Verdict: Better Listed Peers ruling at Lower Valuation
Rs. 909 cr IPO: 72% fresh issue to repay Rs. 470 cr debt and 28% OFS by promoters
IPO Date: Mon 14th Jun to Wed 16th Jun 2021
Price band: Rs. 303-306 per share
Post Issue Mcap: Rs. 7,800 cr (11.7% dilution)
Listing: 24th June 2021.
5.7 MTPA Steel Capacity in East India
Shyam Metalics operates 3 steel plants in West Bengal and Odisha and 227 MW captive power plant, meeting 80% power requirement, and is looking to double capacity to 11.6 MTPA by FY25E. Company calls itself an integrated player, but does not own the critical first piece i.e. iron ore mines, unlike many peers, which increases costs, makes availability difficult (especially after recent mine auction) and caps benefits of ongoing surge in iron ore prices, up ~50% in Q4FY21 and another 45% in Apr-May 2021. Is this why Q4FY21 financials have not been presented in the RHP?
Company also lacks backward linkages to coal mines.
Net Debt to reduce from Rs. 610 cr to Rs. 140 cr
9MFY21 capacity utilization stood at 91% with revenue up 20% YoY to Rs. 3,933 cr, split 15% from ferro alloys, 37% from long products (TMT, wire rods, pipes) and balance from billets, sponge iron and pellets. It reported 18% EBITDA margin for 9MFY21, similar to average EBITDA margin of FY18-20, as it only enjoys the processing margin. Company pays lower income tax at 18% due to tax holidays which will continue for another 2-3 years. 9MFY21 PAT stood at Rs. 456 cr, leading to an EPS of Rs. 19.5 over Rs. 14.6 for FY20, on a large equity of Rs. 234 cr (FV Rs. 10). Post IPO, net debt will be negligible in relation to Rs. 3,300 cr net worth while promoter holding to fall to 88% from 100% at present.
Valuation at Significant Premium:
At Rs. 306, Shyam Metalics will have enterprise value (EV) of Rs. 7,950 cr, which leads to an EV/T of about Rs. 14,000 on 5.7 MTPA capacity and a PE multiple of close to 7.7x, on post dilution estimated EPS of Rs. 40, which are both expensive. Peer Godawari Power, with 4.7 MTPA capacity and captive iron ore mines assuring raw material availability and cost advantage, is ruling at an EV of Rs. 5,100 cr or EV/T of close to Rs. 11,000 and PE multiple of 3.3x (FY22E). Even Sarda Energy with captive iron ore, coal and power facilities is trading at a PE multiple of 4x making Shyam Metalics’ IPO grossly over-valued.
Shyam Metalics’ low leverage coupled with steel up cycle may lead to market attraction for the IPO. However, if one wants to ride the steel up cycle, leverage is not the most competitive advantage, as most peers have reported significant debt reduction in FY21 which is likely to continue into FY22. Instead, raw material integration is vital and hence makes sense to go with a large and fully backward integrated player like SAIL which is also ruling at much lower PE multiple of around 3x, unlike semi-integrated Shyam at PE of +7x.
Such mid-sized steel companies do well as long as sector cycle is on an uptrend, which is the case now. Large players like Tata Steel, JSW and Jindal Steel are ruling at a PE of 7x on FY22 earnings while SAIL is the most efficient (if overlook PSU tag) and is ruling at a PE of 3x (FY22E). It is meaningless to invest in such grossly expensive IPO, where the burden will be carried by new investors once sector cycle turns the trend. Better option is to buy the least expensive large steel maker from secondary market.
Thus, we do not recommend investing in the issue, and instead advise looking at quality commodity picks recommended by us in the Member Zone.
Grey Market Premium (GMP) of Shyam Metalics: Grey Market Premium of Shyam Metalics is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.
Disclosure: No Interest.