to 1.795 billion tonnes and grow 4.1% in 2021. As per CRISIL Research, post 2019, global steel demand is expected to grow approximately 0.2% CAGR through 2024.

Post moderate growth cycles since 2012, India's steel demand exhibited swift comeback with vigorous growth of 8% to 9% on-year in Fiscal 2018. However, demand momentum slowed down to 1.4% in Fiscal 2020 with the COVID-19 pandemic set to dampen demand prospects from automobile, construction and capital goods segment. India steel imports surged sharply from 5.5 MTPA in Fiscal 2014 to 11.7 MTPA in Fiscal 2016 which led to the government imposing several safeguard measures. With installed capacities outpacing demand growth in the domestic market (capacity addition of approximately 25 MT against incremental demand of approximately 8 MT during Fiscal 2013 to Fiscal 2016 period), along with looming threat of imports, the government had to intervene in order to safeguard domestic suppliers’ interest. India steel demand has risen at a modest 5.4% CAGR during past five years (Fiscal 2015 to Fiscal 2020). Alloy steel has witnessed a decline in demand on account of automobile production Fiscal 2019 onwards. As a result, the share of alloy in overall steel demand has fallen from 8.8% in 2014 to 2015 to 6.0% in 2019 to 2020. On the other hand, non-alloy steel has been growing at a CAGR of 6.0%.

Pros and strengths

Integrated operations across the steel value chain: The company is a leading integrated metal producing company based in India and one of the leading integrated steel and ferro alloys producers in the eastern region of India in terms of long steel products, as of March 31, 2020. It currently operates two ‘ore to metal’ integrated steel manufacturing plants one each in Sambalpur, Odisha and Jamuria, West Bengal. The integrated nature (backward and forward integration) of its manufacturing plants has resulted in the control over all aspects of its operations (with the exception of sourcing of primary raw materials) as well as operating margins, thereby enabling it to focus more on quality and create multiple points of sale across the steel value chain. The backward integration activities, include, setting up of iron pellet plants and installation of rotary kilns to produce sponge iron. It utilises the sponge iron produced to further manufacture billets, which are not required to be reheated and are directly utilised by its rolling mills to produce TMT bars and wire rods, thereby resulting in cost efficiencies. It has undertaken various measures to expand and integrate its steel manufacturing plants. For instance, it commenced operations at its Sambalpur manufacturing plant with a sponge iron plant of 115,500 TPA in 2006.

Strategically located manufacturing plants supported by robust infrastructure: The company’s manufacturing plants are strategically located in close proximity to its raw material sources, which lowers its transportation costs and provides significant logistics management and cost benefits thereby improving its operating margins. Its manufacturing plants are located within 250 kilometres of the mineral belt in eastern India, including, iron ore, iron ore fines, manganese ore, chrome ore and coal mines, its primary raw materials. The strategic location of its manufacturing plants has helped it in creating synergies as well as achieving economies of scale and operational efficiencies. Further, its manufacturing plants are well connected by roads, railways and ports. Its Odisha and West Bengal manufacturing plants are in proximity to NH 16 and NH 19, respectively. Its manufacturing plants are located close to its raw material sources and is supported by strong logistics infrastructure, such as private railway siding, which enables it to reduce the logistical costs associated with the transportation of raw materials and products.

Diversified product mix with strong focus on value added products: The company’s products primarily comprise of long steel products, which range from intermediate products, such as, iron pellets, sponge iron and billets and final products, such as, TMT, customised billets, structural products and wire rods; and ferro alloys with a specific focus on high margin products, such as, specialised ferro alloys for special steel applications. Its TMT and structural products are sold under the brand ‘SEL’ and logo. It also undertakes conversion of hot rolled coils to pipes, chrome ore to ferro chrome and manganese ore to silico manganese for an Indian steel conglomerate. The forward and backward integration of its manufacturing plants has resulted in multiple points of sale across the steel value chain and provided it with flexibility to sell intermediate products as well as use them for captive consumption, depending on the demand. This has resulted in a diversified product mix, which has reduced its dependency on a particular product and de-risked its revenue streams.

Experienced promoters, board and senior management team: The company’s diversified Board of Directors is supplemented by a strong senior management team with significant experience in the metal industry and some of them have been associated with its company since its commencement of operations. Its Board and senior management team are also supported by 11,457 personnel, including, 5,841 permanent employees and 5,616 contract employees, as of December 31, 2020. Its manufacturing plants operate in areas with highly skilled and low-cost labour, which helps it to keep its operating costs low.

Risks and concerns

Derive portion of revenues from exports to limited number of markets: In Fiscals 2018, 2019 and 2020, and the nine months ended December 31, 2019 and December 31, 2020, revenue generated from exports accounted for 18.19%, 17.34%, 9.65%, 9.69% and 11.19%, respectively, of company’s revenue from operations in such periods. It has derived a portion of such revenues from exports to limited number of markets, amongst others, Nepal, Bhutan, Bangladesh, China, Japan and Dubai. Its revenues from these markets may decline as a result of increased competition, regulatory action, pricing pressures, fluctuations in the demand for or supply of its products or services, or the outbreak of an infectious disease, such as the COVID-19 pandemic. Its failure to effectively react to these situations or to successfully introduce new products or services in these markets or enter into new markets could adversely affect its business, prospects, results of operations and financial condition.

Certain amount of revenue generated from certain key customers: The company is dependent on a limited number of customers for a certain portion of its revenues. In Fiscals 2018, 2019 and 2020, and in the nine months ended December 31, 2020, its top 10 customers represented 26.10%, 24.52%, 22.36% and 15.57%, respectively, of its total revenues from operations in such periods, while its largest customer represented 4.00%, 4.56%, 3.73% and 2.31%, respectively, of its total revenues from operations in Fiscals 2018, 2019 and 2020, and in the nine months ended December 31, 2020, respectively. There can be no assurance that its significant customers in the past will continue to place similar orders with it in the future. A significant decrease in business from any such key customer, whether due to circumstances specific to such customer or adverse market conditions affecting the steel industry or the economic environment generally, such as the COVID-19 pandemic, may materially and adversely affect its business, results of operations and financial condition.

Face substantial competition: Competing domestic steel and ferro alloy producers have increased their manufacturing capacity and it expects domestic competition to further intensify with the ramping up of new manufacturing plants by these competitors. Some of company’s domestic competitors may possess an advantage over it due to various reasons, such as captive raw material sources, greater economies of scale, integrated manufacturing plants, specialization in production of value-added or niche products, stronger distribution network and greater presence in certain markets. Maintaining or increasing its market share will depend on effective marketing initiatives and its ability to anticipate and respond to various competitive factors affecting the industry, including its ability to improve its manufacturing process and techniques, introduce new products, respond to pricing strategies of its competitors, and adapt to changes in technology and changes in customer preferences. Failure by it to compete effectively could have a material adverse effect on its business, financial condition and results of operations.

Business is seasonal in nature: Demand for company’s products is seasonal as climatic conditions, particularly the monsoon, affect the level of activity in the construction industry. As a result, it usually experiences relatively weaker sales volume during the monsoon, and somewhat stronger sales in other seasons. It expects results of operations will continue to be affected by seasonality in the future. Its results of operations for any quarter in a given year may not, therefore, be comparable with other quarters in that year.

Outlook

Incorporated in 2002, Shyam Metalics and Energy (SMEL) is India's leading integrated metal producer company. The company is primarily engaged in the production of long steel products such as iron pellets, sponge iron, steel billets, TMT, structural products, wire rods, and ferro alloys. As of February 2021, it is among India's largest producers of ferro alloys in terms of installed capacity and the fourth-largest player in the sponge iron industry. It currently operates three manufacturing plants that are located at Sambalpur in Odisha, and Jamuria and Mangalpur in West Bengal. Its manufacturing plants are strategically located in close proximity to the mineral belt in eastern India, including, iron ore, iron ore fines, manganese ore, chrome ore and coal mines, its primary raw material sources and ports, which lowers its transportation costs and provides significant logistics management and cost benefits. On the flip side, the company’s strategy to grow its business may require it to raise additional funds for its working capital or long-term business plans. Additional debt financing may increase its financing costs. Its business operations are heavily dependent on continuous supply of electricity and water which are critical to its manufacturing operations. While its power requirements are met through its captive power plants and through power supply agreements with India Power Corporation, Damodar Valley Corporation and WESCO, it cannot assure you that these will be sufficient and, or, that it will not face a shortage of electricity despite these arrangements.

The issue has been offered in a price band of Rs 303-306 per equity share. The aggregate size of the offer is around Rs 908.99 crore to Rs 917.99 crore based on lower and upper price band respectively. On the performance front, total income decreased by 6.17% from Rs 46,845.60 million in Fiscal 2019 to Rs 43,953.02 million in Fiscal 2020. It recorded a profit for the period of Rs 3,403.29 million in Fiscal 2020 compared to Rs 6,367.83 million in Fiscal 2019. The company intends to strengthen its leading market position in India and achieve better economies of scale by expanding its existing manufacturing capacities and setting up additional manufacturing plants. It intends to further integrate its operations by using the existing waste and by-products from its operations to introduce new and high margin products.