Stock Fundamentals

Should you subscribe to Shyam Metalics and Energy IPO?

Satya Sontanam BL Research Bureau | Updated on June 12, 2021

While fundamentals look good, it is unclear how earnings will fare across the length of a volatile commodity cycle

Shyam Metalics and Energy (SME), an integrated metal producing company, is approaching the primary market to raise about ₹ 909 crore. The IPO is a combination of fresh issue of shares (for about ₹657 crore) and offer for sale (₹252 crore). Post-IPO, the promoter holding will drop to about 88.35 per cent from 100 per cent now. The market capitalisation of the company post-IPO would be around ₹7,800 crore. Significant portion of the public offer proceeding will be utilised for repayment or pre-payment of the debt held by the company/its subsidiaries.

Commissioned in 2005, SME primarily produces intermediate and long steel products, such as, iron pellets, sponge iron, steel billets, TMT, structural products, wire rods, and ferro alloys products. Diversified nature of the product portfolio, low-debt and cost control measures in place are positives for the company. The company’s plans to double the finished steel capacity from about 0.8 million tonne per annum (mtpa) to two mtpa, which is expected to be commissioned in FY24, will give the company a leg-up to its earnings provided favorable conditions are in place.

Valuations

At the upper end of the price, the stock is valued at 11.8 times its annualised FY21 earnings (₹19.53 per share for 9 months FY21). There are no immediate comparable peers for the company because of its diversified output. However, since half of the revenue is generated from finished steel, we try to analyse the valuation of SME at the offer price with the standalone operations of Indian steel players (excluding overseas operations).

The big players in the steel industry, Tata Steel, JSPL and JSW Steel are trading at 9.79, 6.0 and 20.9 times trailing twelve month earnings respectively. Clearly, SME at its offer price appears expensive than the standalone business (Indian operations which is more comparable with SME which has operations only in India) of already established steel players - Tata steel and JSPL. Even at a consoldiated level JSPL trading at 7.8 times is cheaper. SME’s valuation at a discount to JSW Steel is also justified due to its size and scale, and also the higher margin that the latter can realise. The EBITDA margin of SME for the nine month period ending December 2020 stood at 18 per cent compared to 26.7 per cent for JSW Steel’s Indian operations.

Though, the prospects of the company seem healthy, long term investors can skip subscribing to the IPO now due to valuation.

Well diversified

SME has three manufacturing plants having capacities across steel value chain constituting pellet (2.4 mtpa), sponge iron (1.38 mtpa), billet (0.9 mtpa), finished products (0.8 mtpa) and ferro alloys (0.2 mtpa). In 9MFY21 about 51.4 per cent of revenues were from steel (including billets), 21.8 per cent from pellets, 15.5 per cent from ferro alloys and about 11 per cent from sponge iron. Being a well-diversified entity helps the company to have flexibility to sell as intermediaries as well as use them for captive consumption for finished value added products like TMT, Wire Rods etc.Further, SME intends to expand pellet capacity by 50 per cent to 3.6 mtpa and more than double the sponge iron, billet and TMT capacity to 2.9 mtpa, 2 mtpa and 2.07 mtpa. It has capex plan of ₹2,900 crore to be spent in phases till FY25.

Financials

During FY20, SME’s operational performance was poor due to shut down of plant due to maintenance and modernisation and impact of Covid-19. Between FY18 and FY20, total revenue grew at a CAGR of almost six per cent to ₹4,400 crore. But operating profit margin fell to 14 per cent in FY20 from 18 per cent in FY18. Consequently, net profit dropped from ₹520 crore in FY18 to ₹340 crore in FY20.

However, turnaround in the commodity cycle from the second half of 2020, aided the company. The sales in the nine month period ending December 2020 went up by 20 per cent to ₹4,000 crore with operating margin bouncing back to 18 per cent and net profit at ₹460 crore (up 77 per cent). In leverage terms, the company looks comfortable with gross debt to equity ratio at 0.27 times as on December 2020 (down from 0.47 times as on March 2020). Despite the capex plans, the management has guided to maintain the leverage ratio below 0.5 times and expects it to be funded by internal accruals.

While the company’s fundamentals look good , there is lack of clarity on how earnings will fare across the length of a volatile commodity cycle. There are currently divergent views on wether the current commodity cycle will last long or is in a liquidity driven bubble. Given this uncertainity and also with established listed players getting valued cheaper, the valuation is also not attractive. Hence, long term investors can avoid the IPO now.

Given low public float post listing, the stock can also be volatile on both sides. Investors can monitor how the company performs over the next few quarters, when more information about the company related to quarterly performance and its resilience to withstand volatility to commodities’ cycle will be available.

Published on June 12, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor