Shyam Metalics IPO review (May apply)

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Review By Dilip Davda on June 9, 2021

•    SMEL is one of the leading integrated metal producing and profit-making company.
•    It has a well-diversified product portfolio in metal with the captive power plant.
•    It suffered a setback for FY20 on account of expansion underway and higher provision.
•    The issue is fully priced based on its financial data.
•    Investors may consider an investment with a long term perspective.

ABOUT COMPANY:
Shyam Metalics And Energy Ltd. (SMEL) is a leading integrated metal producing company based in India (Source: CRISIL Report) with a focus on long steel products and ferroalloys. It is amongst the largest producers of ferroalloys in terms of installed capacity in India, as of February 2021 (Source: CRISIL Report). The company has the ability to sell intermediate and final products across the steel value chain. As of March 31, 2020, SMEL was one of the leading players in terms of pellet capacity and the fourth-largest player in the sponge iron industry in terms of sponge iron capacity in India (Source: CRISIL Report).

The company primarily produces intermediate and long steel products, such as iron pellets, sponge iron, steel billets, TMT, structural products, wire rods, and ferroalloys products with a specific focus on high margin products, such as customised billets and specialised ferroalloys for special steel applications. Its TMT and structural products are sold under the brand 'SEL' and logo.

It also undertakes conversion of hot rolled coils to pipes, chrome ore to ferrochrome and manganese ore to silico manganese for an Indian steel conglomerate. The company is also currently in the process of further diversifying its product portfolio by entering into the segments, such as pig iron, ductile iron pipes and aluminium foil.

SMEL is also one of the leading integrated steel and ferroalloys producers in the eastern region of India in terms of long steel products, as of March 31, 2020 (Source: CRISIL Report). It has a consistent track record of delivering operating profitability, and since the commencement of operations in Fiscal 2005, the company has delivered a positive EBITDA in each of the Fiscals.

The company currently operate three manufacturing plants that are located at Sambalpur in Odisha, and Jamuria and Mangalpur in West Bengal. As of December 31, 2020, the aggregate installed metal capacity of manufacturing plants was 5.71 million tonnes per annum ('MTPA') (comprising of intermediate and final products). Its manufacturing plants also include captive power plants with an aggregate installed capacity of 227 MW, as of December 31, 2020.

The company is also in the process of increasing the capacities of existing manufacturing plants and captive power plants, which is expected to increase its aggregate installed metal capacity (comprising of intermediate and final products) from 5.71 MTPA, as of December 31, 2020, to 11.60 MTPA and captive power plants aggregate installed capacity from 227 MW, as of December 31, 2020, to 357 MW.

These proposed expansions are expected to become operational between Fiscal 2022 and Fiscal 2025. In addition, SMEL is in the process of commissioning an aluminium foil rolling mill at Pakuria in West Bengal with a proposed installed capacity of 0.04 MTPA, which is expected to become operational in Fiscal 2022.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its plans for repayment/pre-payment of group's debt in part or full (Rs. 470.00 cr.) and General Corpus fund needs, SMEL is coming out with a maiden IPO of Rs. 909 cr. that includes Rs. 657 cr. for fresh equity issue and Rs. 252 cr. as offer for sale.  The company has fixed the price band of Rs. 303 - Rs. 306 for this book built IPO, and minimum application is to be made for 45 shares and in multiples thereon, thereafter. The issue opens for subscription on June 14, 2021, and will close on June 16, 2021. At the upper price band, the company will be issuing approx. 29705895 shares including a fresh equity issue of 21470580 shares. The issue constitutes 11.65% of the post issue paid-up equity capital of the company. Post allotment, shares will be listed on BSE and NSE.

The company has reserved 300000 shares for its eligible employees and from the residual portion, it has allocated 50% for QIBs, 15% for HNIs and 35% for retail investors. SMEL is offering a discount of Rs. 15 per share to its eligible employees.

Book Running Lead Managers (BRLMs) for this IPO are ICICI Securities Ltd., Axis Capital Ltd., IIFL Securities Ltd., JM Financial Ltd. and SBI Capital Markets Ltd. while KFin Technologies Pvt. Ltd. is the registrar to the issue.  

Having issued initial equity at par, the company raised further equity capital in the price range of Rs. 30 to Rs. 186 per share between April 2003 and March 2017. It has also issued bonus shares in the ratio of 4 for 1 in June 2018. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.75, Rs. 2.00, Rs. 2.37, Rs. 2.54, Rs. 4.29, Rs. 5.94, Rs. 8.04, Rs. 10.39 and Rs. 10.72 per share.

Post issue, SMEL's current paid-up equity capital of Rs. 233.61 cr. will stand enhanced to Rs. 255.08 cr. At the upper price band, the company is looking for a market cap of Rs. 7805.47 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, SMEL has, on a consolidated basis, posted turnover/net profit of Rs. 3920.40 cr. / Rs. 528.04 cr. (FY18), Rs. 4684.56 cr. / Rs. 636.78 cr. (FY19), Rs. 4395.30 cr. / Rs. 340.33 cr. (FY20). For the first nine months ended on December 31, 2021, for FY21, it has earned a net profit of Rs. 456.32 cr. on a turnover of Rs. 3995.63 cr. According to management, for FY20 it suffered a minor setback on account of expansion plans afoot and its bottom line marked a decline commensurate with lower turnover coupled with higher provisions for interest and depreciation.

For the last three fiscals, it has posted an average EPS of Rs. 18.93 and an average RoNW of 17.93%. At the upper cap of the price band, the issue is priced at a P/BV of 2.18 based on its NAV of Rs. 140.63 as of December 31, 2020, and at a P/BV of 1.98 based on its post-issue NAV of Rs. 154.55.

If we annualize FY21 earnings and attribute it to fully diluted post issue equity, then the asking price is at a P/E of around 12.83, making it a fully priced offer.

DIVIDEND POLICY:
As per offer documents, SMEL has not paid any dividend for FY 2018 to FY2020. It has paid an interim dividend of 18.5% for FY21 (refer to page 210 of the documents). Post listing, it will adopt a prudent dividend policy based on the company's financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the RHP data, SMEL has shown Tata Steel, JSW Steel, SAIL, Jindal Steel & Power and Tata Steel Long Products as its listed peers. They are currently trading at a P/E of 11.62, 19.75, 14.37, 5.62 and 7.26 (as of June 08, 2021). However, they are not truly comparable on an apple to apple basis.

BRLM's TRACK RECORD:
The five BRLMs associated with the offer have handled 37 public offers in the past three years out of which 13 offers closed below the offer price on the listing date.

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