Earthstahl & Alloys coming with an IPO to raise upto Rs 12.96 crore

Earthstahl & Alloys

• Earthstahl & Alloys is coming out with a 100% book building; initial public offering (IPO) of 32,40,000 shares of Rs 10 each in a price band Rs 38-40 per equity share.
• The issue will open on January 27, 2023 and will close on January 31, 2023
• The shares will be listed on SME Platform of BSE.
• The face value of the share is Rs 10 and is priced 3.80 times of its face value on the lower side and 4.00 times on the higher side.
• Book running lead manager to the issue is HEM Securities.
• Compliance Officer for the issue is Rahul Kumar Sinha.

Profile of the company

Located in steel hub of Raipur Chhattisgarh, the company is engaged in the business of manufacturing Cast Iron Lumps and Ductile Iron Pipe Fittings. Cast Iron Lumps are used as raw material in the steel foundries to manufacture products like: cast iron pipe fittings, machine components such as latche machines, fan components, manhole covers, decorative cast iron pieces, cast iron pipe fitting and other units engaged in manufacturing of steel or cast iron products. Ductile Iron Pipe Fittings are used in public water supply systems as connectors of pipes.

The company started its operations of manufacturing cast iron in the year 2012 with one submerged electric arc furnace with capacity of 3.6 MVA to manufacture 10,500 tonnes p.a. of Cast iron Lumps and thereafter in the year 2017 the company forayed into the Ductile Iron Pipes fittings segment to cater to the growing water infrastructure requirements in the country for which it commissioned Lost Foam based Steel Foundry consisting of one induction furnace with two crucibles, one of 500 KG and another 1000 KG to produce Ductile iron pipe fittings of different dimensions, shapes and sizes used in water supply system.

The foundry is also capable of producing parts or components of plant and machinery/ automobiles using foam molds and therefore the company can produce various parts of Pellet plants, Cement plants, Sponge iron plants, Power plants, Automobile Sector, Railway & Ductile Iron Pipes Fittings. Over the years, the company has been successful in manufacturing a full range of BIS Certified Ductile Iron Pipe Fittings of upto 600 mm width with accuracy, consistency & smooth surface finish. In the year 2022, the company also commissioned another 5.5 MVA submerged electric arc furnace to manufacture 15,750 tonnes p.a. of cast iron lumps.

Proceed is being used for:

• Funding capital expenditure towards change in electricity supply voltage from 33 KV to 132 KV at its manufacturing facility at Village Duldula, Baloda Bazar (C.G.)
• Meeting Working Capital requirements
• General Corporate Purpose
• Meeting issue expenses

Industry Overview

The Indian Foundry & Forging industry occupies a special place in shaping the country’s economy. India is currently among the largest producers of ferrous and non-ferrous castings. The sector which was the world’s fifth largest in 2008 has become the third largest with a growth of 47% in six years followed by China and USA. Steels and cast irons are essentially alloys of iron and carbon, modified by the presence of other elements. Cast iron may be defined as an alloy of iron and carbon (with or without other alloying elements) containing more than 2.0 percent of carbon, not usefully malleable or forgeable as initially cast. For reasons that will be apparent later, the dividing line between steels and cast irons is taken at 2.0 percent of carbon, even though certain special steels contain carbon in excess of this amount. In addition to carbon, four other elements are normally present in steels and in cast irons. These are mangnaese, silicon, phosphorus, and supfur. The properties of cast iron also may be modified by the presence of alloying elements - such irons are called alloy cast irons. Cast irons are of three general types, gray, white, and nodular. The terms gray and white are descriptive of the characteristic appearances of the fractures and nodular is descriptive of the shape of the graphite particles.

Depending on the process of steel making and the type of steel being manufactured, the requirement of different ferroalloys varies widely. Indian Ferroalloys Industry has immense potential and capability to compete in the international market. On the positive side, India produces some of the finest ferroalloys in the world. Indian ferroalloys are extensively preferred in Europe. India exports potential is indeed bright with very high growth prospects. As per the steel world report, ferroalloys Industry is estimated to grow at a CAGR of 5.9% between 2017 to 2025 and is expected to reach a valuation of $188.7 billion by 2025.

India is expected to show strong growth in usage of steel in the coming years because of its robust economy, massive infrastructure needs and expansion of industrial production. India is expected to become one of the leading steel consuming nations in the next decade. In this scenario, the Ferroalloys Industry estimates that the consumption of ferroalloys will increase domestically and internationally in the coming years. Some of the Ferroalloy Producers have already gone for expansion and some new units are coming up.

Pros and strengths

Strategically located manufacturing plant: The company’s manufacturing plant is strategically located in close proximity to its raw material sources, which lowers the company’s transportation costs and provides significant logistics management and cost benefits thereby contributing to maintain proper inventory and improving its operating margins. The company’s manufacturing plant is located near Raipur in the state of Chhattisgarh, which has major factories like: SAIL, Sarda Energy And Minerals Ltd, Godawari Power and Ispat Limited, Jayaswal Neco Industries Ltd, JSW Ispat Special Products Ltd which is the main source of its raw material. The strategic location of the company’s plant has helped it in creating synergies as well as achieving economies of scale and operational efficiencies.

Diversified client base and long standing relationship with customers: The company serves a diversified client base ranging from manufacturers of machine components such as latche machines, fan components, manhole covers, decorative cast iron pieces, cast iron pipe fitting and other units engaged in manufacturing of steel or cast iron products and water supply infrastructure contractors. The company generally does not enter into long term agreements with its customers, however, it has developed long-standing 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, the company has been able to retain a number of its customers for a long period of time ensuring uninterrupted supplies of its products to them.

Environment friendly manufacturing: The company uses waste generated in the steel plants to produce cast iron. The steel plants are holding huge dump of such material which, if not use productively, causes pollution. Huge quantum of waste accumulated over a long period of time will ensure availability of raw material feed at low cost over a long period. The raw material used in manufacturing cast iron is taken out from polluting waste generated by integrated steel plants, sponge iron plants and rolling mills. Thus recycling of such waste also conserves natural resource and saves environment from pollution.

Risks and concerns

Maximum revenue comes from limited clients: The substantial portion of the company’s revenues has been dependent upon few customers. For instance, its top ten customers for the stub period ended on September 30, 2022 and F.Y. 21-22, 20-21 and 19-20 accounted for 67.57%, 69.33%, 63.35% and 72.64% of its revenue from operations respectively. 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.

Significant power requirements: The company has two submerged electric arc furnace with power input transformer capacity of 3.6 MVA and 5.5 MVA installed in its factory for manufacturing cast iron lumps. The company’s factory has significant electricity requirements and any interruption in power supply to its factory may disrupt its operations. The company’s electricity cost constitutes a significant percentage of its total expenses which is 38.74%, 34.21% and 44.50% of total expenses for FY 21-22, FY 20-21 and FY 19-20 respectively. Also availability of water is an essential utility in its manufacturing process. It is used for the purpose of equipment cooling, in Sub-merged Arc furnaces and Induction furnace. The company’s business and financial results may be affected by any disruption of operations due to lack of essential utilities. The company depends on third parties for all of its power and water requirements. Since it has significant power consumption, any unexpected or significant increase in its tariff can increase the operating cost and affect the results of operations and financial condition of the company.

Stiff competition from both organized and unorganized players: The market for its products is competitive on account of existence of both the organized and unorganized players. Competition occurs generally on the key attributes such as quality of products, sales network, pricing, payment terms and timely delivery. Some of its competitors have longer industry experience, access to a cheaper cost of capital and greater financial, technical and other resources, which may enable them to adopt faster in changing market scenario and remain competitive. Moreover, the unorganized sector can offers their products at highly competitive prices which may not be matched by the company and consequently affect its volume of sales and growth prospects. Growing competition may result in a decline in its market share and may affect its margins which may adversely affect its business operations and its financial condition.

Outlook

Earthstahl & Alloys Limited is engaged in the business of manufacturing Cast Iron Lumps and Ductile Iron Pipe Fittings. The manufacturing unit of Earthstahl & Alloys Limited is located in the village of Duldula nearby Raipur, Chhattisgarh, and is spread across an area of around 4.73 hectares of land. Alongside the efficient manufacturing and delivery of Cast iron Lumps and Ductile iron pipe fittings, the entity is also expanding its horizon by producing parts or components of plant and machinery with the help of foam molds. 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 a few of its major customers 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 32,40,000 equity shares of face value of Rs 10 each. The issue has been offered in a price band of Rs 38-40 per equity share. The aggregate size of the offer is around Rs 12.31 crore to Rs 12.96 crore based on lower and upper price band respectively. Minimum application is to be made for 3000 shares and in multiples thereon, thereafter. On performance front, total income for the FY22 stood at Rs 4,907.54 lakh whereas in FY21 the same stood at Rs 2,457.53 lakh representing significant increase of 99.69%. The main reason of increase was increase in the business operations of the company. Moreover, the company reported restated profit after tax for the FY22 of Rs 745.48 lakh in comparison to Rs 267.31 lakh in the FY21.

Going forward, the company focuses on keeping its operating costs low, which is critical for remaining competitive and profitable, by implementing measures to reduce its operating costs and improving its operational efficiencies. The company has expanded its cast iron production capacity to take benefit of economies of scale. It intends to continuously invest in infrastructure at its manufacturing plant. Moreover, the company will continue to further improve its manufacturing processes to identify the areas of bottlenecks and correct them. This would help it in improving efficiency and putting resources to optimal use. Additionally the company has acquired land adjacent to the existing manufacturing facility during FY 21-22 for future expansion and growth.