Vraj Iron and Steel coming with IPO to raise Rs 181.52 crore

Vraj Iron and Steel 

• Vraj Iron and Steel is coming out with a 100% book building; initial public offering (IPO) of 87,69,230 shares of Rs 10 each in a price band Rs 195- 207 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 26, 2024 and will close on June 28, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 19.50 times of its face value on the lower side and 20.70 times on the higher side.
• Book running lead manager to the issue is Aryaman Financial Services.
• Compliance Officer for the issue is Priya Namdeo.

Profile of the company

The company is engaged in manufacturing of Sponge Iron, M.S. Billets, and TMT bars under the brand Vraj. It currently operates through two manufacturing plants which are located at Raipur and Bilaspur in Chhattisgarh spread across 52.93 acres. As of December 31, 2023, the aggregate installed capacity of its manufacturing plants was 2,31,600 tons per annum (TPA) (comprising of intermediate and final products). The company’s manufacturing plant at Raipur also includes a captive power plant with an aggregate installed capacity of 5 MW, as of December 31, 2023.

The company is in the process of increasing the capacities of its existing manufacturing plants and captive power plant, which is expected to increase its aggregate installed capacity (comprising of intermediate and final products) from 2,31,600 TPA to 5,00,100 TPA and captive power plants aggregate installed capacity from 5 MW to 20 MW. The proposed expansion of Sponge Iron and Captive Power Plant are expected to become operational in Q4 of FY 2024-25 whereas MS Billets is expected to become operational in Q1 of FY 2025-26.
The company’s product offerings such as Sponge Iron, TMT Bar, MS Billets and by-products Dolochar, Pellet and Pig Iron cater to a mix of customers that consist of industrial customers and end-users. It sells its products directly as well as through brokers / dealers. As part of its initiatives towards continual improvement, it has obtained the Environment Management System Certification under the new standard of ISO 14001: 2015 for Raipur Plant.

Proceed is being used for:

• Funding for Capital Expenditure towards the Expansion Project at Bilaspur Plant: Repayment or prepayment of borrowings from HDFC Bank obtained by the company for the capital expenditure towards the Expansion Project at Bilaspur Plant; and Capital expenditure towards the Expansion Project at Bilaspur Plant.
• General Corporate Purposes.

Industry overview

India is the second-largest steel producer in the world with an installed capacity of 161.3 MT in FY23. It is also the second-largest consumer of finished steel with a consumption of 120 MT in FY23. The Indian steel sector growth over the years has been attributed to the domestic availability of raw materials such as iron ore and cost-effective labour. Also, the industry has benefitted from domestic demands in sectors such as construction, real estate, and automobiles. Whereas the vast coastline has enabled exports and imports, making India one of the leading countries in the global steel industry. Further, the per capita finished steel consumption in India was 81.1 kg in CY22, significantly lower than the world average of 222 kg per capita. The National Steel Policy 2017 envisages that per capita finished steel consumption will increase to 158-160 kg by FY31. In addition, steel has an output multiplier effect of 1.4x on GDP and an employment multiplier effect of 6.8x in India. Thus, the steel industry has significant domestic potential and is expected to play a key role in the future economic growth of the country. 

The domestic crude steel production has grown at a CAGR of 3.3% in the past five years to reach 126.3 MT in FY23 from 110.9 MT in FY19. Large steel manufacturers’ capacity utilization has been in the range of 80% to 90% in FY23 and most players have announced the expansion of crude steel capacities. The National Steel Policy 2017 envisages achieving 300 MT of production capacity from the current level of 153-157 MT to cater to the expected steel demand of 230 MT by FY31. The steel industry in India has grown steadily with a CAGR of 16.4% from FY19-FY22 in value terms, driven by volume and realisation growth. The size of the industry reached Rs 9 lakh crore in FY22 as the average prices of finished steel rose by 45% on a y-o-y basis. During FY23, the size of the industry stood at 9.2 lakh crore, indicating a growth of 2.7% y-o-y. This growth can be attributed to increased volumes of finished steel by 13.3% y-o-y and high prices of steel. Finished Steel exports from India have contributed to the total offtake of steel, in addition to the domestic demand, supported by India’s increasing capacity and production. For instance, exports increased at a CAGR of 28.5% over the period of 4 years from 6.4 MT in FY19 to 13.5 MT in FY22. In addition, India was a net steel exporter for three years FY20-FY22.

Pros and strengths

Integrated and well-established manufacturing setup: The company currently operates two integrated steel manufacturing plants, in Bilaspur and Raipur, Chhattisgarh. The integrated nature 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. It primarily focusses on manufacturing three main products, sponge iron, MS Billets and TMT Bars. It has a total capacity of 1,20,000 TPA for the production of Sponge Iron, where its backward integration begins. The company uses induction furnaces for production of steel. Induction furnaces convert steel scrap and sponge iron into liquid steel by induction heating. This further gets processed into billets, blooms, ingots, etc. It currently has a production capacity of 57,600 TPA of MS Billets, which can be used by its rolling mills to manufacture TMT Bars, having a production capacity of 54,000 TPA. The company had chosen Bilaspur Plant to do the capacity expansion mainly due to (a) lack of manufacturing facility for MS Billets &lack of Power Plant to reduce the cost and (b) availability on existing land in the Bilaspur plant & thereby no additional cost is to be incurred for the Land & Site Development for this Expansion. By doing the expansion at Bilaspur Plant, the company will be able to reduce the cost of the project and improve the margin.

Diversified product mix with strong focus on value added products: The company’s products primarily comprise of Sponge Iron, TMT Bar and MS Billets which amounts to 96.88% 97.01%, 95.31% and 96.40% of total revenue from operations for period ended December 31, 2023, Fiscals 2023, 2022 and 2021 respectively. Its TMT Bar is sold under the brand ‘Vraj’ TMT Bars. Its diversified product range has resulted in a diversified product mix, which has reduced its dependency on a particular product and de-risked its revenue streams. For the nine months ended December 31, 2023 and Fiscals 2023, 2022 and 2021, it witnessed a shift in its sales mix, with TMT Bars contributing 30.31%, 34.90%, 24.39% and 15.38% respectively. Sponge Iron has been contributing a higher share to its revenue from operations during the last three years and period ended December 31, 2023. Such forward integration practices of sponge iron and MS Billets will result in cost efficiencies and higher operating margins, and hence it has been deriving a significant proportion of its revenue from end-products such as TMT Bars. 

Manufacturing plants are strategically located: The company’s two manufacturing plants are strategically located at Bilaspur and Raipur within the mineral rich State of Chhattisgarh and in close proximity to the mineral belt in eastern India. Its presence in these locations allows it to have easy access to raw materials and end users both which helps it overcome significant entry barriers in comparison with its competitors. This lowers its transportation costs and provides it with logistics management and cost benefits, thereby improving its operating margins. The company has entered into agreements for purchase of iron ore lump with NMDC and a fuel-supply agreements for purchase of coal with South Eastern Coalfields enabling smooth flow in production plants. The main advantages of buying raw materials from its existing suppliers are their enormous capacity, which allows them to meet its requirements of raw materials under any circumstance, their reduced lead times and seamless material flow, on-time deliveries and direct line of communication. 

Experienced Promoter, Board and management team: The company is led by its experienced and diverse board and management team, who have multifold experience in the iron and steel industry, and have been instrumental in the growth of the company and has the expertise and vision to scale up its business. Vijay Anand Jhanwar is the Promoter and the Chairman and Managing Director of the Company and has been well-established in the industry for more than two decades. He was the General Secretary, President and also the Co-Chairman of Chhattisgarh Sponge Iron Manufacturers Association. He was also an expert member of Steel Consumer Council of India under the Ministry of Steel, Government of India, during the period commencing from the year 2016 to 2019. The knowledge and experience of its management and its team provide it with a competitive advantage as it seek to grow its existing business and expand the same. Having an experienced Board of Directors who have extensive knowledge and understanding of the metal industry being supplemented by a strong senior management team with significant experience in the metal industry will be strong foundational pillars of growth for its company.

Risks and concerns

Manufacturing facilities concentrated in single region: The company’s existing manufacturing units are located at Raipur and Bilaspur, Chhattisgarh. Further its Expansion Project is also being implemented at Bilaspur, Chhattisgarh. Its success depends on its ability to successfully manufacture and deliver products to meet customer demand. Its manufacturing facilities are susceptible to damage or interruption or operating risks, such as human error, power loss, breakdown or failure of equipment, power supply or processes, performance below expected levels of output or efficiency, obsolescence, loss of services of its external contractors, terrorist attacks, acts of war, break-ins, earthquakes, other natural disasters and industrial accidents and similar events. During COVID-19 pandemic, on account of the government-imposed lockdown in India, operations at all of its manufacturing facilities were temporarily shut down and it was required to follow protocols as suggested by regulatory authorities, which impacted its ability to operate its manufacturing facilities at optimum utilizations. Further, any materially adverse social, political or economic development, civil disruptions, or changes in the policies of the state government or state or local governments in this region could adversely affect its manufacturing operations, and require a modification of its business strategy, or require it to incur significant capital expenditure or suspend its operations.

Predominantly dependent on sale of steel product: The company’s business prospects are dependent on the demand for its products amongst its existing customers and new customers. In addition, its financial performance is dependent on the sale of its steel products such as TMT Bars, MS Billets and Sponge Iron. As a result, its business and financial condition is dependent on the performance of the steel market in India and it is exposed to fluctuations in the performance of these markets. In the event of a decrease in demand for steel in India, it will experience pronounced effects on its business, results of operations, financial condition, cash flows and prospects. The steel market may be affected by, among others, changes in government policies, government initiatives, economic conditions, income levels and interest rates, which may negatively affect the demand for and the valuation of its products. These and other factors may negatively contribute to changes in the prices of and demand for its steel products and may materially adversely affect its business, financial condition, results of operations and cash flows. 

Do not have long-term agreements with customers: The company’s product offerings cater to industrial customers through its agents or by directly supplying to traders. Though it has had repeat orders from customers and has developed relationships with certain customers, it does not typically enter into long-term contracts with its customers. In the absence of long-term contracts, there can be no assurance that its existing customers will continue to purchase its products that may have a material adverse effect on its business, results of operations and financial condition. It derives a significant portion of its revenues from its top 10 customers. The loss of business derived from these customers or a significant reduction in, the revenues it receives from, one or more of these customers may adversely affect its business.

Subject to strict quality requirements: The company may face an inherent business risk of exposure to product defects and subsequent liability claims if the use of any of its products results in personal injury or property damage, however, in the past existence of its business operations it has not faced any liability claim for its products which has resulted in personal injury or property damage. The products manufactured by it needs to comply with certain standards as prescribed by the Bureau of Indian Standards (BIS). It may not be able to meet regulatory relevant quality standards in India, or the quality standards imposed by its customers and applicable to its manufacturing processes, which could have a material adverse effect on its business, financial condition, results of operations and cash flows. If any of its products do not meet regulatory standards or are defective, it may be, inter alia, (i) responsible for damages relating to any defective products, (ii) required to replace, recall or redesign such products or (iii) incur significant costs to defend any such claims. 

Outlook

Vraj Iron And steel is a subsidiary company of Gopal Sponge and Power (GSPPL) Raipur having interest in steel, power. The company has currently two manufacturing units at Raipur and Bilaspur in Chhattisgarh. The company has pride to declare itself as one of the leading Iron and steel manufacturers of Central India. It is in the process of adding fresh capacities to its manufacturing plants and captive power plants and diversifying into related segments. Its state-of-art integrated steel plants includes manufacturing setup like DRI unit, EAF, continuous billet casting mill, sophisticated and high-speed rolling mill, microprocessor-based product technologies and fully-equipped quality Assurance & testing laboratories. Its best quality Iron and steel products is most preferred for all type of Structure purposes across India. On the concern side, to effectively manage the company’s inventory, it must be able to accurately estimate customer demand and supply requirements and manufacture and trade inventory accordingly. If its management has misjudged expected customer demand it could adversely impact the results by causing either a shortage of products or an accumulation of excess inventory. Further, if it fails to sell the inventory it manufactures, it may be required to write-down its inventory or pay its suppliers without new purchases, or create additional vendor financing, which could have an adverse impact on its income and cash flows.

The company is coming out with an IPO of 87,69,230 equity shares of face value of Rs 10 each. The issue has been offered in a price band of Rs 195-207 per equity share. The aggregate size of the offer is around Rs 171 crore to Rs 181.52 crore based on lower and upper price band respectively. On performance front, the company’s revenue from operations increased by 24.55% to Rs 5,156.71 million in Fiscal 2023 from Rs 4,140.43 million in Fiscal 2022. The company’s profit for the year increased to Rs 539.97 million in Fiscal 2023 from Rs 287.04 million in Fiscal 2022. Meanwhile, by adding further production capacities, the company intends to leverage its strong execution capabilities in a capital efficient manner to maintain and improve its return ratios and drive sales growth through penetrating deeper in its established regional markets, and hence it will be able to better cater to the increased demands of its customers and gain additional cost efficiencies through economies of scale and better cost controls, leading to improving its presence across the steel value chain.