Shyam Metalics IPO: Shyam Metalics IPO opens on Monday: Should you subscribe to the issue?

NEW DELHI: Shyam Metalics, the firm that produces intermediate and long steel products, will hit the market with a Rs 909 crore initial public offering (IPO) on Monday. Analysts said the issue is reasonably valued and has enough on the table for investors.

The IPO will be sold in the Rs 303-Rs 306 price band and would comprise fresh issuance of shares, aggregating up to Rs 657 crore, and an offer for sale of shares worth up to Rs 252 crore by existing shareholders.

Analysts said the company has consistently outperformed its peers in terms of profitability. They said the majority of the power that Shyam Metalics consumes is met through captive sources, which results in low power costs and, thereby, improved operating performance vis-à-vis its peers. The company also enjoys low freight costs due to captive railway siding.

Astha Jain of Hem Securities said the company is bringing in the issue at a PE multiple of 13 times on a post-issue annualised FY21 EPS basis.

“We like the company’s financial performance with healthy balance sheet status. Efficiency improvements, better productivity and cost rationalisation have enabled the company to deliver consistent and strong financial and operational performance,” Jain said and recommended a “subscribe” rating to the issue on both short- and long-term basis.

Reliance Securities said the issue is valued at 2.4 times of 9MFY21 basis and 12.8 times of FY21 annualised earnings, which look reasonable.

“Considering improved visibility of demand recovery in domestic as well as international markets, led by a strong focus on infrastructure development and steady pricing scenario, Shyam Metalics’ financial performance is expected to improve significantly in the coming quarters,” the brokerage said.

It said the domestic steel industry is witnessing a structural change with increased commitment towards reduction in carbon emission by large producing countries like China, which bodes well for the domestic steelmakers.

“A strong balance sheet along with best-in-class leveraging positioning offers an edge to SMEL. Additionally, the OCF (operating cash flow) yield at 8.4 per cent as on 9MFY21 looks to be impressive and expected to improve further with higher cash flow generation in the ensuing quarters,” Reliance Securities said and recommended a ‘subscribe’ rating on the issue.

The company is one of the leading integrated steel and ferroalloys producers in the eastern region of India in terms of long steel products. It has three manufacturing units with an operating capacity of 5.70 million tonnes per annum, with 227 mw of captive power capacity.

Shyam Metalics’ integrated units are located at Sambalpur, Odisha and Jamuria, West Bengal respectively. Another unit is located at Mangalpur, West Bengal. The integrated nature (backward and forward integration) of manufacturing plants has resulted in the control over all aspects of their operations with the exception of sourcing of primary raw materials, Kotak Securities said in a note.

“The backward integration activities, include, setting up of iron pellet plants and installation of rotary kilns to produce sponge iron. SMEL utilises the sponge iron produced to further manufacture billets. The forward integration activities include, diversification of their product mix by utilising the billets to produce value-added products, such as, TMT bars, structural products, and wire rods, which enable them to de-risk revenue streams and expand product offerings,” Kotak said.

The company has a relatively better financial strength compared with peers operating in the long and intermediary steel sector, Axis Securities said, adding that the company has reported healthy operational as well as financial growth despite downturns in the industry, especially during FY09 and FY15.

Revenues of Shyam Metalics rose 6.5 per cent compounded annually to Rs 4,362.89 crore in FY20 over Rs 3,842.57 crore in FY18 (It had fallen in FY20). Revenues for the first nine months of FY21 rose 19.80 per cent to Rs 3,933.08 crore. The company’s manufacturing plants are currently operating subject to certain social distancing and additional safety measures.

Ebitda for FY20 came in at Rs 634 crore and for first nine months of FY21 at Rs 717.32 crore.

Profit almost halved to Rs 340 crore in FY20 from Rs 637 crore in FY19, though it has improved strongly to Rs 456 crore in the first nine months of FY21 from Rs 260 crore in comparable period last year.

The company is least leveraged group among its peers, Axis Securities said.

The company proposes to use the net proceeds from the fresh issue towards repayment or prepayment of up to Rs 470 crore of its debt and that of its subsidiary, Shyam SEL and Power, and for other general corporate purposes.

Angel Broking said valuations are optically high at 9.2 times trailing 12-month EV/Ebitda, but volume and realisation growth and improving Ebitda per tonne (that suggests a higher contribution from value-added products), are suggesting reasonable FY23 EV/Ebitda. This brokerage has a ‘subscribe’ rating on the issue.