The Hindu Business Line : Adhunik Metalliks: Avoid

Investors can refrain from subscribing to the book-built initial public offer by Adhunik Metaliks. The valuation appears stiff when compared to the likes of Tata Metaliks, Sunflag Iron and Steel, and Usha Martin. Adhunik Metaliks makes and sells iron and steel products. The company plans to part-finance its expansion project, which includes the setting up a stainless steel and a ferro alloy plant as also a captive power plant (CPP) of 18 MW.

Possible risks

The company has applied to the Orissa Government for mining rights to secure long-term supplies of iron ore and coal. It expects to commence commercial exploration of captive iron ore and coal mines from March 2008.

Any delay in allocation and, hence, extraction of ores/coal for use are likely to affect operations and profitability. Benefits in the form of cost-reductions will be reflected fully in earnings only from FY-2009 onwards. In the intermediate period, higher transportation costs may dent profitability owing to the company's unfavourable location.

The demand for stainless steel has not been encouraging. Although there are signs of revival in this segment, the incremental capacities that are being added in the Central and Eastern Europe and Asia are likely to exert pressure on prices in the medium term.

While the demand from the domestic auto-ancillary segment — the largest user of stainless steel — is likely to grow at 5-6 per cent per annum over the next three-to-four years, imports are also likely to meet a fairly large part the incremental demand, particularly in the OEM market.

Adhunik Metaliks may find the going tough owing to its small scale of operations. A higher interest outgo is likely to dampen the profitability level; the impact will be more pronounced in the event of a downturn in steel cycle.

If the steel price cycle is unfavourable in 2008-09, it could lengthen the payback period for the expansion project of Adhunik Metaliks.

This risk, too, makes the offer unattractive. In the light of these factors, we believe that the funds could be deployed in stocks that are more attractive from a growth perspective.

Offer details: Adhunik Metaliks plans to raise Rs 100 crore through this offer. The price band is fixed at Rs 37-42 per share.

The offer closes on March 17. SBI Capital Markets and Karvy Investor Services are lead managers to the offer.

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