Chaman Metallics coming with an IPO to raise Rs 24.21 crore

Chaman Metallics

• Chaman Metallics is coming out with an initial public offering (IPO) of 63,72,000 equity shares of face value of Rs 10 each for cash at a fixed price of Rs 38 per equity share.
• The issue will open for subscription on January 04, 2023 and will close on January 06, 2023.
• The shares will be listed on NSE Emerge Platform.
• The share is priced 3.80 times higher to its face value of Rs 10.
• Book running lead manager to the issue is Hem Securities.
• Compliance Officer for the issue is Rahul Relwani.

Profile of the company

Incorporated in 2003, the company is primarily engaged in the business of manufacturing and selling of Direct Reduced Iron (i.e. sponge iron). Sponge iron is mainly used as a raw material for making steel in electric arc furnaces and induction furnaces. Through its sponge iron business, the company caters to the metallic requirements of steel producers in selected geographies. The company was under the control of MSP Group from 2006 to 2019. In 2019, the company was acquired by Raipur-based GR Group which is in steel business since 1996. The company’s business operations are organized synergistically, and it derives benefits after its acquisition by GR Group, which operates in various segment of steel i.e. Ferro alloys, Sponge Iron, MS Ingots and re-rolled products.

The company’s manufacturing unit is based at Chandrapur, Maharashtra and is spread across an area of around 63 acres of land. At its sponge iron manufacturing facility, it operates two Rotary kilns having an aggregate annual installed capacity of 72,000 MT (2 X 100 MTPD) for production of sponge iron as at September 30, 2022. The strategic location of its sponge iron manufacturing facility aids its access to high-quality iron ore, iron ore pellets, coal and dolomite which are the major raw materials for sponge iron manufacturing. During the production of sponge iron, a solid waste is produced as a by-product called dolochar.

The company has been granted ISO 9001:2015 for quality management systems, ISO 14001:2015 for environmental management systems and ISO 45001:2018 for occupational health and safety management systems. The company’s manufacturing facility is equipped with requisite technology and infrastructure including machineries, testing laboratory other handling equipments to facilitate smooth manufacturing process. The key raw materials to produce sponge iron are iron ore/iron ore pellets, coal and dolomite. Sponge iron manufacturing is highly sensitive to raw material characteristics that would help obtain the rated capacity and the desired product quality. To ascertain the suitability of its raw materials in a rotary kiln, it has in-house testing laboratory that is responsible for conducting tests on raw materials i.e. coal, iron ore and dolomite to check their chemical and physical properties, so as to ensure that the product conform with the pre-determined standards.

Proceed is being used for:

• Meeting working capital requirements
  
• General corporate purpose
  
• Meeting issue expenses

Industry overview

India’s finished steel consumption is anticipated to increase to 230 MT by 2030-31 from 105.751 MT in FY22.To drive post COVID19 economic recovery, for the government has planned investments in roads, railways, metro connectivity, industrial parks, industrial  corridors, DFC, transportation of water, oil and gas, transmission towers, affordable housing. All these sectors will drive demand for steel. To achieve steel capacity build-up of 300 MTPA by 2030, India would need to invest $156.08 billion by 2030-31. The industry is witnessing consolidation of players, which has led to investment by entities from other sectors. The ongoing consolidation also presents an opportunity to global players to enter the Indian market. In FY22, the production of crude steel and finished steel stood a 120.007 MT and 113.596 MT, respectively. In April 2022, the production of crude steel in India stood at 10.144 MT (million tonnes). In April 2022, finished steel production stood at 9.382 MT.

Meanwhile, India is also an important producer of pig iron. Post-liberalization, with setting up several units in the private sector, not only imports have drastically reduced but also India has turned out to be a net exporter of pig iron. The private sector accounted for 89% of total production of pig iron (5.76 mt) in the country in 2021-22 (provisional). Moreover, India, world’s largest producer of sponge iron, has a host of coal-based units located in the mineral-rich states of the country. Over the years, the coal-based route has emerged as a key contributor and accounted for 77% of total Sponge Iron production in the country during 2021-22 (provisional). Production of Sponge Iron making too has increased over the years and stood at 39.03 mt during 2021-22 (provisional).

Demand for steel from different sectors will drive this industry. Consumption of steel by India’s infrastructure segment is expected to increase to 11% by FY26. Steel demand from the automotive sector is expected to increase due to rise in the demand for automobiles. The new Vehicle Scrappage policy will help in reducing steel prices as the policy enables recycling of materials used in old vehicles. On the healthcare front, key steel producers are now exceeding their capacities to produce oxygen cylinders for COVID patients. The Smart Cities’ Affordable Housing and industrial corridors are a few government initiates to boost the steel industry. About 158 lakh metric tonnes (MT) of steel are likely to be consumed in the construction of houses sanctioned under the Pradhan Mantri Awas Yojana (Urban).

Pros and strengths

Strategically located manufacturing unit: The company operates from its manufacturing facility located at Chandrapur, Maharashtra having an installed capacity of 72,000 MT for production of sponge iron. It is strategically located and is well connected with road for transportation of raw materials & finished goods. The iron ore/iron ore pellets, coal and dolomite are some of the key raw materials required for its manufacturing operations, and their continued and sustained availability at competitive prices is essential to the growth of its business. These raw materials i.e. coal, iron ore and dolomite are available in abundant in the local mines of Chandrapur which are located at nearby distance from its manufacturing facility. The close proximity with raw materials brings cost efficiencies in procurement of raw material and also reduce logistic cost which helps the company to achieve economies of scale.

Strong quality control system: The quality of raw materials and their relative proportions determine the quality of the final product and the efficiency of its rotary kilns and blast furnaces. Thus, the quality of raw materials is of paramount importance to it in its sponge iron production process. To verify the same, it has established in-house testing laboratory at its sponge iron manufacturing facility, which is equipped with precision equipments, that is responsible for conducting tests and checks in respect of the quality of its key raw materials. The company employs an extensive and stringent quality control mechanism at each stage of the manufacturing including check of raw materials, which are required to ensure that its finished product conforms with the exact requirement of its customers and successfully passes all validations and quality checks.

Long standing relationship with customers: The company’s sponge iron product generally caters to customers who primarily are manufacturers of steel in state of Maharashtra, Chhattisgarh and Madhya Pradesh. The company generally do not enter into long term agreements with its customers, however, it has developed longstanding relationships with these customers. Maintaining strong relationships with its key customers is essential to its business strategy and to the growth of its business. Owing to its strong customer relationships and service, it has been able to retain a number of its customers for a long period of time ensuring uninterrupted supplies of its products to them. The company’s existing relationship with its customers represents a competitive advantage in gaining new customers and increasing its business.

Risks and concerns

Maximum revenue comes from few customers: The substantial portion of the company’s revenues has been dependent upon few customers. For instance, its top five customers for the six months period ended September 2002 (H1FY23), F.Y. ended March 31, 2022 and March 31, 2021 accounted for 79.94%, 76.58% and 81.38% of its revenue from operations for the respective year/period. The company’s reliance on a limited number of customers for its business exposes it to risks, that may include, but are not limited to, reductions, delays or cancellation of orders from its significant customers, a failure to negotiate favourable terms with its key customers or the loss of these customers, all of which would have a material adverse effect on the business, financial condition, results of operations, cash flows and future prospects of the company.

Geographical constrain: The manufacturing operations of the company are carried in the state of Maharashtra at Chandrapur. Due to the geographical concentration of its manufacturing operations in Maharashtra, its operations are susceptible to local, regional and environmental factors, such as social and civil unrest, regional conflicts, civil disturbances, economic and weather conditions, natural disasters, demographic and population changes, and other unforeseen events and circumstances. Such disruptions could result in the damage or destruction of a significant portion of its manufacturing abilities, significant delays in the transport of its products and raw materials, loss of key managerial personnel, and/or otherwise adversely affect its business, financial condition and results of operations.

Dependent on few of the raw material supplier: Sponge iron production requires substantial amounts of raw materials and energy, including iron ore and coal, which are subject to significant price volatility. The amount spent for the procurement of raw materials from its top five suppliers, as a percentage of its total purchases, was 62.26% in Fiscal 2022 and 75.77% in the six months period ended September 2002 (H1FY23). The company’s cost of raw materials consumed for Fiscal 2022 was Rs 15,208.41 lakhs, which represented 82.27% of its revenue from operations and for six months period ended September 2002 (H1FY23) was Rs 9,359.55 lakh, which represented 83.98% of its revenue from operations. The company’s ability to remain competitive, maintain costs and profitability depend, in part, on its ability to source and maintain a stable and sufficient supply of raw materials at acceptable prices.

Outlook

Chaman Metallics is primarily engaged in the business of manufacturing and selling of Direct Reduced Iron (i.e. sponge iron). Sponge iron is mainly used as a raw material for making steel in electric arc furnaces and induction furnaces. The company has been granted ISO 9001:2015 for its superior management systems, ISO 14001:2015 for environmental management systems, and ISO 45001:2018 for occupational health and safety management system proficiency. On the concern side, substantial portion of the company’s revenues has been dependent upon few customers, with which it does not have any firm commitments. The loss of any one or more of its major customer would have a material adverse effect on its business, cash flows, results of operations and financial condition.

The company is coming out with an IPO of 63,72,000 equity shares of face value of Rs 10 each for cash at a fixed price of Rs 38 per equity share to mobilize Rs 24.21 crore. Minimum application is to be made for 3000 shares and in multiples thereon, thereafter. On performance front, total income for the financial year 2021-2022 stood at Rs 18,546.32 lakh whereas in Financial Year 2020-2021 the same stood at Rs 14,075.89 lakh representing an increase of 31.76%. The main reason of increase was increase in the business operations of the company. Moreover, the company reported a jump of 78.69% in its restated profit after tax for the financial year 2021-2022 at Rs 934.65 lakh in comparison to Restated PAT for the Rs 523.07 lakh in the financial year 2020-2021.

Going forward, the company intends to undertake expansion of its existing manufacturing facility by setting up Sponge Iron Plant, Induction Furnace Plant (Steel Melting Unit for Silico Manganese and Ferro Silicon), Arc Furnace Plant (Cast Iron unit for Billets) and Captive Power Plant at its existing unit, to capitalize on the future demand. The company is also seeking to expand its capabilities in a cost efficient manner, by actively pursuing joint venture opportunities, acquisitions and strategic alliances with entities that are complementary to its business. The company will continue to pursue such opportunities where it will add value to its business, its stakeholders and its customers.