The Hindu Business Line : Gallantt Metal: Avoid

The absence of a proven track record, the high level of debt financing, the low earnings visibility and the operational risks make the offer unattractive.

Gallantt Metal has completed setting up a sponge iron unit and a steel melting shop in Kutch, Gujarat; commercial production commenced in December 2005. From the proceeds of the issue, it proposes to set up an 18 MW captive power plant, which is expected to go on stream by October. During the intermediate period, it plans to buy power from external sources, which is likely to push up fuel costs for the company.

Rising costs

Moreover, the risks associated with its operations also remain high. First, for iron ore, a basic raw material for billet making, the company proposes to transport it from Karnataka and Orissa. At a time when steel producers are grappling with mounting logistics and transportation costs, this is only likely to push up production costs. Secondly, import of steam coal from Indonesia and South Africa may expose the company to the risks associated with exchange rate and price changes. The offer document does not mention any contractual tie-ups for sourcing its raw materials.

As the company has just commenced operations, the lack of a track record is also a concern.

The time taken for the project to break-even is likely to be long. We believe, the opportunity cost of locking in funds in the offer is likely to be stiff.

About 60 per cent of the project cost of about Rs 190 crore is to be funded by debt. Higher depreciation and interest outgo may dent profitability in the medium term. As per the offer document, the company plans to sell its finished products — billets and bars — in western and northern India, although no expression of interest has been received so far. Given its size and scale of operations, it may find the going tough, particularly, as the drive towards consolidation in the steel sector is likely to intensify.

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