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Salient features of the IPO:

* Integrated metal producing company Shyam Metalics and Energy Ltd. (SMEL), is planning to raise up to Rs. 909cr through an IPO, which opens on 14th Jun. and closes on 16th Jun. 2021. The price band is Rs. 303 - 306 per share.

* The issue is a combination of fresh issue and OFS. The company will not receive any proceeds from the OFS portion. Of the net proceeds from the fresh issue, Rs. 470cr will be utilized to repay or prepayment of debt availed by the company. Residual funds will be used for general corporate purposes.

* The company reduced the OFS size to Rs. 252cr, as against earlier plan of Rs. 452cr. The probable reason behind the same could be the prevailing higher valuation of the metal stocks. However, the fresh issue remain unchanged to Rs. 657cr.

Key competitive strengths:

* Integrated operations across the steel value chain

* Strategically located manufacturing plants supported by robust infrastructure resulting in cost and time efficiencies

* Diversified product mix with strong focus on value added products, such as, ferro alloys, association with reputed customers and robust distribution network

* Strong financial performance and credit ratings

* Experienced promoters, board and senior management team

Risk and concerns:

* Re-emergence of the Covid-19 infection

* Fall in international steel prices

* Unfavorable product-mix

* Unfavorable movement in raw material prices

* Rise in interest rate

* Competition

Peer comparison and valuation:

At higher price band of Rs. 306, SMEL is demanding a TTM EV/EBITDA multiple of 8.6x, which is at premium to the peer average of 6.4x. Thus, the issue seems to be overpriced.

Below are a few key observations of the issue:

* With sustained consumption from the end-use segment, India’s steel demand has increased by 5.4% CAGR over FY15-20. In FY21, the steel consumption declined mainly due to the Covid-19 pandemic. However, considering various initiatives undertaken by the government in the areas of affordable housing and infrastructure projects (like metro, road, and urban infra space), which are more steel intensive, the steel consumption is forecasted to grow at 5-6% CAGR till FY25.

* Since H2 of FY21, steel prices are in up-move globally. This is mainly because of restricted supply and higher demand from China in the initial days. Subsequently, major economies across the world planned a massive spending stimulus. This coupled with environment related supply restrictions from China, global steel prices remained elevated till date. Going forward, we see limited upside and prices are most likely to stabilize around this level till supply exceeds demand.

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