Shyam Metallics IPO Everything you need to know! About ...

www.jstinvestments.com

Shyam Metallics IPO – Everything you need to know!

About Shyam Metallics

Shyam Metalics and Energy Limited (“SMEL”) was incorporated on December 10, 2002. SMEL is a

leading integrated metal producing company based in India with a focus on long steel products and

ferro alloys. They are amongst the largest producers of Ferro alloys in terms of installed capacity in

India, as of February 2021

Business at a snapshot!

Product Mix


Expansion Plans


Raw Materials linkages

Captive Power


About the Offer

Note - Before they were going to do a Rs 450 cr OFS , reduced it to Rs 252 Cr, fresh issue same.

That’s interesting, seems like promoter wants to sell as less as possible, this is a positive sign. Also

employee discount is Rs 15 on the price band above.

Mcap post IPO – Rs 7805 Cr (657 cr fresh / ipo price = new shares 2.147 cr + Already outstanding

23.36 cr shares)

Objects of Issue

1. Repayment and/or pre-payment, in full or part, of debt of the Company and SSPL, one of their Subsidiaries (470 cr) 2. General corporate purposes

Strengths

Captive Power

Close Proximity to Mines

Located near to rich mineral belts

Product Mix good

Expanding continously

Low Debt compared to other steel makers

Risks

If any of the major suppliers ceases to have business dealings with them or materially reduces the quantity of raw materials supplied to the company & they are unable to secure new suppliers for such raw materials to meet the requirements at manufacturing plants, the production schedule may be delayed


In Fiscals 2018, 2019 and 2020, and the nine months ended December 31, 2020, Top three raw materials suppliers accounted for 14.04%, 13.29%, 16.22 % and 16.22 %, respectively, of the total raw material purchase costs. The demand and pricing in the steel industry is volatile and are sensitive to the cyclical nature of the industries it serves. A decrease in steel prices may have a material adverse effect on the business: Resulting in lower revenue and margins and write-downs of finished steel products and raw material inventories. Criminal proceedings run in the shareholders & promoters.

Two of their Group Companies, SFAL and SPSPL, are engaged primarily in manufacturing of ferro alloy products and the metal manufacturing segment, respectively, lines of business similar to that of Shyam Metallics. Any conflict of interest which may occur between the business of such Group Companies and us could adversely affect our business, prospects, results of operations and financial condition. Currently, SFAL and SPSPL have not entered into any non-compete agreement with the company


The manufacturing plants and sources of their raw materials are primarily concentrated in eastern India and any adverse developments affecting this region could have an adverse effect on the business. Manufacturing plants primarily acquire coal from Mahanadi Coalfields Limited, Central Coalfields Limited and South Eastern Coalfields Limited pursuant to various fuel supply agreements. Under the fuel supply agreements, we are obligated to offtake between 75% of the annual contracted capacity failing which we are required to pay compensation or liquidated damages to Mahanadi Coalfields Limited, Central Coalfields Limited and South Eastern Coalfields Limited (as the case maybe). Further, we are obligated to offtake atleast 90% of the annual contracted capacity of the chrome ore from Odisha Mining Corporation Limited, failing which we are required to pay damages equivalent to 5% of the entire sale value of the allotted quantity. We have, in the past, faced instances where we were required to pay liquidated damages for noncompliances with such obligations. In Fiscals 2018, 2019, 2020, liquidated damages aggregating to ₹ 5.46 million, ₹ 0.08 million and ₹ 0.90 million, respectively, have been levied on us. No long-term agreements with customers which would have a material adverse effect on the business, results of operations and financial condition. They were required to spend ₹ 89.38 million in Fiscal 2020; however, they spent ₹ 66.66 million towards corporate social responsibility activities in such period which is less than the prescribed amount under the Companies Act, 2013. Another notice dated January 30, 2013 was received from the BIS inter alia stating that due to misuse of an ISI mark, it was decided to put the BIS license under “stop marking” with immediate effect, and hence preventing SSPL from marking or dispatching any product with the said ISI mark, and calling upon SSPL to deposit ₹ 3,371 (Rupees Three Thousand Three Hundred and Seventy One Rupees Only) towards special inspection charges (collectively, “Notices”). By letter dated February 26, 2013, SSPL has responded to the notice dated January 30, 2013 inter alia submitting the relevant documents and confirming compliance with the conditions mentioned in the Notices. Subsequently, a criminal complaint has been filed by the Bureau of Indian Standards (“Complainant”) against our Subsidiary, SSPL, before the Court of the Chief Judicial Magistrate at Burdwan, under Section 33(1) of the Bureau of Indian Standards Act, for violation of Section 11(1) of the Bureau of Indian Standards Act on the grounds that SSPL had manufactured certain items without mandatory certification. For further information, see “Outstanding Litigation and Other Material Developments” on page 326.


The capital structure of the company to a large extent looks clean


However, many share based acquisitions in the past look doubtful as the valuations of the assets bought are murky.


Financials

P&L

Cyclical business with high volatility in margins (3 years are not enough to judge a cycle, one needs

to wait & watch)


Balance Sheet

Borrowings under control, Inventory & Trade receivables management needs to be tracked.


Cash Flow Statement

CFO cyclicality shows the fragile nature of the business+ the ability to cater to capex (as it’s a capex

heavy business) in times of low steel prices needs to be studied further.

Valuations & Conclusion

Shyam Metallics IPO is coming with a price band of Rs 303 – 306. At Annualized EPS of 26.04, the IPO

is priced at 11.8x P/E and 2.18x P/BV (9MFY21 BV). It will command a post listing diluted market cap

of Rs 7805 Cr, which is 1.95x price to sales. Tata Steel trades at 0.87x P/S, JSW Steel trades at 2.17x

P/S, while SAIL, Jindal Stainless and Tata Steel BSL all trade below 1x P/S.

The IPO timing couldn’t have been more perfect. Commodity cycle is on an upswing with tailwinds

working in the steel makers’ favour along with extreme bullishness for the sector. The steel sector

remains exposed to steel prices globally, which declined significantly in fiscal 2016 impacting

realisations and operating profitability – The group's operating margin declined to 9.4% (Number

from CRISIL rating report in Aug 2020), currently its OPM is at 18.2% (9MFY21. 14.3% in FY20,20.5%

in FY19 and 18.1% in FY18, which is highly cyclical) given the upcycle!

The company may perform till the time steel/commodity cycle is in upswing, but the company is a

sure-shot ‘Avoid’, given the highly cyclical nature of the steel business & the current prices being

much higher than the last 20 years average. The questionable criminal litigation that entails the

owners & group companies being in the same business & checkered acquisitions in the past doesn’t

help us either.

Closing Thoughts (Taken from CRISIL credit rating note on Shyam Metallics on Aug 2020)

The company's performance remains vulnerable to cyclicality in the steel sector given the close

linkage between the demand for steel products and the domestic and global economy. The end-user

segments such as real estate, civil construction and engineering also display cyclicality. While there


has been a significant push by the government on steel-intensive sectors such as railways and

infrastructure, any sustained downturn in demand will adversely impact performance of steel

companies.

The competitive intensity in the Indian steel sector is significant owing to presence of large steel

companies such as Tata Steel Limited, JSW Steel Limited, Jindal Steel and Power Limited. Also steel

imports from other countries, mainly China, add to the competition. Additionally the domestic steel

sector is fairly capital intensive. In order to maintain/improve market share, the industry participants

have been observed to routinely carry out the capacity expansion and debottlenecking activities.

Shyam Metalics is also doing capacity expansions.

--------------------------------------------------------------------------------------------------------------------------

Want to read something cool on the Steel Sector? We created a thread here –

https://twitter.com/jstinvestments/status/1382178725882581001?lang=en

--------------------------------------------------------------------------------------------------------------------------

Thanks for reading till the end!

If you would like to add anything or give any feedback or would like to appreciate the article, reach

out to me on twitter – aditya_kondawar or email me at [email protected]!

--------------------------------------------------------------------------------------------------------------------------

https://twitter.com/jstinvestments/status/1382178725882581001?lang=en

mailto:[email protected]

Shyam Metallics IPO Everything you need to know! About ...

Documents

Transcript of Shyam Metallics IPO Everything you need to know! About ...