About the company:
Riding on the current record steel upcycle, Shyam Metallics and Energy Ltd is coming out with an IPO. The company is looking to raise Rs. 909 crore via a mix of a Fresh Issue of Rs. 657 crore and an Offer for Sale to the tune of Rs. 252 crore. The price band has been set at Rs. 303 to Rs. 306 per share for a lot size of 45 shares. The issue opens on 14 June, 2021 and closes of 16 June, 2021. Post the issue, the implied market cap of the company will stand in the range of about Rs. 7,735 to Rs. 7,805 crore.
COMPANY OVERVIEW
Shyam Metallics and Energy Ltd (SMEL) is a leading metals player with a focus on long steel products and ferro alloys. The company is amongst the largest producers of ferro alloys in terms of installed capacity in India, as of February 2021. SMEL is also engaged in selling intermediate and final products across the steel value chain. As of March 31, 2020, it 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. The company is also a leading integrated steel and ferro alloys producers in the eastern region of India in terms of long steel products.
The intermediate and long steel products includes iron pellets, sponge iron, steel billets, Thermo Mechanically Treated (TMT), structural products, wire rods, and ferro alloys products with a specific focus on high margin products, such as, customised billets and specialised ferro alloys for special steel applications. They also undertake conversion of hot rolled coils to pipes, chrome ore to ferro chrome and manganese ore to silico manganese for an Indian steel conglomerate. They are also currently in the process of further diversifying their product portfolio by entering into the segments, such as, pig iron, ductile iron pipes and aluminium foil.
SMEL has 3 manufacturing units with aggregate operating capacity of 5.71 MTPA along with a 227 MW of Captive Power Plant. Its plants are located at Sambalpur in Odisha, and Jamuria and Mangalpur in West Bengal. As of December 31, 2020, they had partnerships with 42 distributors, who stock and sell their finished products across 13 states and 1 union territory. The management has highlighted that they will be expanding capacities going ahead. The capacity is planned to be expanded to 11.60 MTPA while the installed captive power capacity will grow to 357 MW between FY22 and FY25. In addition, they are 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.
While the captive power plants have supplied large portions of their power needs, Power units from their plants have seen a declining rate in their contribution to total power supplied to SMEL. In Fiscals 2018, 2019 and 2020, and the 9 months ended December 31, 2020, power units produced from their captive power plants accounted for 90.06%, 87.32%, 85.19% and 79.58%, respectively, of their total power units consumed. The proposed expansion plans of their captive power plants will help them to meet their increased requirement of power and enable them to become more self-sufficient.
The Sambalpur manufacturing plant caters to customers in the southern and western regions of India whereas their Jamuria and Mangalpur manufacturing plants cater to customers in northern and eastern regions of India. Their product offerings cater to a mix of customers that consist of institutional customers and end-use consumers through their distribution network.
With the fresh issue of Rs. 657 crore worth of shares, Shyam Metallics aims to pay off debt to the tune of Rs. 470 crore of the company and SSPL, a subsidiary of SMEL. Other proceeds will be utilised towards general corporate purposes of the company.
FINANCIAL PERFORMANCE
|
Rs.
In Cr (except EPS)
|
FY18
|
FY19
|
FY20
|
9MFY21
|
|
Revenue
|
3,843
|
4,606
|
4,363
|
3,933
|
|
EBITDA
|
701
|
945
|
646
|
719
|
|
EBITDA Margin (%)
|
18%
|
21%
|
15%
|
18%
|
|
PAT
|
528
|
637
|
340
|
456
|
|
PAT Margin (%)
|
14%
|
14%
|
8%
|
12%
|
|
EPS (Rs. per share)
|
21
|
25
|
13
|
18
|
|
ROE (%)
|
26%
|
26%
|
12%
|
14%
|
|
ROCE (%)
|
20%
|
25%
|
10%
|
13%
|
|
EV/EBITDA
|
3.16
|
2.76
|
4.74
|
4.58
|
|
OCF/EBITDA
|
0.35
|
0.48
|
0.13
|
0.91
|
|
Debt/Equity
|
0.23
|
0.26
|
0.45
|
0.26
|
Shyam Metallics has seen a steady growth in its revenues over the past 3 years (FY18 to FY20). Revenues have grown at 6.6 percent CAGR from FY18 to FY20 despite FY20 seeing a slight decline in the collections. Despite this, for the 9MFY21 period has seen a strong rebound with a growth of 19.8 percent over the previous year. This growth was primarily driven by the rise in steel prices seen the world over, which drove higher realisations for steel producers. Accordingly, EBITDA margins have also seen a robust recovery despite the impact from COVID-19.
Despite the growth in revenues, the company has reported a decline in both its ROE and ROCE over the last 3 years. Along with this, the EV/EBITDA ratio has risen from 3.16x in FY18 to 4.74x in FY20. While the debt/equity also a sharp rise from 0.23x in FY18 to 0.45x in FY20, the company has been able to reduce their debt allowing the D/E to fall to 0.26x. With the IPO proceeds to the tune of Rs. 470 crore being used towards further debt payoff, the debt ratio is poised to reduce further, which augurs well for the company and its shareholders. This has resulted in the company carrying a much lower debt on its books as compared to larger steel players which carry an average D/E ratio of about 0.7x-1.1x.
On the working capital front, the company saw a significant improvement in the cash conversion cycle, but has seen a rise again in the 9MFY21 period, primarily owing to the higher amount of inventory being hoarded by the company. SMEL has also managed to increase its cash and bank balances over the years owing to prudent cash flow management with balances rising from Rs. 53.3 crore in FY18 to Rs. 178.2 crore for the 9MFY21 period (a growth of 234percent).
POSITIVES
LOW LEVERAGE AND FINANCIAL STRENGTH: Shyam Metallics carries much lower debt on its books as compared to larger peers such as Tata Steel, JSW Steel and SAIL. With the IPO, the company will be paying off further debt of Rs. 470 crore further deleveraging its books. Given the lower leverage on books, the company has more flexibility with usage of capital and allows for higher shareholder returns. Along with this, the company also carries a substantial amount of cash on its books giving it strong liquidity.
VERTICAL INTEGRATION: The company has both backward and forward integration as it process the entire value chain from ore to final metal products, giving the company significant cost controls. This has allowed the company to deliver positive and growing margins with the company delivering positive EBITDA since it began operations in 2005.
PROXIMITY TO MARKETS: Also, with its own captive power capacity, SMEL saves up on significant power costs. With its location across the key mineral belt across Eastern India, the plants have easy access to raw material as well as key markets. This not only allows for easy access to its customers, but also lowers transportation costs both ways and contributes positively to the margins.
STRONG FOOTHOLD AND PRODUCT PORTFOLIO: SMEL is well established across multiple steel products such as iron pellets, sponge iron (4th largest player in India), ferro alloys, TMT bars, steel billets, structural products, wire rods and other long steel products. With a diverse range of product offering, SMEL has been able to boost realisations with value-added products.
BENEFICIARY OF THE STEEL CYCLE: With the current upcycle of steel as global steel prices continue to remain elevated, SMEL stands to gain largely as higher prices lead to higher realisations and rising profit margins. Along with this, the company will be undertaking expansion plans with foray into DI products which will further drive growth and margins going ahead.
RISKS
EXPOSURE TO CYCLICALITY: While steel continues to be trending upwards currently, historically steel has been one the most cyclical industries. Due to this, as steel prices normalise, SMEL may see a decline in demand, lower realisations and may witness a significant impact to its margins.
DECLINING PROFTIABILITY: Despite the revenues seeing a growth at 6.6 percent CAGR over the past 3 years, both the EBITDA and PAT have seen a decline at 4 percent CAGR and 19.7 percent CAGR, respectively over the same period. Along with this, the margins had also seen some decline though they might see some recovery in FY21 as the 9M period saw higher margins from better realisations.
PREMIUM VALUATION: SMEL is getting listed at an implied P/B value of about 2.4x (9MFY21 book value). Larger peers such as Tata Steel, SAIL and JSPL trade at more attractive valuations ranging between 1.2x to 1.8x. Given that the steel sector has been seeing strong momentum throughout last year and reached to these levels, a P/B of over 2x makes SMEL relatively overvalued against peers.
STRONG COMPETITION FROM LARGER PLAYERS: Given the commoditized nature of steel products, SMEL faces strong competition from established names such as Tata Steel, JSW Steel, SAIL and JSPL. With some players having their own captive mines, they command a better cost control vs SMEL and can price their offerings competitively which can impact its market share and revenue.
CONCLUSION
Overall, SMEL is a financially stable player in the steel industry with a wide range of offerings across the long product segment. Given the robust balance sheet and deleveraging the company has undertaken, the company has capital flexibility to allow for future expansions and fuel growth. But, given that it competes in the steel industry, it is highly susceptible to the cyclicality of steel and its impact on the financials of the company over the long term.
With the steel cycle already soaring high many stocks in this sector are already at their all-time highs and will only continue to deliver further upside if steel prices continue their upswing. Given these run up in steel companies, and the fact that the company is listing at a premium against its peers, long-term upside is highly dependent on how the current steel cycle shapes up.
Therefore, we recommend investors to subscribe to the IPO only for listing gains as a play on the overall steel upswing. Those holding steel stocks in their portfolio need to assess the risk they are comfortable taking and assess their exposure on the sector before applying to this IPO.
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