The Hindu Business Line : Rathi Udyog

Investors can refrain from subscribing to the follow-on public offering from Rathi Udyog being made in the Rs 50-55 price band. Though the offer is being made at a substantial discount to the market price of Rs 73, the risks related to this offer outweigh the potential for capital appreciation in the medium term.

While the demand from the construction segment is likely to remain buoyant for long products, competition from the integrated players such as Tata Steel or SAIL at the upper end and small competing units in the rolling segment at the lower end, are likely to impact revenue growth and pricing power of the company.

The sourcing of raw materials such as iron ore or coal from the open markets (till the company secures blocks in Orissa), which have been on an uptrend, may impose pressure on operating margins relative to its established peers.

In the backdrop of volatility in metal prices (though lower for long products), scale advantages enjoyed by integrated steel players and the ongoing consolidation in the global steel industry, investors will be better off hedging their bets with frontline stocks available at attractive valuations.

Offer backdrop

The object of the current offer is to part-finance the setting up of a steel complex in Sambalpur, Orissa, for 1,50,000 tonnes of sponge iron and 1,50,000 tonnes of steel billets with a 20 MW captive power plant. It is also expanding its Ghaziabad facilities for rolling capacity and installing value-added stainless steel and alloy steel products.

Of the total project cost of Rs 277.77 crore, Rs 98 crore is to be raised through the present offer.

The balance Rs 180 crore (out of Rs 277.77 crore) is being mobilised through term loans from banks.

The offer document indicates that commercial production from the integrated plant in Orissa will commence by October 2006.

However, the key risk will relate to execution of this large-scale project to the defined timeline and managing growth thereafter.

While the company's financials have grown steadily, the proportion of traded products to total revenues have remained almost 40 per cent.

For instance, in the nine months ended December 2005, of the total revenues of Rs 219 crore, traded products accounted for Rs 93.4 crore (or 42 per cent of revenues). And this appears to have also kept the operating margins of the company on a tight leash.

The lead manager to the offer is UTI Securities. The offer opened on May 19 and closes on May 23.

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