IPO Size: Rs. 130 cr – Entirely fresh issue

• Objects: Rs. 50 cr capex, Rs. 40 cr working cap

Price band: Rs. 144-153 per share

M cap: Rs. 390 cr, implying 33% dilution

IPO Date: Wed 30^th Mar to Tue 5^th Apr 2022, Listing 13^th April 2022 (in T category)

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

South India based Steel Pipe Maker

Andhra and Telangana based integrated steel manufacturer, selling Mild Steel (MS) Pipes, Scaffolding, HR Strips, MS Billets, Sponge Iron in South India, mainly used in housing and infrastructure. Promoter stake will drop to 66% from existing 99%.

Rising Capacity and Utilisation

On 84,000 MTPA, pipe mill capacity utilization is 53% currently, leaving ample room for scale up, as utilization was 91% in FY19 when capacity was 20,000 MT. In addition to this, company is establishing a greenfield facility with Rs. 50 cr capex to increase pipe mill capacity by 57% by Nov 2022, to 1,32,000 MTPA, which will further boost revenue FY24E onwards.

Healthy Financials

At 35% capacity utilization, FY21 revenue stood at Rs. 254 cr, with PAT of Rs.15 cr (6% net margin). In H1FY22, utilization rose to 54%, with revenue and PAT jumping to Rs. 200 cr and Rs. 13 cr respectively. EPS for H1FY22 stood at Rs. 7.58 (wrongly mentioned Rs. 15.12 in the RHP), up from FY21’s EPS of Rs. 9.80. It clocked 20%+ RoE for FY21 and H1FY22 and even in FY19, RoE stood at 22%. Net margins stood at 6% even in FY18 and FY19, if one was to argue that past 18 month earnings were supported by rising steel prices.  

Concerns:

1. Company’s scale of operation is small and it lacks captive iron ore mines.
2. 1/4^th revenue generated from sale to group company Ultra Pipe - Related party transactions are always viewed adversely.
3. Gross debt of Rs. 88 cr will continue post IPO. While it is rated BBB+, present net debt equity ratio of 1:1 will shrink to a 0.4:1, as equity expands after IPO.

Attractively Priced Issue

Annualising H1FY22 PAT of Rs. 13 cr leads to a PE multiple of 10x, which much lower than Rama Steel Tubes, Hitech Pipes and JTL Infra all ruling above 15x.

• Rama reported PAT of Rs. 14 cr and Rs. 12 cr for H1FY22 and FY21, same at Hariom, but is trading at a mcap of Rs. 540 cr, making Hariom’s Rs. 390 cr mcap attractive, especially in the light of its healthy growth visibility.  
• JTL with 3 lakh MTPA installed capacity is ruling at a PE multiple of 26x, with mcap of Rs. 1,366 cr. Post expansion, Hariom’s capacity will rise to 1.3 lakh MTPA which is available at mcap of only Rs. 390 cr.