Abha Power and Steel coming with IPO to raise Rs 38.54 crore

Abha Power and Steel

• Abha Power and Steel is coming out with an initial public offering (IPO) of 51,39,200 equity shares of face value of Rs 10 each for cash at a fixed price of Rs 75 per equity share.
• The issue will open on November 27, 2024 and will close on November 29, 2024.
• The shares will be listed on SME Platform of NSE.
• The share is priced 7.50 times higher to its face value of Rs 10.
• Book running lead manager to the issue is Horizon Management.
• Compliance Officer for the issue is Pratibha Patel.

Profile of the company

Abha Power and Steel is engaged in the business of iron and steel foundry, more particularly in the business of casting and manufacturing customised products in mostly all grades of iron and steel. The company’s versatile product portfolio covers all grades of mild steel, spheroidal graphite cast iron, manganese steel, stainless steel, low alloy and high alloy castings (high CR & high Ni), HRCS & WRCS, from as small as 0.5 Kgs to 6 Tonnes single finished casting. The company is a RDSO certified vendor for supply of certain casting products to Indian Railways and an approved vendor for supply of certain casting products to National Mineral Development Corporation and Integral Coach Factory, Chennai. The company is also holding a PED Certificate from TUV-Nord which certifies its quality management system for manufacturing of castings and makes it eligible for supply of pressure equipment to European nations.

Over the years, the company has leveraged its expertise, processes and infrastructure to cater to diverse industries such as Indian Railways, steel, cement, heavy engineering, mining, power, etc. It offers to its customers a comprehensive range of both standard and customised products. With around 20 years of experience, in understanding customer specific requirements, and have a strong focus on quality, safety, value proposition, and the price competitiveness of its offerings, which has helped it in establishing and maintaining long term relationships with its customers. The company sells its products to domestic customers and also exports them to over 6 countries, such as UAE, Germany, Canada, Italy and Netherlands.

The company has a diverse product portfolio of over 1000 product supplemented by its ability to make customised products, demonstrates its capability as an emerging supplier for a diverse range of products and positions it as a strategic and preferred supplier. The company constantly strives to produce its products of standard quality and sustainability. To achieve this, it sticks to strict quality standards, continuous in-house evaluations and training of its workforce. The company’s continuous focus on providing quality products and services consistently to its customers has helped it to nurture long-term relationships with its customers. The company’s track record of delivering timely services and demonstrated industry expertise has helped in forging strong relationships with them. The company has a history of high customer retention and derives a significant proportion of its revenue from repeated customers. 

Proceed is being used for:

• Funding the capital expenditure towards modernization and upgradation of the manufacturing facilities in Bilaspur, Chhattisgarh to expand its product portfolio
• Funding working capital requirements of the company
• General corporate purposes

Industry Overview

One of the primary forces behind industrialization has been the use of metals. Steel has traditionally occupied a top spot among metals. Steel production and consumption are frequently seen as measures of a country's economic development because it is both a raw material and an intermediary product. India is the world’s second-largest producer of crude steel, with an output of 125.32 MT of crude steel and finished steel production of 121.29 MT in FY23. India’s steel production is estimated to grow 4-7% to 123-127 MT in FY24. In FY24 (until November 2023), the production of crude steel and finished steel stood at 94.01 MT and 88.81 MT respectively. In FY24 (until November 2023), the consumption of finished steel stood at 86.97 MT. The per-capita consumption of steel stood at 86.7 kgs in FY23. Huge scope for growth is offered by India's comparatively low per capita steel consumption and the expected rise in consumption due to increased infrastructure construction and the thriving automobile and railways sectors.

The forging industry is a key link between critical manufacturing segments--metal suppliers (both ferrous and nonferrous) and end user industries. Forging units are usually classified basis the installed capacity of the forging unit. Over the years, the Indian forging industry has evolved from being a labour-intensive industry to capital-intensive manufacturing sector. India is 2nd largest producer of castings in the world and has ambitious growth plans with new capacities being added at rapid pace. The Indian Foundry Industry is producing estimated 12 million MT of various grades of Castings as per International standards. There are around 4500 units out of which 85% can be classified as small-scale units & 10% as medium & 5% as large-scale units. Foundry Industry has a turnover of approx. $20 billion with exports approx. $3.54 billion. 

India's casting industry expected to reach $25 billion by 2025. The Indian forging Industry is second in total quantity to China who produces 11 million tonnes that occupies 39 per cent of the market. The China plus one factor and the spiralling energy costs in Europe have enhanced the prospects for Indian players and in the next three years the industry’s capacity is expected to increase to 3.5-4 million tonnes. It can be concluded that the foundry business in India is an essential contributor to the economy of the nation. This sector is responsible for the employment of millions of people and the production of castings of superior quality at more affordable prices. With the assistance of the government, the sector has been able to compete successfully on a worldwide scale thanks to its ongoing efforts to modernize and innovate on a consistent basis. Because of the growing demand from a variety of industries and the widespread use of technologies that are cleaner and more environmentally friendly, the industry has the potential for continuing development and innovation. 

Pros and strengths

Diversified product mix with strong focus on customised products: The company has a diverse product portfolio of over 1000 different products and is in a position to manufacture these products or new products as per the requirement of its customers. It is a RDSO certified vendor for supply of certain casting products such as SGCI Inserts, Jaw Adopters and other ancillary casting products to Indian Railways. It procures orders from Indian railways through direct purchase orders from Zonal Railway. As it is a RDSO approved vendor, it also receives orders from the Railway Contractors. Railway Contractors are allowed to procure products only from RDSO approved Vendors.

Strategically located manufacturing facility: The company’s manufacturing facility is strategically located in close proximity to its raw material sources, which it minimises its transportation costs and provides logistics advantage and cost benefits resulting in improved operating margins. The company’s manufacturing facility is located in mineral reach, densely industrialized and one of the steel hubs of central India i.e. in Bilaspur, in the state of Chhattisgarh. The sourced raw material sources are supported by proper logistics infrastructure which reduces the logistical cost and turnaround time for transportation of raw materials to its manufacturing facility and products to its customers. The strategic location of its plant has helped it in creating synergies as well as achieving economies of scale and operational efficiencies.

Captive Power plant: Power is an important factor in every manufacturing facility. Considering the integrated nature of its manufacturing unit and its corresponding power requirements, the company has installed a power plant with electricity generation capacity of 2.99 MW from Solar at Bakarkuda, Malhar, Masturi, Bilaspur. Its 35% of electricity requirement is met out of the electricity generated by Solar Power. Also, it has a power generator of 250 KVA which gives it stable and uninterrupted power supply for its ancillary processes in its manufacturing operations. This helps to avoid any delays in manufacturing process thereby ensuring optimum utilization of its capacities.

Risks and concerns  

Maximum revenue comes from limited clients: A significant majority of the company’s revenues from operations are derived from a limited number of customers. The company garnered 68.18%, 72.97% and 68.04% of its revenue from top 10 customers in FY24, FY23 and FY22, respectively. The company’s revenues may be adversely affected if there is an adverse development with such customer, including as a result of a dispute with or its disqualification by such major customers, which may result in significant reduction in its orders from such customers, and thereby decline in its revenue, cash flows and liquidity. Further, if the company’s customers are able to fulfil their requirements through captive or in house manufacturing or any of its existing or new competitors providing products with better quality, or cheaper cost, it may lose significant portion of its business and revenue.

Geographical constrain: The company has historically derived a significant portion of its revenues from State of Madhya Pradesh and Chhattisgarh. Accordingly, any materially adverse social, political or economic development, natural calamities, civil disruptions, regulatory developments of the government in the State of Madhya Pradesh and Chhattisgarh or any adverse conditions affecting the business of its customers or its business in the State of Madhya Pradesh and Chhattisgarh which will in turn have a material adverse effect on its business, financial condition, and cash flows.

Business is capital intensive: The company’s business requires significant amount of working capital primarily as a considerable amount of time passes between purchase of raw materials and collection of receivables post sales to customers. The company’s working capital requirement was Rs 2,148.18 lakh, Rs 1,742.52 lakh and Rs 2,285.57 lakh for the financial years ended March 31, 2024, March 31, 2023 and March 31, 2022, respectively. The working capital requirement for the financial year 2025 and 2026 is projected to be Rs 2,318.01 lakh and Rs 2,963.77 lakh. This requires it to obtain financing through various means. As on October 15, 2024, the company’s total secured borrowings stood at Rs 2,122.01 lakh. The company may incur additional indebtedness in the future. Additional debt financing could increase its interest costs and require it to comply with additional restrictive covenants in its financing agreements. Additional equity financing could dilute its earnings per Equity Share and investors interest in the company and could adversely impact its Equity Share price.

Outlook

Abha Power and Steel is engaged in the business of casting and manufacturing iron and steel products. The company makes a wide variety of products, including mild steel, manganese steel, stainless steel, and low and high-alloy castings. As of March 31, 2024, the total installed capacity of the plant was 14,400 metric tonnes per annum (MTPA). Moreover, it has a diverse portfolio of over 1,000 products, it caters to various industries. On the concern side, the company’s revenue is majorly concentrated from the State of Madhya Pradesh and Chhattisgarh. Any adverse changes in the state policies of Madhya Pradesh and Chhattisgarh may have a material effect on its business and results of operations. Moreover, a significant majority of its revenues from operations are derived from a limited number of customers.

The company is coming out with an IPO of 51,39,200 equity shares of face value of Rs 10 each for cash at a fixed price of Rs 75 per equity share to mobilize Rs 38.54 crore. On performance front, total revenue has decreased by Rs 295.25 lakh and 5.40%, from Rs 5,469.96 lakh in the fiscal year ended March 31, 2023 to Rs 5,174.70 lakh in the fiscal year ended March 31, 2024. The decrease in revenue was on account of decrease in production and sale of finish product. Moreover, net profit has increased by Rs 238.05 lakh and 169.86% from Rs 140.14 lakh in the fiscal year ended March 31, 2023 to Rs 378.19 lakh in the fiscal year ended March 31, 2024.

The company has over the years diversified its product portfolio and presently manufacturing low value products on a large scale and high value products on a low scale. In order to manufacture high value products consistently, it has to upgrade its existing manufacturing facility to make it equipped with (i) electric arc furnace to get better quality of steel; (ii) automatic mechanised moulding system; (iii) larger heat treatment system; (iv) Systematic fettling setup; and (v) increase covered working area. With the upgradation of its manufacturing facility, the company will be able to manufacture critical railway parts and oil & gas castings. The strategic decision to expand its product portfolio will enable it to create additional revenue streams, diversify its business operations and reduce its dependence on existing small value products. This will also provide the company export opportunity.