SP Refractories coming with an IPO to raise upto Rs 4.92 crore

SP Refractories

• SP Refractories has come out with an initial public offering (IPO) of 5,47,200 Equity Shares of face value of Rs 10 each for cash at a fixed price of Rs 90 per equity share.
  
• The issue will open for subscription on March 9, 2022 and will close on March 11, 2022.
  
• The shares will be listed on NSE Emerge Platform.
  
• The share is priced 9 times higher to its face value of Rs 10.
  
• Book running lead manager to the issue is Aryaman Financial Services.
  
• Compliance Officer for the issue is Shreyaa Jajoo.   
  

Profile of the company

SP Refractories is engaged in manufacturing and supplying Refractory Material made using hydrated lime, Calcined Alumina and other raw materials. Its core focus is on refractory cement which is a niche and high margin cement widely used in iron & steel and construction industries because of its thermal conductivity, Maximum strength and Heat resistance. The company has one Manufacturing facility at M- 10, MIDC, Hingna, Nagpur and the adjoining premise M- 11-1 & M-11-2, MIDC, Hingna, Nagpur is being used as Godown and storage facility. The manufacturing facility is located in MIDC which is well-developed industrial area of Nagpur.

The company has a healthy client base due to its quality product, customized solutions and large product line. It has clinkers manufacturing capacity of 4000 MT per year and Clinkers crushing capacity of 6000 MT per year. It get clinkers manufactured from outsider on job work basis and thereafter process of crushing the clinkers, blending and packing of refectory cement in powder form carries out in its manufacturing facility for excess capacity of crushing. Further, as and when required it purchase clinkers from third party and carry out process of crushing the clinkers, blending and packing of refectory cement in powder form to utilize its excess capacity of crushing.

The company has dedicated semi-automatic machines and skilled operators for manual checking of raw materials as well as Finished Goods. Its Testing and QC Technical team combined with its testing equipments ensures the quality of raw material dispensed in the production process and also the finished goods delivered to its customers. This helps in improving its procurement process thus reducing wastages, returns and other related costs. 

Proceed is being used for

• Funding working capital requirements.
  
• General corporate purposes.
  

Industry overview

The Indian refractory industry is an Rs 9,000 crore market, with major players such as TRL Krosaki, Dalmia OCL, RHI Magnesita India. About 75% of the refractories manufactured using magnesia; alumina or silica is used with the rest being consumed by cement and glass, ceramics, petrochemicals and boiler industries. They are the necessary materials for various high-temperature equipment like in the internal linings of blast furnaces and converters used for steel making and in furnaces for heating materials before further processing etc. Data sourced from the ministry of commerce shows that India imported refractory bricks, blocks, tiles and similar refractory ceramic constructional goods worth Rs 855 crore in 2019 and 2020 which is 4% higher than the previous year of Rs 816 crore. India also imported high alumina refractory cement used in steel and cement companies worth Rs 25.3 crore in 2019-2020 as against, Rs 12 crore in 2018-2019.

The Indian refractory industry started its journey with first line of production in Kolkata in 1874. Today, the industry comprises over 100 established units, with 11 large plants, 24 medium-scale units and the rest in the small-scale sector. However, while the refractory industry in India took off in the late 19th century, the real growth came in the late 1950s when the public sector steel plants were set up and Tata Steel embarked upon its expansion plans. Currently, the Indian refractory industry has an aggregate production capacity of 20 lakh tones per annum. The capacity utilization, however, currently stands at around 60 percent or 11.5-12 lakh tones per annum. About 75 per cent of the refractories that are manufactured find application in the steel industry, 12 percent in the cement industry, 5-6 per cent in non-ferrous industries, three per cent in the glass industry and the balance in other industries.

Pros and strengths

Long standing relationship with key customers and suppliers:  The company enjoys long standing relationship with key Customers & suppliers. These long standing relationships are result of its commitment to quality, timely delivery, promptness in payments and adaptability etc. It benefits immensely from this. Its business and growth are significantly depending on its ability to maintain the client relationship. These long standing relationship with customers and suppliers have helped in establishing its reputation as a trusted business player in Refractory Industry.

Strong balance sheet and financial condition: The company performed reasonably well with strong revenue and balance sheet position. As on September 30, 2021, the owned net worth of the company (i.e. equity plus free reserves) was Rs 547.80 lakhs. The company is a low debt well capitalized company. Hence, it can procure the goods by making upfront payments and take benefit of cash discount or can buy in bulk and hold inventory for longer periods thereby improving its profitability. It has the ability to leverage its balance sheet to take advantage of a favorable business cycle or market opportunity.

Quality assurance: The company’s products and processes undergo regular quality checks to ensure zero defects. The quality assurance efforts include thorough checking of all raw materials, other inputs and finished goods to ensure quality. All the divisions are well equipped with quality checking and testing equipments for quality assurance. It has in-house testing laboratory to test its raw materials and finished products to match the quality standards.

Risks and concerns

Dependent on third party service providers: The company is heavily dependent on third party service provider who provides clinkers to it on job work basis. Its business from its crushing capacity is dependent on its continuing relationship with such service providers, and there can be no assurance that such service providers will continue to do business with it in the future on commercially acceptable terms or at all. However, in case of any change in the delivering pattern of its services providers or disassociation with them can adversely affect its business or if its service providers do not continue to manufacture clinkers for it, or reduce the volume of clinkers manufactured for it, its business prospects, results of operations and financial condition may be adversely affected. Further, loss of or interruption of work by, service provider or a supplier of clinkers or the inability to procure clinkers on a regular basis or at all may have an adverse effect on its revenues, cash flows and operations.

Business is working capital intensive: The company’s business is working capital intensive including fund requirement for payment for bulk purchases of various raw materials. Hence, major portion of its working capital is utilized towards debtors and inventory. The results of operations of its business are dependent on its ability to effectively manage its inventory and trade receivables. To effectively manage its inventory, it must be able to accurately estimate customer demand and supply requirements and manufacture new inventory accordingly. However, if its management misjudges expected customer demand, it could cause either a shortage of products or an accumulation of excess inventory. Further, if it fail to sell the inventory it manufacture, it may be required to write-down its inventory or pay its suppliers without new purchases, or create additional vendor financing, all of which could have an adverse impact on its income and cash flows.

Face competition: The Refractory Industry is highly competitive, having presence of large number of small players. With the high level of competition, the company’s results of operations are sensitive to, and may be materially and adversely affected by, competitive pricing, services offered, brand recognition and other factors. Competition may result in pricing pressure, reduced profit margin or a failure to increase its market share, any of which could substantially harm its business and results of its operations. Many of its competitors have significant competitive advantages, including longer operating histories, larger and broader customer base, greater financial, research and development, marketing, distribution budgets and other resources than it does. The number of its direct competitors and the intensity of competition may increase as it expands into other product lines or as other smaller players expand into other product lines. Its competitors may enter into business combinations or alliances.

Outlook

SP Refractories manufactures and supplies refractory material made using hydrated lime, Calcined Alumina, and other raw materials. Refractory cement is its core focus that is widely used in steel & construction industries because of high thermal conductivity, maximum strength, and heat resistance. The company purchases clinkers from outsiders and thereafter crushes, blend, and pack refractory cement in powder form in its manufacturing facility. It has a healthy client base due to its quality product, customized solutions and large product line. It has clinkers manufacturing capacity of 4000 MT per year and Clinkers crushing capacity of 6000 MT per year. It has dedicated semi-automatic machines and skilled operators for manual checking of raw materials as well as Finished Goods. On the concern side, the company’s business and assets could suffer damage from fire, natural calamities and the goods transported to its customers by its supplier could suffer from damage, misappropriation or other causes, resulting in losses, which may not be covered / fully compensated by insurance. It face an inherent business risk of exposure to product liability or recall claims, in the event that its products fail to perform as expected or such failure results, it may be subject to claims resulting from its manufacturing defects or failure to satisfy the requirements of its customers.

The company is coming out with an IPO of 5,47,200 equity shares of Rs 10 each at a fixed price of Rs 90 per equity share to mobilize Rs 4.92 crore. On the performance front, in fiscal 2021, the company’s total income increased by Rs 472.98 lakh or 22.56 %, from Rs 2,096.56 lakh in fiscal 2020 to Rs 2,569.54 lakh in fiscal 2021. The increase in the year 2021 was due to increase in its capacity utilization since its products were identified as essential goods and its operations were shut down only for initial period of covid-19 pandemic and thereafter it was able to operate. Profit after Tax increased by Rs 35.41 lakh or 88.67%, from Rs 39.93 lakh in fiscal 2020 to Rs 75.34 lakh in fiscal 2021. The company expects to increase its volumes, revenues and scale of operations and it will require substantial working capital for the same. It is hence its strategy to raise funds from this Issue and augment its fund based working capital capabilities. The company may also explore possibilities for utilising the available capital to increase die making capabilities so as to increase its product line in the future.