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Loha Ispaat IPO: Our view

Mar 20, 2014

About the company

Loha Ispaat Limited is one of the leading Independent Steel Service Centers in India having an existing client base of over 500 customers Pan India, making them a major player in the flat steel product (i.e. HR and CR Coils, Sheets and Plates) markets in India.

The company operates as an Independent Steel Service Centre that purchases raw materials like Hot Rolled Coils, Cold Rolled Coils, etc. from steel manufacturers and converts them into various shapes and forms. They serve an important function as an intermediary between primary metal producers that generally sell large volumes of limited sizes and configurations, and end-users that require efficient services and economical quantities of customized products.

The company operates two plants near Mumbai. One in Khopoli and another one in Taloja. The company is planning to scale up its existing 1.8 million tonnes per annum (mtpa) plant at Khopoli to 2.2 mtpa. The company is also backward integrating its operations by setting up a 0.03 mtpa cold rolling mill at Taloja, where it operates a 0.1 mtpa steel processing plant.

Loha Ispaat has a raw material procurement centre in Hong Kong and a subsidiary in Dubai which is more into trading. Though Loha Ispaat is currently catering to only the domestic market, it also intends to target the West Asia and North Africa region.

Issue details

Open on March 11. 2014
Close on March 25, 2014
Issue Size 26,705,476 Equity Shares
Face Value Rs 10
Issue Price 74-77
Market Lot 175 shares
Minimum Order Quantity 175 shares
Listing BSE, NSE
Merchant Banker Aryaman Financial Services Ltd
Purpose of the issue Fund working capital requirements and for general corporate purposes

Reasons to apply
  • Large customer base - The Company has a well diversified customer base of more than 500 regular large and medium size customers all over India. Their customers include global authorized vendors of leading corporate houses and OEMs covering more than 100 types of industry segments and sub segments such as Automobile, General and Heavy Engineering, Fabrication, Pipe and Tubes and Power and Infrastructure. This reduces the intensity of any significant single industry's contribution to their revenues.

  • Promoter's long experience in steel industry - The Company is managed by a team of professionals led by the Chairman and Managing Director, Mr. Rajesh Poddar, who has been associated with the Steel Industry since almost three decades.

  • Loha Ispaat, which is mainly into processing of flat steel products, is also planning to diversify by entering the non-ferrous metals processing segment in the next two years.
Reasons not to apply
  • High working capital intensity, long inventory holding period (70-90 days) and high susceptibility to steel prices.

  • The company is sitting on debt of around Rs 8 bn on an equity of Rs 5.5 bn, which is high considering that interest coverage is just about two times.

  • Demand from most user industries is expected to be subdued in the near term. Loha Ispaat's products, which are largely sold domestically, are used in automobile components, welded pipes, railway coaches, and other goods.

  • Apart from the players in the unorganised sector, the company faces competition from large steel-makers such as JSW Steel, Steel Authority of India and Tata Steel, which too have steel processing facilities. The offer is priced at about 12 times annualised FY14 earnings which is way higher than about eight-nine times that some of the bigger players like JSW Steel and SAIL are available. At the price of Rs 77, the stock of Loha Ispaat discounts its consolidated book value (post-issue) by 0.95 times. This makes it only a tad cheaper than some of the better-placed large steel-makers.
Concluding remarks

Loha Ispaat operates a high-volume low-margin business, the fortunes of which depend significantly on the growth of user industries. It has to maintain large inventory levels and is also high on debtors. While it is moderately leveraged, it does not have sufficient interest cover. Hence we would recommend investors to 'Avoid' to the issue from a long term perspective.

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