The Hindu Business Line : MSP Steel and Power: Avoid

AN INVESTMENT in the initial public offering (IPO) of MSP Steel and Power can be avoided, as the risks far outweigh the scope for returns, if any. Given the weak fundamentals, stiff valuation, a high level of financial risk and the softening of prices of steel products, which is likely to continue in the near term, the IPO of MSP Steel and Power does not appear attractive. When compared to its peers, the valuation appears expensive.

The company's performance over the past few years has not been impressive. This was particularly on account of the nature of business carried on by the company — making katha, which is used in the preparation of readymade betels. Due to scarcity of raw materials, it discontinued this business and moved into making sponge iron in 2003.

The company has already completed the first phase of its capacity expansion and the sponge iron facility has been operational from November 2004. Although the current capacity expansion is likely to bolster the level of sales, revenue growth, which would be a critical factor, is likely to be moderate due to soft trends in prices. At a time when the primary and secondary steel-makers are going for capacity additions, excess supply is likely to result in pressure on prices.

Although the company enjoys locational advantages for procuring iron ore and coke, the prices of inputs are likely to remain at higher levels in the near term on account of shortage. This is likely to push up the production cost and the company may not be able to fully pass on the increase in costs to customers. A substantial portion of the project's cost (over 60 per cent), which is funded by debt, is likely to increase the financial risk. The interest outgo may act as a drag on its profitability.

Offer details: MSP Steel and Power is offering 160 lakh shares at Rs 10 each. The post-offer equity would be Rs 58.1 crore. The promoters would hold a stake of 71.8 per cent. The lead manager for the offer is Microsec India. The offer opens on June 20 and closes on 24.

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