Hariom Pipe IPO review (Apply)

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Review By Dilip Davda on March 29, 2022

•    HPIL is an integrated manufacturer of MS Pipes and other related products. 
•    Following a boom in commodity prices, it has reaped benefits for the last 18 months.
•    Based on super earnings, it is fully priced around 15 P/E, but well placed against peers.
•    Investors may consider investment for short to long term. 

ABOUT COMPANY: 
Hariom Pipe Industries Ltd. (HPIL) is an integrated manufacturer of Mild Steel (MS) Pipes, Scaffolding, HR Strips, MS Billets, and Sponge Iron. It uses iron ore to produce Sponge Iron which is then processed across various stages to manufacture final products viz. MS Pipes and Scaffolding making manufacturing process cost-effective. HPIL caters to the southern and western Indian markets for products. Its MS Pipes are marketed and sold in these geographies under the brand name "Hariom Pipes". A substantial portion of the Sponge Iron, MS Billets and HR Strips produced by it are used for captive consumption in the manufacturing of MS Pipes and Scaffolding.

The company mainly sells MS Pipes through more than two hundred (200) distributors and dealers. It also sells MS Pipes and Scaffoldings to certain developers and contractors directly as B2B sales. It manufactures MS Pipes and Scaffoldings of more than one hundred fifty (150) different specifications and cater, directly and indirectly, to customer requirements in various sectors such as housing, infrastructure, agriculture, automotive, power, cement, mining, solar power and engineering. As of January 31, 2022, the company had 249 employees on its payroll. Apart from this, it also engages contract labourers to facilitate manufacturing operations.

HPIL's integrated plant at Mahabubnagar District in Telangana (Unit I) manufactures finished steel products from iron scrap and Sponge Iron and another plant at Anantapur District, Andhra Pradesh (Unit II) exclusively manufactures Sponge Iron. Unit II is located near Bellary, which is one of the hubs in South India for iron ore production. The iron ore required to produce Sponge Iron at Unit II is mostly procured through the online bidding process. Most of the Sponge Iron produced at Unit II is transported to Unit I and used as a raw material for manufacturing MS Billets, HR Strips, MS Pipes and Scaffolding. The manufacturing of Sponge Iron at Unit II has reduced dependence on external sources for raw materials since its acquisition in September 2020. The integration of Unit I and II has optimized operations and profitability through backward integration which helps with efficient logistics, inventory management, procurement, energy savings and quality control.

ISSUE DETAILS/CAPITAL HISTORY: 
To part finance its needs for capital expenditure (Rs. 50.05 cr.), working capital (Rs. 40.00 cr.) and general corporate purpose, HPIL is coming out with a maiden book building process IPO of 8500000 equity shares of Rs. 10 each for mobilizing Rs. 130.05 cr. at the upper price band of the issue. The company has fixed a price band of Rs. 144 to Rs. 153 per equity share of Rs. 10 each. The issue opens for subscription on March 30, 2022, and will close on April 05, 2022. Minimum application is to be made for 98 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 33.36% of the post issue paid-up capital of the company. 

The issue is solely lead managed by ITI Capital Ltd. and Bigshare Services Pvt. Ltd. is the registrar to the issue. The company has allocated up to 30% for QIBs, up to 35% for HNIs and up to 35% for retail investors. 

Having issued initial equity shares at par, the company issued further equity shares in the price range of Rs. 30 to Rs. 200 between March 2008 and May 2021. It has also issued bonus shares in the ratio of 23 for 5 in December 2017. The average cost of acquisition of shares by the promoters is Rs. 7.53 and Rs. 11.72 per share. 

Post-IPO, HPIL's current paid-up equity capital of Rs. 16.98 cr. will stand enhanced to Rs. 25.48 cr. Based on the upper cap of the IPO pricing, the company is looking for a market cap of Rs. 389.79 cr. 

FINANCIAL PERFORMANCE: 
On the financial performance front, for the last three fiscals, HPIL has posted turnover/net profits of Rs. 133.92 cr. / Rs. 8.02 cr. (FY19), Rs. 161.15 cr. / Rs. 7.91 cr. (FY20) and Rs. 254.82 cr. / Rs. 15.13 cr. (FY21). For the first half of FY22 ended on September 2021, it has earned a net profit of Rs. 12.87 cr. on a turnover of Rs. 201.16 cr. Super earnings for the last one and half year is a bit surprising but according to company circles, it's the impact of rising commodity prices globally. This has also improved its net margins for the current fiscal. 

For the last three fiscals, HPIL has posted an average EPS of Rs. 8.10 and an average RoNW of 19.85%. The issue is priced at a P/BV of 3.11 based on its NAV of Rs. 49.19 as of September 30, 2021, and at a P/BV of 1.82 based on its post-IPO NAV of Rs. 83.91 per share (at the upper cap).

If we annualize FY22 earnings and attribute it to post IPO fully diluted equity capital, then the asking price is at a P/E of 15.15. Thus the issue appears fully priced, but it is at competitive pricing compared to peers. 

DIVIDEND POLICY: 
After paying a dividend of 6% for FY19, it skipped the dividend for the following years. It will adopt a prudent dividend policy post listing based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per offer documents, HPIL has shown APL Apollo, Hi-Tech Pipes, Rama Steel Tubes and JTL Infra as its listed peers. They are currently trading around 98.58, 23.78, 59.29 and 31.94 P/E. (as of March 28, 2022). However, they are not truly comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORDS: 
The BRLM associated with this issue has handled 2 public issues in the last three fiscals, out of which 1 issue closed below the issue price on the listing date.

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