Vibhor Steel Tubes
- Vibhor Steel Tubes is coming out with a 100% book building; initial public offering (IPO) of 51,18,410 shares of Rs 10 each in a price band Rs 141-151 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 for subscription on February 13, 2024 and will close on February 15, 2024.
- The shares will be listed on BSE as well as NSE.
- The face value of the share is Rs 10 and is priced 14.10 times of its face value on the lower side and 15.10 times on the higher side.
- Book running lead managers to the issue is Khambatta Securities.
- Compliance Officer for the issue is Lovkesh.
Profile of the company
Vibhor Steel Tubes is manufacturers and exporters of Mild Steel/Carbon Steel ERW Black and Galvanized Pipes, Hallow Steel Pipe, Cold rolled Steel (CR) Strips/ Coils. It is 2 decades old manufacturer, exporter and supplier of steel pipes and tubes to various heavy engineering industries in India. Steel pipes and tubes can be used for many purposes such as steel pipes for frames and shafts, steel pipes for bicycle frames, steel pipes for furniture, CDW pipes for shockers, steel pipes for various structural purposes, steel pipes for various engineering purposes etc. The company has a very wide range of steel pipes and tubes products. The lengths of the steel pipes & tubes in different ranges unless otherwise specified by the customers. It manufactures steel pipes and tubes in various shapes and size such square, round, rectangular and elliptical or any special shape.
The company is working with Jindal Pipes Limited since 2003. It manufactures & supplies the finished goods for “Jindal Pipes Limited” (“Jindal”) vide the renewed agreement dated April 01, 2023 under the brand name “Jindal Star”. The company has a long-term agreement for the six years with the Jindal. Under the agreement Jindal will provide orders with a minimum quantity of 1,00,000 MT per annum to fill majority capacity of Unit I & Unit II of the Company.
Proceed is being used for:
- Funding of working capital requirements of the company.
- General corporate purposes.
Industry overview
India is the second largest steel producer in the world with an installed capacity of 154.1 MT in FY22. It is also the second-largest consumer of finished steel2with a consumption of 120 MT in FY23. The Indian steel sector has been able to grow over the years due to domestic availability of raw materials such as iron ore and cost-effective labour. The industry has been driven by domestic steel demand from sectors such as construction, real estate, and automobiles, while the vast coastline has enabled exports and imports, making India one of the leading countries in the global steel industry. The per capita finished steel consumption in India was 81.1 kg in CY22, which is significantly lower than the world average of 222 kg per capita. The National Steel Policy 2017 envisages that per capita steel consumption will increase to 158-160 kg by FY31. Further, steel has an output multiplier effect of 1.4x on GDP and an employment multiplier effect of 6.8x3in India. Thus, the steel industry has significant domestic potential and is expected to play a key role in the future economic growth of the country.
Domestic crude steel production has grown at a CAGR of 3.3% in the past five years to reach 126 MT in FY23 from 111 MT in FY19. Large steel manufacturers’ capacity utilization has been in the range of 80% to 90% in FY23 and all players have announced expansion of crude steel capacities. The National Steel Policy 2017 envisages achieving 300 MT of production capacity from the current level of 153-157 MT to cater to the expected demand of 230 MT by FY31.The crude steel production in India increased by 13.6% to 58 MT in YTD FY24 (April 2023-August 2023) from 51 MT in YTD FY23 (April 2022-August 2022). In the last 5 years, finished steel production has grown at a CAGR of 4.8% to 122 MT in FY23 from 101 MT in FY19. The growth in production has been backed by a rise in domestic steel consumption on account of growing economic activities in the country supported by an increase in infrastructure and construction spending by the government, a rise in automobile and consumer durable demand, among others. During YTD FY24, the production of finished steel grew by 13.4% on a y-o-y basis backed by strong demand in domestic market.
India’s steel consumption growth rate is expected to to be healthy at 8-10% in FY24 led by improving activities in the construction sector along with sustained momentum in the real estate and automobile sectors is expected to boost the demand for steel products in the country. As India has entered its pre-election year in 2023, the government is likely to increase investments both at the state and central levels and this is expected to augur well for the domestic steel demand. During FY23, exports witnessed a de-growth as compared to FY22. This was mainly because the government imposed export duty of 15% which made steel exports from India expensive and affected export demand. However, in November 2022, the government has withdrawn the export duty on steel products. Post removal, the exports have been rising sequentially and the full impact of the duty reversal is expected in FY24. However, exports may not reach the highs achieved in FY22 due to weak global demand and an increase in finished steel exports from China as observed from January to April 2023. Global steel prices are expected to be under pressure in the near term due to continued weakness in global steel demand and a decline in coking coal prices. Domestic prices are also expected to trend in line with global prices supported by healthy domestic demand.
Pros and strengths
Association with Jindal Pipes: Promoters of the Company and Jindal Pipes Limited (JPL) share common friendship from Hisar origin. The Company benefits from a long-standing relationship with JPL. It started with Job work activity which has now translated into full time production of pipes (0.5 inch to 12 inch) for JPL under brand “Jindal Star”. As per the business agreement dated renewed April 01, 2023, the Company sells all its finished product under brand name “Jindal Star” to JPL and its approved customers based on monthly card rates. As entire procurement and selling is facilitated by JPL, pricing becomes very transparent and passing of variation in raw material prices to the customers is effective.
Strategic location of manufacturing Units: The company’s Unit I is located at located Raigad, Maharashtra, which is the best place for export of goods, it exports 100% of export sales from Unit I only. Unit II is located around seventy (70) kms from Hyderabad in the Mahabubnagar District, State of Telangana and close to Jadcherla industrial area. This proximity enables ease of logistics, power, water supply and raw materials for its operations in Unit I. Skilled personnel for Unit I also come from Hyderabad.
Well-developed distribution and marketing network: With the help of Jindal Pipes Limited, the company has developed and implemented a wide range of networking channels throughout the industry and society to strengthen the scope of identifying core customer base and designing right marketing strategies for procurement and liaising of projects to deliver customized solutions for clients. Its distribution and marketing network ensure its product availability to its customers translating into efficient supply chain, focused customer service and short turnaround times for product delivery. It has customers in domestic as well as in international market, as on September 30, 2023, it has exported around 10 countries across the globe.
International Accreditations: As the company sells its product under the brand name “Jindal Star” for Jindal Pipes Limited. It follows international standard manufacturing practices and its Manufacturing Facility benefits from the quality benchmarking certifications such as (i) ISO 9001:2015 for manufacturing & supply of ERW Steel Pipes-Black & Galvanized with certificate number 10116-AQMS-0216 approved by Global Accreditation Board and International Council of Accreditation Bodies issued by Acerna 004Danagement Systems Private Limited, a third party (ii) IS 1239:2004, IS 3601:2006, IS 3589:2001 from Bureau of Indian Standards Such practices and accreditations, coupled with its technical capabilities and know-how enable it to manufacture products for both domestic and international customers.
Risks and concerns
Maximum revenue comes from single customer ‘Jindal Pipess: The company is dependent on a single customer i.e. Jindal Pipes Limited. For the half year ended September 30, 2023 & in the Fiscal 2023, Fiscal 2022 and Fiscal 2021, the revenue contributed by the single customer were Rs 47,083.89 lakh (88.75%), Rs 1,03,142.18 lakh (92.66%), Rs 73,935.39 lakh (90.38%) and Rs 45,393.83 lakh (88.92%). The company’s profitability also depends on the growth and performance in business of its key customer. In the manufacturing, its revenues are dependent on the sale of products by its customer under their own brand names. The company relies on the success of its customer in marketing and selling of these products and therefore any negative impact on their reputation may also have an effect on its business. Accordingly, risks that could seriously harm its top customer could harm it as well, including, recession in the geographies in which its key customers operate their businesses, its key customers’ inability to effectively manage their operations or changes in laws and policies affecting its customers to operate profitably.
Geographical constrain: The company’s existing Unit I is located at located Raigad, Maharashtra, which is the best place for export of goods, it exports 100% of export sales from Unit I only and Unit II is located around seventy (70) kms from Hyderabad in the Mahabubnagar District, State of Telangana and close to Jadcherla industrial area. This proximity enables ease of logistics, power, water supply and raw materials for its operations in Unit I. Skilled personnel for Unit I also come from Hyderabad. The company generates revenue of Rs 29,444.55 lakh (57.59%), Rs 59,103.71 lakh (53.09%), Rs 39,726.20 lakh (48.56%) and Rs 25,724.52 lakh (50.39%) in September 30, 2023, FY23, FY22, FY21 in the state of Maharashtra, respectively. While, the company generates revenue of Rs 19,734.10 lakh (38.60%), Rs 46,352.42 lakh (41.64%), Rs 36,998.58 lakh (45.23%) and Rs 22,103.72 lakh (43.30%) in September 30, 2023, FY23, FY22, FY21 in the state of Telangana. This concentration of its business in these states are subjects it to various risks, including but not limited to i) regional slowdown in manufacturing activities; ii) vulnerability to change of policies, laws and regulations or the political and economic environment of States; iii) constraint on its ability to diversify across states; and iv) laws regulating the generation, storage, handling, use and transportation of material. Any such adverse development affecting continuing operations at its manufacturing facilities could result in significant loss due to an inability to meet customer contracts and production schedules, which could materially affect its business reputation within the industry.
Fluctuations in steel prices: Low steel prices adversely affect the businesses and results of operations of steel product producers generally, including its, resulting in lower revenue and margins and write-downs of products and raw material inventories. Further, substantial decreases in steel and steel product prices during periods of economic weakness have not always been balanced by commensurate price increases during periods of economic strength. Any sustained price recovery shall require a broad economic recovery, in order to underpin an increase in real demand for steel and steel products by end users. In addition, the volatility, length and nature of business cycles affecting the steel and steel products industry may become increasingly unpredictable, and the recurrence of another major downturn in the industry may have a material adverse impact on its business, results of operations, financial condition and prospects.
Business is working capital intensive: The company’s working capital requirements for Financial Year 2024 and 2025 are estimated at Rs 20,978.70 lakh and Rs 27,418.05 lakh, respectively. An amount of Rs 6,200 lakh in Financial Year 2024 towards working capital requirements will be funded out of the Issue Proceeds, whereas the balance, if any, would be arranged from its internal accruals and/or loan funds. The company requires a significant amount towards working capital requirements which is based on certain assumptions, and accordingly, any change of such assumptions would result in changes to its working capital requirements. A significant amount of working capital is required to finance the purchase of raw materials and trade receivables. As a result, it may continue to avail debt in the future to satisfy its working capital requirements. The company’s working capital requirements may increase if it undertakes larger or additional order from Jindal Pipes Limited or if payment terms do not include advance payments or such contracts have payment schedules that shift payments toward the end of a project or otherwise increase its working capital burden.
Outlook
Vibhor Steel Tubes manufactures, exports and supplies steel pipes and tubes to various heavy engineering industries in India. The company has two manufacturing facilities in Raigad, Maharashtra and Mahabubnagar (Dist.), Telangana and a warehouse in Hisar, Haryana. As of January 24, 2024 the company had a total of 640 permanent employees. On the concern side, the company is dependent on, and derive a substantial portion of its revenue from, a single customer, Jindal Pipes Limited and over 90% of its revenue is derived from its single customer. Cancellation by Jindal Pipes Limited or delay or reduction in their orders could have a material adverse effect on its business, results of operations and financial condition
The company is coming out with an IPO of 51,18,410 equity shares of face value of Rs 10 each. The issue has been offered in a price band of Rs 141-151 per equity share. The aggregate size of the offer is around Rs 72.17 crore to Rs 77.29 crore based on lower and upper price band respectively. On performance front, the company’s revenue from operations increased by 36.08% to Rs 1,11,311.90 lakh for Fiscal 2023 as compared to Rs 81,799.60 lakh for Fiscal 2022. This increase in revenue from operations was primarily due to increase in sale of domestic market. Moreover, the company’s profit for the year increased by 85.91% to Rs 2,106.62 lakh for Fiscal 2023 compared to Rs 1,133.12 lakh for Fiscal 2022.
The company has successfully exported finished goods under the brand name “Jindal Star” around 10 countries across the globe. It plans to continue its strategy of diversifying and expanding its presence in these regions for the growth of its business. The company is selective in expanding to new locations and look at new geographies where it can deliver quality products without experiencing significant delays and interruptions. Through further diversification of its operations geographically, it hopes to hedge against risks of operations in only specific areas and protection from fluctuations resulting from business concentration in limited geographical areas.
