Vibhor Steel Tubes IPO review (May apply)

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Review By Dilip Davda on February 10, 2024

•    VSTL is a manufacturer and exporter of steel pipes and tubes of many varieties.
•    Currently it is working with Jindal Pipes Ltd. as preferred supplier. 
•    The company has posted growth in its top and bottom lines for the reported periods. 
•    Based on FY24 annualized earnings, the issue appears fully priced. 
•    Well-informed investors may park funds for the medium term rewards.

ABOUT COMPANY:
Vibhor Steel Tubes Ltd. (VSTL) is manufacturers and exporters of Mild Steel/Carbon Steel ERW Black and Galvanized Pipes, Hallow Steel Pipe, Cold rolled Steel (CR) Strips/ Coils. It is 2 decades old manufacturer, exporter and supplier of steel pipes and tubes to various heavy engineering industries in India. Steel pipes and tubes can be used for many purposes such as steel pipes for frames and shafts, steel pipes for bicycle frames, steel pipes for furniture, CDW pipes for shockers, steel pipes for various structural purposes, steel pipes for various engineering purposes etc. 

It has a very wide range of steel pipes and tubes products. The lengths of the steel pipes & tubes in different ranges unless otherwise specified by the customers. VSTL manufactures steel pipes and tubes in various shapes and size such as square, round, rectangular and elliptical or any special shape.
The company is working with Jindal Pipes Limited since 2003. It manufactures & supplies the finished goods for "Jindal Pipes Limited" ("Jindal") vide the renewed agreement dated April 01, 2023 under the brand name "Jindal Star". It has a long-term agreement for the six (6) years with the Jindal. Under the agreement Jindal will provide orders with a minimum quantity of 1,00,000 MT per annum to fill majority capacity of Unit I & Unit II of the Company. Though the company has a long-term agreement but not the exclusive agreement, as per the agreement there are no restrictions on the Company that they cannot sell their products in open market without the brand name of Jindal Star.

It has a big opportunity as a manufactures of steel Pipes & Tubes products in the domestic market as well as in export market. There is huge demand in the market so if the agreement will get disrupt, the company will not face any problem in maintaining its production volume. It has 630 employees on its payroll as of the date of filing this prospectus.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of Rs. 72.17 cr. (approx. 4779423 shares at the upper cap). It has announced a price band of Rs. 141 - Rs. 151 per share of Rs. 10 each. The issue opens for subscription on February 13, 2024 and will close on February 15, 2024. The minimum application to be made is for 99 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 25.20% of the post-IPO paid=up capital of the company. From the net proceeds of the IPO funds, it will utilize Rs. 62.00 cr. for working capital and the rest for general corporate purposes. The company has reserved shares worth Rs. 0.45 cr. for eligible employees and from the rest, it has allocated not more than 50% for QIBs, not less than 15% for HNIs and not less than 35% for Retail investors. 

The issue is solely lead managed by Khambatta Securities Ltd., and KFin Technologies Ltd. is the registrar of the issue. The offer document has erred for gross proceeds of the fresh issue data on page no. 96 of the offer document as it shows Rs. 62.00 cr. as gross proceeds.

The company has issued entire equity capital at par value so far. The average cost of acquisition of shares by the promoters is Rs. 9.65, Rs. 10.00, Rs.11.26, and Rs. 57.48

Post-IPO, company's current paid-up equity capital of Rs. 14.18 cr. will stand enhanced to Rs. 18.96 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 286.33 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted total revenue/net profit of Rs. 511.51 cr. / Rs. 0.69 cr. (FY21), Rs. 818.48 cr. / Rs. 11.33 cr. (FY22), and Rs. 1114.38 cr. / Rs. 21.07 cr. (FY23). For H1 of FY24 ended on September 30, 2023, it earned a net profit of Rs.  8.52 cr. on a total revenue of Rs. 531.24 cr.

For the last three fiscals, the company has reported and average EPS of Rs. 10.17 and an average RoNW of 16.73%. The issue is priced at a P/BV of 2.11 based on its NAV of Rs. 71.74 as of September 30, 2023. There appears to be mistake in post-IPO NAV data as the IPO price band ad shows Rs. 151 as its post-IPO NAV, which is impossible.
 
If we attribute FY24 annualized earnings to its post-IPO paid-up capital, then the asking price is at a P/E of 16.80. Thus the issue appears fully priced. 

For the reported periods, the company has posted PAT margins of 0.13% (FY21), 1.39% (FY22), 1.89% (FY23), 1.61% (H1-FY24), and RoCE margins of 9.90%, 12.09%, 16.48%, 6.97% respectively for the referred periods.  

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown APL Apollo, Hi-Tech Pipes, Goodluck India and Rama Steel as their listed peers. They are trading at a P/E of 48.8, 48.9, 26.9, and 65.8 (as of February 09, 2024) However, they are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 8th mandate from Khambatta Securities in the last two fiscals. Out of the last 7 listings, all listed with premiums ranging from 3.33% to 88.12% on the listing date. 

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