Newmalayalam Steel coming with IPO to raise Rs 41.76 crore

Newmalayalam Steel

• Newmalayalam Steel is coming out with an initial public offering (IPO) of 46,40,000 equity shares in a price band Rs 85-90 per equity share.
• The issue will open on December 19, 2024 and will close on December 23, 2024.
• The shares will be listed on SME Platform of NSE.
• The face value of the share is Rs 10 and is priced 8.50 times of its face value on the lower side and 9.00 times on the higher side.
• Book running lead manager to the issue is Khandwala Securities.
• Compliance Officer for the issue is Shravan Kannan Dev.

Profile of the company

Newmalayalam Steel is engaged in the business of manufacturing galvanised pipes, tubes, and sheets. Owing to the consistent efforts of its Promoters, the company has been able to create a brand presence in Kerala, under the name of ‘Demac Steel’. In 2018, the company commenced manufacturing of galvanised pipes, tubes, and sheets by installing another electric resistance welding tube mill of an installed capacity of 3,500 MT in its manufacturing unit situated at Thrissur, Kerala. Its products find extensive application in the general households of Kerala. Galvanised pipes and tubes are used for building the roofs to reduce heat and avoid leakage, further the galvanisation process offers an added advantage of increasing the life of the product and enhancing its quality by making it rust-free. In order to market and sell its products, it has established a widespread dealer base in Kerala through which it sells its products to local contractors and retailers. Its dealers have an established marketing network which it has utilized to create a market presence in Kerala and for penetrating the local markets of the aforementioned areas.

Since incorporation, it has been the company’s vision and focus to manufacture and supply superior quality products to its customers, which has enabled it to expand its business operations. It has a quality control and assurance division (Quality Division) in its manufacturing unit which carries out the required tests on the materials received including raw materials which are used in the manufacturing process and also on the final products. Its quality laboratory carries out wheat analysis tests on the raw materials and finished products to ensure that its products are compliant with the specifications provided by its customers. Its Quality Division also carries out tests on all the stages of its manufacturing processes to ensure that the quality is built through the process. It has an in-house laboratory at its manufacturing unit, wherein its Quality Division carries out quality tests on the raw material, semi-finished goods and finished goods.

The company’s manufacturing unit is substantially operated through its solar plant situated at Poyya Village and Kodungallur Taluk. In the year, 2022, the company had set up a solar plant of an installed capacity of 489.77 kWp. It partly sources the electricity for running its manufacturing unit from its solar plant and also rely on the electricity supplied by Kerala State Electricity Board. It also sells a portion of the electricity produced at the solar plant to Kerala State Electricity Board, which is adjusted in its bill by the said authority. Its solar plant empowers it in becoming a responsible, ethical and socially responsible green unit. 

Proceed is being used for:

• IT / Technological Upgradation of existing manufacturing facility
• Expansion of the existing solar facility for power generation
• Funding of expenditure towards civil construction of new factory shed cum storage facility within the existing factory premises situated at Kerala
• Advertising, marketing and brand building
• Funding incremental working capital requirements of the company
• Issue related expenses
• General corporate purposes

Industry Overview

India is the second largest steel producer in the world with an installed capacity of 154.1 MT in FY22. It is also the second-largest consumer of finished steel with a consumption of 120 MT in FY23. The Indian steel sector has been able to grow over the years due to domestic availability of raw materials such as iron ore and cost-effective labour. The industry has been driven by domestic steel demand from sectors such as construction, real estate, and automobiles, while the vast coastline has enabled exports and imports, making India one of the leading countries in the global steel industry. In the last 10 years, finished steel production has grown at a CAGR of 2.8% to 122 MT in FY23 from 96 MT in FY14. The growth in production has been backed by a rise in domestic steel consumption on account of growing economic activities in the country supported by an increase in infrastructure and construction spending by the government, a rise in automobile and consumer durable demand, among others. Domestic finished steel consumption in India has increased at a CAGR of 5.5% to 120 MT in FY23 from 74 MT in FY14. After witnessing an uptrend in steel production, India observed a de-growth of 20.2% y-o-y in FY19 due to lower exports. Further, the outbreak of covid-19 pandemic resulted in a decrease in steel production in FY21, a de-growth of 6.3%.

India’s renewable energy (RE) sector has experienced a remarkable growth rate of 14% over a five-year period, spanning from FY 2017 to FY 2022. This growth has propelled the country to achieve a significant milestone, reaching a total RE capacity of 114 GW as of September 2022. Notably, solar power constitutes around 51% of this overall capacity. Over the past decade, the share of solar installations in India has exhibited a remarkable compound annual growth rate (CAGR) of 29%, soaring from 4% in FY 2012 to 51% by September 2022. India’s appetite for renewables is growing year on year, the country is now ranked 4th globally in solar power generation. India Solar Energy Market was estimated at $38 billion in 2022 and is anticipated to reach around $238 billion by 2030, growing at a CAGR of roughly 40% between 2023 and 2032.

As the solar energy industry expands, the demand for various components and infrastructure associated with solar power generation will also experience a substantial increase. Solar structural pipes, which play a crucial role in supporting solar panels and creating the framework for solar installations, may likely see a tremendous surge in demand. Solar structural pipes are used in the construction of ground-mounted solar arrays, rooftop installations, and solar tracking systems. As the solar energy capacity in India increases, more solar farms and installations will be set up, driving up the demand for these pipes. India's commitment to expanding its renewable energy capacity, especially solar, is backed by favorable government policies and incentives. This supportive environment shall encourage investment in the entire solar ecosystem, including the production and supply of components like solar structural pipes. In conclusion, the booming India solar energy market may likely have a cascading effect on various industries, including the market for solar structural pipes. The increased demand for solar installations, driven by India's renewable energy goals and policies, is poised to create substantial opportunities for businesses involved in supplying the necessary components to support this growth. 

Pros and strengths

Widespread distribution network: The company has invested in establishing processes, teams and technology to manage its distribution channels and retail presence. The company has a unique business model through which it markets and sells its products. The company has engaged number of dealers to ensure easy product availability to its customers, efficient supply chain, focused customer service and short turnaround times. Its sales and marketing team periodically reviews new products, assesses market trends and develops and builds business relations. Its long-standing dealer base is supported by an efficient sales team, leading the products to retailers and wholesalers in Kerala, thereby making its products available on the shelf at all times, reducing dealer stock levels and increasing annual sales per dealer. The intermediaries in its distribution network remain in constant contact with its customers, which enables them to perceive the market requirement and the sentiment of customers towards its products.

Diversified product basket: The company’s capacity to continuously diversify and develop its products, effectively supported by its strategically located manufacturing and distribution network, enables it to launch and market new products aligned to evolving consumer preferences. The company’s products are generally standardised in nature, however on specific requirements of its dealers/ customers, it also customise its products by reducing or increasing the length of its tubes and pipes. This facilitates minimal time-to-scale, and has enabled it to generate significant revenues from each of its products. Owing to its wide range of products, its business and results of operations are less susceptible to price fluctuation or disruptions in market trends.

Brand recall and established track record: The reputation and the quality of its products has enabled it to establish brand equity of the products marketed under its brand name “Demac Steel”. It has a track record of developing home-grown brands, leveraging its deep understanding and market research of the steel industry. The company’s products are marketed by its dealers, sales and marketing teams. Its brands enable it to better cater to the needs of its customers and increase the range and diversity of its products, leading to increased brand loyalty and repeat customers. The steel industry is a fragmented and an unorganized industry in India and it intends to focus on creating a diverse portfolio of brands to gain higher market share from the unorganized segment. The company is also enhancing brand visibility by expanding its distribution network and has taken certain initiatives towards achieving the same.

Risks and concerns  

Dependent on dealers for a significant portion of revenue: In order to market and sell its products, it has established a widespread dealer base in Kerala through which it sells its products to local contractors and retailers. The company’s dealers have an established marketing network which it has utilized to create a market presence in Kerala and for penetrating the local markets of the aforementioned areas. It has entered into formal agreements with majority of its dealers and offer them a mutually agreed upon margin on the goods which are distributed by them. It sells all its products using its dealer network. Any decrease in revenues or sales from any one of its key intermediaries may adversely affect its business and results of operations.

Geographical constrain: The company’s manufacturing unit and its business operations are located in Kerala. Its products find extensive application in the general households of Kerala. Galvanised pipes and tubes are used for building the roofs to reduce heat and avoid leakage, further the galvanisation process offers an added advantage of increasing the life of the product and enhancing its quality by making it rust-free. Its products are therefore manufactured to provide an effective solution to the continuous damage caused to houses in Kerala on account of inclement weather condition. Accordingly, its products experience a constant demand on account of being an indispensable raw material in the construction industry in Kerala. Consequently, it is exposed to risks from economic, regulatory and other developments in the eastern region which could have an adverse effect on its business, results of operations and financial condition.

Steel industry is highly cyclical: The steel industry is cyclical in nature. Steel prices fluctuate based on a number of factors, such as the availability and cost of raw material inputs, climatic changes, fluctuations in domestic and international demand and supply of steel and steel products, worldwide production and capacity, fluctuation in the volume of steel imports, transportation costs and protective trade measures, in the economies in which the steel producers sell their products and are sensitive to the trends of particular industries, such as the construction, infrastructure development and transportation, which are among the biggest consumers of steel products. In the last few Fiscals, the company’s focus on retail customers through its dealers has helped it to deliver consistent financial performance despite adverse conditions in the steel sector, in circumstances where a downturn occur in these economies or sectors, it may experience decreased demand for its products, which may lead to a decrease in its product prices, which may, in turn, have a material adverse effect on its business, results of operations, financial condition and prospects.

Outlook

NewMalayalam Steel manufactures galvanised pipes, tubes, and sheets. The company has an electric resistance welding tube mill with an installed capacity of 3,500 MT in a manufacturing unit in Kerala, India. The company has Widespread distribution network and presence across various retail channels. It has strategically located manufacturing facilities with modern infrastructure and integrated manufacturing facilities with a core focus on quality. On the concern side, the company is dependent on Jaihind Steel Private Limited, one of its Promoter Group entity for a portion of its revenue and business. It also purchases raw materials from Jaihind Steel Private Limited and Jaihind Tubes Private Limited, one of its Group Companies, and are dependent on it for part of its raw materials requirements. In the event, of loss of business from such Promoter Group entity or delay in receiving raw materials, its business and results of operations could be adversely affected.

The company is coming out with a maiden IPO of 46,40,000 equity shares of Rs 10 each. The issue has been offered in a price band of Rs 85-90 per equity share. The aggregate size of the offer is around Rs 39.44 crore to Rs 41.76 crore based on lower and upper price band respectively. On performance front, the revenue from operations has decreased by 15.40% from Rs 35,479.84 lakh in fiscal year 2023 to Rs 30,016.06 lakh for the fiscal year ended 2024. The decrease in the revenue is due to price fall in the iron steel across the globe, the sales revenue decreased. Moreover, net profit after tax, extraordinary items and minority interest has decreased by 28.91% from Rs 600.48 lakh for the fiscal Year 2023 to Rs 426.86 lakh for the Fiscal year 2024, due to decrease in sales and other income and whereas increase in finance cost, other expenses and depreciation expenses. 

The company has over the years increased its production capacities through consistent growth and innovation. In 2018, the company commenced manufacturing of galvanised pipes, tubes, and sheets by installing another electric resistance welding tube mill of an installed capacity of 3,500 MT in its manufacturing unit in Thrissur, Kerala. In order to capture the market and cater to the growing demand, in the year 2019, it increased its manufacturing capacity by installing another electric resistance welding tube mill of an installed capacity of 4,000 MT in its manufacturing unit. Going forward, the company intends to expand the manufacturing capacity by establishing a new factory shed in the same premises as its manufacturing unit, which will increase the present capacity and subsequently boost its sales and profitability.