Gallantt Ispat

Gallantt Ispat has entered the capital market on 22^nd September 2010 to raise Rs. 40.5 crore via public issue, comprising of a fresh issue of 81 lakh equity shares of Rs. 10 each, at a price of Rs. 50 per share. Promoter contribution is Rs. 7 crore, representing 17% of the issue, while balance is available for public subscription. The fixed priced issue, constitutes about 30.26% of post-issue paid-up capital of the company and closes on 24^th September 2010.

Gallantt Ispat, promoted by listed company Gallantt Metal, which presently holds 46.4% stake in the company, is engaged in the manufacture of sponge iron, mild steel billets, re-rolled products (TMT bars and mild steel structural) and wheat flour products, same as that of  its promoter company's business. Thus, there is huge conflict of interest between the company and promoter, as can also be seen from unsecured loan of Rs. 49 crore, as of 20^th August 2010, provided to the company by Gallantt Metal. Moreover, there are significant amount of sale / purchase transactions being undertaken with other group companies. Besides, the company does not have much operating history, as its steel melt shop and rolling mill are operational only since May 2009, while the flour mill is operational since March 2009.

The company's existing manufacturing facility is located in Gorakhpur, while its market is restricted to only Uttar Pradesh. It is now undertaking massive expansion by setting-up an integrated steel plant comprising a sponge iron plant (99,000 MTPA), mild steel billets (1.6 lakh MTPA) and re-rolled products (1.7 lakh MTPA), supported by a 16 MW captive power plant, with an investment of Rs. 211 crore. It is also setting-up a 1.8 lakh MTPA flour mill, also in Gorakhpur, worth Rs. 24 crore. Besides, 113 acres of land development, fixed assets, margin money for working capital and other expenses account for Rs. 73 crore, aggregating to fund requirement of Rs. 308 crore for the company. Part of this is being funded from IPO proceeds, while Rs. 124 crore will be availed as term loan.

Till date, the company has received Rs. 24 crore as capital subsidy from the Utter Pradesh government, of the total Rs. 104 crore available to it. The company will get balance Rs. 79 crore subsidy, only post investment of Rs. 200 crore in capital expenditure. Thus, the expansion plan appears as a scheme to simply pocket this grant. 

Promoter Gallant Metal, which had come out with its Rs. 37 crore IPO, at face value, in March 2006, has track record of delay in implementation of project. This is likely to get repeated for expansion plans of Gallantt Ispat as well, which expects to complete all its expansion projects in the next 6 months, by March 2011. The fact that orders for key plant and machinery amounting to Rs. 81 crore have still not been placed by the company, till 15^th September 2010, just adds to the probability of delay in completion.

Also, there is uncertainity on the raw material linkages, as the application for coal-linkages yet under process, and the company is yet to secure firm linkages for key inputs.

In its first full year of operations, in FY10, the company incurred loss of Rs. 4.5 crore on revenues of Rs. 122 crore. Present equity stands at 18.7 crore and net worth at Rs. 97 crore. Company has debt of Rs. 108 crore, which will rise to Rs. 124 crore by FY11 end. The promoter holding, which presently stands at 92.77%, is likely to decline to 69.93% post-IPO.

The performance of Gallantt Metal is also not too impressive either. For FY10, it reported flat revenues of Rs. 433 crore and net profit of Rs. 24 crore, on equity of 81 crore. For Q1 FY11, its revenue was Rs. 129 crore while net profit slipped to Rs. 4.7 crore. Present market cap of Gallantt Metal is Rs. 266 crore, with outstanding debt of Rs. 161 crore.

Limited geographical presence, lack of firm raw material linkages, poor financial history and doubt on timely execution capabilities of promoters, all put discomfort on the issue of Gallantt Ispat. On fundamentals, investors can pass this one!