Readymade Steel India to tap the primary market with an IPO of Rs 35 crore

Readymade Steel India limited

• Readymade Steel India is coming out with a 100% book building; initial public issue in a price band Rs 90 to Rs 108 per equity share.
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open on June 27, 2011 and will close on June 29, 2011.The shares will be listed on BSE only.
• The face value of the share is Rs 10 and is priced 9.0 times of its face value on the lower side and 10.8 times on the higher side.
• Book running lead managers to the issue is Arihant Capital Markets Limited.
• Company Secretary and Compliance Officer for the issue is Umakanta Das.

Profile of the company:

Readymade Steel India (RMS) was incorporated on March 21, 2006 under Companies Act, 1956 in Maharashtra. It is an ISO 9001:2008 certified steel service provider with an installed capacity of 27,000 MTPA and also one of the pioneers of introducing the concept of readymade steel products in the country. The company currently operates from its plant located at Khopoli, Raigad District, Maharashtra. The plant consists of automated shearlines, bending lines, cutting lines, automated stirrup machines etc. and is supported by other material handling equipments. Anil Agrawal is the founder promoter of the company and has more than a decade of experience in steel industry. The current staff strength is 36 which includes qualified and experienced professionals.

The major customers of company are infrastructure developers and contractors. The company, since last few years, is successfully obtaining orders from major construction companies like Larsen & Toubro Limited, Nagarjuna Constructions Company Limited, etc. to supply ready to use steel products for their construction needs. It has supplied steel products to Mumbai Mono Rail Project, Sahar Elevated Access Road, Mumbai, Nasik Elevated Corridor, Palais Royale, Mumbai etc.

The company's products find their application in all kinds of construction activities spanning across bridges, mono rail, metro rail, airports, malls, hotels, buildings, factories etc. These products are processed from iron and steel products such as re-bars fulfilling domestic and international design requirements.The company intends to add more value added products, like the welded steel mesh, standard stirrups etc., this will enable it to become a one stop solution provider to all the reinforcement needs of the customers.

The company is now expanding business both in terms of productive capacity and geographical reach by expanding the existing facility at Khopoli and setting-up additional facilities near New Delhi and Raipur respectively. With this expansion, the existing capacity at Khopoli will be increased from 27,000 MTPA to 90,000 MTPA and proposed new facilities near New Delhi and Raipur will be having capacity of 50,000 MTPA each.Since company offers niche and relatively new product in India it faces limited competition.

IPO Grading

CARE has assigned IPO grade of ‘2/5’, indicating below average fundamentals to the Initial Public Offering of the company.

Proceeds is being used to

• To part finance the cost of enhancing the capacity at its existing facility at Khopoli, district Raigad,
• Maharashtra and the cost of setting up of new facilities near New Delhi and Raipur;
• To meet the pre-operative expenses including Issue expenses;
• To meet margin money requirements of working capital and
• To meet general corporate purposes

Industry Overview

Indian steel industry plays a significant role in the country's economic growth. The major contribution directs the attention that steel is having a stronghold in the traditional sectors, such as infrastructure and constructions, automobile, transportation, industrial applications etc. Moreover, steel variant stainless steel is finding innovative applications due to its corrosion resistive property. India is the fifth largest steel producer at the global front and struggling to become the second largest producer in the coming years.

The country has acquired a central position on the global steel map with its giant steel mills, acquisition of global scale capacities by players, continuous modernization & up gradation of old plants, improving energy efficiency, and backward integration into global raw material sources. Global steel giants from across the world have shown interest in the industry due to its phenomenal performance. For instance - the crude steel production in India registered a year-on-year growth of 6.4% in 2010 and reached 66.8 Million Metric Tons. Iron and Steel Industry contributes around 2% of the Gross Domestic Product (GDP) and its weight in the Index of Industrial Production (IIP) is 6.2%. The National Steel Policy 2005 had projected consumption to grow at 7% based on a GDP growth rate of 7- 7.5% and production of 110 million tonne by 2019-20.

Domestic crude steel production grew at a compounded annual growth rate of 8.6% during 2004-05 to 2008-09. This growth was driven by both capacity expansion (from 47.99 million tonne in 2004-05 to 66.343 million tonne in 2008-09) and improved capacity utilization. India, the world's largest producer of Direct Reduced Iron (DRI) or sponge iron, is also expected to maintain its lead in the near future. Sponge iron production grew at a CAGR of 11% to reach a level of 21.09 million tonne in 2008-09 compared to 12.54 million tonne in 2004-05.

Peer Group Comparison (Rs. in Millions)

Pros and strengths

Early Mover Advantage - Being one of the pioneers of introducing the concept of ‘Readymade Steel’ in India, the company is well positioned to take advantage of growing market with increased awareness and acceptability of this concept among users. Company’s first hand experience of introducing and popularizing the concept among major construction companies, has given it the invaluable inputs on customer requirements, their constraints and willingness for innovation in the construction cycle. This helps the company in undertaking product development and product enrichment to serve the existing customers and also attract the new customers.

Association with various major projects - The company has supplied Ready to use Steel to some of the major projects being undertaken by its clients in the country. Some of the projects are Mumbai Mono Rail Project, Sahar Elevated Access Road, Mumbai, Nasik Elevated Corridor, Palais Royale, Mumbai etc.These association with the renowned brands are likely o help the company in future orders.

In depth understanding of the client requirements - Company’s strength lies in understanding the requirement of the customer and its execution capabilities to provide the product as per the client requirements. This involves understanding the technical requirements like the tensile strength of the bars, following the bar bending schedules, permitted levels of tolerances as well the schedule of requirement of the client. The entity act as reinforcement partners of the client and make the product available of the right quality at the right time to meet their construction cycle requirements. This also helps the clients to plan in advance and use the manpower resources available on site to get the optimal output.

Wide existing customer base - The company has been carrying on this business for the last three years and it has the advantage of enjoying good relations with its existing customers. Some of its customers are already present in the locations where it is planning to set up its proposed facility, company is confident of securing businesses from these clients in those areas.

Risks and concerns

New concept of ‘ready-to-use steel’ business- The concept of ready to use steel is at a very nascent stage in India. The key factor in success of company’s business is the acceptance of the concept of readymade steel and getting the contractors/ developers to switch from labor oriented conventional method to ‘ready-to–use-steel’ in construction. Over the years Indian construction sector has been largely dependent on conventional methods of construction. In the event company is unable to successfully convince these developers/constructors, its business, financial position and results of operation of company will be adversely affected.

Dependency on few customers- The company is dependent on few customers for its business as the concept of ready to use steel is new and the industry is at a nascent stage with only a few of the major infrastructure development companies currently using the ready to use steel products for their construction requirements. In FY 2010, 4 customers accounted for about 89% of company’s total sales and in the nine-month period ended as on December 31, 2010 about 95% of its sales was accounted for by 6 customers. The company does not have long term arrangements with any of its customers to purchase its products in the future, at the current prices or at all.

Geographically concentration of Processing Facilities- Company’s existing processing facilities are located in Khopoli, Raigad District. As a result, any local social unrest, natural disaster or break down of services and utilities in that area could have material adverse effect on the business, financial position and results of operation of the company. Though the company intends to expand its presence geographically to northern and central India, but again if it is unable to manage the expansion expansion it would have a material adverse effect on the operations.

Increases in steel prices- The prices at which company purchase the raw material depends on prices in the domestic and international market. Company’s operating margins may be adversely affected in the future due to any of these factors, which may include general economic conditions, industry capacity utilization, downturns in purchases by traditional bulk steel end-users or their customers, a slowdown in basic manufacturing industries, governmental regulations, etc. Company does not typically enter into long-term contracts for the supply of raw materials or components and are hence exposed to fluctuations in price and delivery schedules.

Outlook

Readymade Steel India is a steel service provider to the fast growing infrastructure sector. Company conducts the processing of steel through use of automated machines from its Plant and delivers ready to use cut and bend steel rods, prefabricated cages and other steel products required for construction activities. This process is faster and the output is uniform and easy to handle. It is pioneers of introducing the concept of ‘Readymade Steel’ in India and in a short span is having association with various major projects. Its products have been successfully used by some of the top construction and infrastructure companies in India for their reinforced steel requirements.

On the concern side, the company is in a new concept business which is in the very nascent stage and that’s why the company is dependent of very few customers as the concept of ready to use steel is new and is still to get wide acceptance. The company is planning to expand in new geography from its current location of Maharashtra, that too entails risk, above all the company is highly dependent on its raw material steel, whose prices had been volatile in last some time.

Readymade Steel India is coming out with an Initial Public Offer (IPO) to raise Rs 34.75 crore. It has raised more than Rs 6.5 crore through pre-IPO placement. The issue has been offered in a price band of Rs 90-108 per equity share. Based on the EPS of Rs 0.99 for the fiscal years ending March 31, 2010 the P/E comes at 90.91x at the lower price band while, it comes at 109.09x at the upper price band., the company is primarily in the business of providing ready to use steel for construction activities, which is in nascent stages, hence there are no strictly comparable listed companies having the same business. For the nine months period ended December 2010, Readymade Steel reported a profit of Rs 2.32 crore and total sales of Rs 81.6 crore. Though the promoters of the company are having vast experience in the steel industry and the company is having good relationship with its key customers and a healthy order book position, but on the same time it is having a relatively small size of operations and though business prospects have a better outlook but are still in the nascent stage hence we will be having a neutral outlook for the issue, with investment only for a long term prospect.

Financial performance (Rs. in Millions)