The Hindu Business Line : Rohit Ferro-Tech: Avoid

Investors can refrain from subscribing to the initial public offer by Rohit Ferro-Tech. At the offer price of Rs 30 per share, the price-to-earnings multiple works out to 6-7 times its expected FY 07 earnings, on an expanded equity base.

This appears stiff relative to Jindal Stainless, Tata Metaliks and Nava Bharat Ferro Alloys.

Rohit Ferro-Tech is in the business of manufacturing and trading ferro-alloys with a current capacity of 40,000 tonnes per annum (TPA). The company now plans to set up another ferro alloy plant in Orissa so as to expand its capacity to more than 1,50,000 TPA of ferro alloys. This is expected to commence operations by October.

Price trends

The company's performance in the last two years was impressive, thanks to the buoyant steel market that helped Rohit Ferro record higher realisations. Steel prices across the board have cooled off and are likely to stabilise at current levels; price-linked earnings growth is, therefore, likely to be moderate. What is more critical is the outlook for the stainless steel segment, as the company's products (ferro alloys) form the principal raw material for making stainless steel. Currently, about 40 per cent of the company's revenues are derived from exports to markets in Europe, China, West Asia and Asia. The demand in these markets has remained sluggish over the past few months and may take a while to pick up. The outlook for the price of various grades of stainless steel points to, at best, flat trends at the international and domestic levels over the medium term.

There are also execution risks. The company has applied for mining leases with the Government of Orissa (for chrome and manganese ores). The offer document is, however, silent on contractual agreements entered into for securing long-term supplies. Any delay in procuring the inputs will necessarily mean higher costs and longer gestation period. Several other companies in the group run by the promoters also are in the business of manufacturing ferro alloys, which could involve a conflict of interests.

Two group companies, Impex Ferro Tech and Vikash Metal and Power, have tapped the market over the past year.

The concentration risk is high, with the top 10 customers accounting for about 95 per cent of the total revenues. High debt levels may also dampen profitability.

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