Hariom Pipe Industries Limited - IPO Note

Iron & Steel Products

Hariom Pipe Industries Limited - IPO Note

Iron & Steel Products

Price range
Rs. INR 144-153
Issue Period:
Mar 30, 2022
Apr 05, 2022
Rating
Subscribe
April 01, 2022

Stock Info

Sensex
58884.86
CNX Nifty
17541.25
Face value (Rs.)
10
Market lot
98
Issue size
Rs. 130 Cr cr.
Public Issue
0.850 cr. shares
Market cap post IPO
389.7 cr.
Equity Pre - IPO
1.697 cr.
Equity Post - IPO
2.547 cr.
Issue type
Fresh Issue

Shareholding (Pre IPO)

Promoters
42.00
Public
58.00
Source: Ace equity, StockAxis Research

Shareholding (Post IPO)

Promoters
27.99
Public
72.01
Source: Ace equity, StockAxis Research

Key Strengths & Strategies

The Integrated Nature of Operations leads to cost effectiveness:
The company uses ore to make sponge iron, which is then processed through several stages to make final products. This contributes to the cost-effectiveness of the MS Pipes and Scaffolding manufacturing process. All finished products in various stages serve as an input for the next process, allowing for flexibility in product mix as per the market demand and supply, market place, and available gross margins.

Induction Plant Output is MS Billets. MS Billets can be sold independently or used as an input for rolling mills. Rolling Mill Output is HR Strips. HR Strips can be sold independently or used as an input for manufacturing MS Pipes.

The company believes that their ability to change the product mix as per market demand and supply dynamics gives the flexibility to serve a wider spectrum of customers across various sectors. The seamless operations and integration of production process provides cost advantage over competitors.

Competitive pricing of products compared with peers:
The Company is able to face competition from other industry players effectively as its products are a result of backward integration which leads up to the Sponge Iron stage of manufacturing.

Backward integration has it owns cost advantages which competitors may be lacking giving to the company as a competitive advantage as to price. The company have also built in manufacturing process some flexibility as to thickness, length and quality of products which enables customisation leading to better margins for products.

Due to the flexibility in manufacturing a range of products having specific thickness, length and quality, the demand for the company products is higher as compared to competitors who manufacture and sell standard industry sizes or dimensions of products

Expanding geographical network:
The Company is presently serving the markets of Southern and some parts in Western India. The distribution channels developed over the years have been critical to growth. The company have vast distribution and sales network and currently have 1500 sales points. It intends to continue developing and nurturing existing markets and creating new distribution channels in under and nonpenetrated geographies. Also, aim to further develop domestic sales networks in those territories where there are lower transportation costs having a significant demand for products.

Expanding product range to add more value-added products:
MS Pipes and Scaffoldings are the end products that are manufactured from the conversion of Sponge Iron to HR MS Billets and HR Strips. The company intend to further enhance value proposition by manufacturing value added products which have better margins and wider markets. Certain value added products require certain modifications and extensions to existing lines which are in the development phase.

Some value additions to their existing products include the following:

  • Rust Free MS Pipe: These are anti rust oil coated MS Pipes which prevent rusting of MS Pipes.
  • End Facing of MS Pipe: This process provides a softer finish to the MS Pipe thereby avoiding injuries due to sharp edges.
  • Packaging: They use packing strips/tapes for packing their MS Pipes to enable easy movement from one place to another.

Higher EBITDA Margins:
The company manufactures from iron ore to final pipes. Ore is purchased from an auctioned platform and is converted into sponge iron. The induction furnace in the Hyderabad plant melts and makes it into billets. It is then put into rolling mills. Hariom uses a hot charging facility to convert this into coils.

The facility allows saving a lot on coal, labour, and timing which covers EBITDA a lot. Rolling mills also allow for good control of thickness variations- different thicknesses available in the market today are provided only by Hariom.

The company offers 200+ variants of thicknesses and pipes that are distributed through a dealer network. The company also manufactures scaffolds. Leftover steel and scrap in the crushers are also re-melted in induction furnaces and used/ sold. This is one of the USPs of Hariom which allows for high EBITDA margins.

Margins are superior to peers like APL because of blended costs being optimal, since operations are fully integrated, every segment has an EBITDA from 4% to 16%. Other competitors don’t have fully integrated units. According to the management, the current margins are sustainable as the company is able to pass on all price rises.

Industry

Peer comparison

Particulars (Rs. in Crores) FY21 Revenue CAGR (FY19 - FY21) EBITDAM (%) RoE (%) RoCE (%) EPS PE (x)
HARIOM PIPE INDUSTRIES LTD. 38.00% 13.50% 21.00% 13.00% 10.00 15.00
LISTED PEERS
APL APOLLO TUBES LTD. 17.00% 8.00% 11.00% 28.00% 12.00 78.00
HI-TECH PIPES LTD. 10.00% 5.00% 9.00% 13.00% 13.00 41.00
RAMA STEEL TUBES LTD. 8.00% 4.00% 6.00% 13.00% 3.00 103.00
JTL INFRA LTD. 37.00% 8.00% 21.00% 27.00% 18.00 11.00

Risks

The company has not entered into long term agreement with customers for purchasing the products. There is no assurance that customers will continue to purchase the products.

Customer Concentration Risk:

The significant portion of income are from top 10 customers.

  • FY20 – 49.78% of revenue from top 10 customers
  • FY21 – 60.74% revenue from top 10 customers
  • H2FY22 – 62.37% revenue from top 10 customers

Revenue concentration risk is there in the business. If the company unable to keep the customers, it could impact the business.

Raw material risk:
Demand and pricing in the metal industry (for both raw materials and finished products) are volatile and are sensitive to the cyclical nature of the industries it serves. Volatility in the steel prices may have a material adverse effect on its operations

Project execution risk:
Hariom Pipes supplies its products to capital goods, infrastructure and construction companies. These sectors are going through a strong revival phase due to the Indian Railways electrification programme, improvement in the real estate sector and the government's focus to improve logistics (rail/road/ports). However, the slowdown in the domestic market or delay in project execution could impact the recovery in these sectors which will directly affect revenue predictions.

Company Description

Hariom Pipe Industries Ltd. is an integrated manufacturer of Mild Steel (MS) Pipes, Scaffolding, HR Strips, MS Billets, and Sponge Iron. They cater to the southern and western Indian markets for their products. They are a premium manufacturer of iron and steel products. The company has gone from strength to strength, evolving into an integrated steel manufacturer with a stronghold in the South Indian market. It operates two plants, one at Mahabubnagar District in Telangana (Unit I) and the second plant at Anantapur District, Andhra Pradesh (Unit II). They mainly sell MS Pipes through more than 200 distributors and dealers. They also sell MS Pipes and Scaffoldings to certain developers and contractors directly as B2B sales. Hariom Pipe Industries has more than 200 employees, 1400 plus Retailers distribution network, 150 plus manufacturing specifications, and a total of 300832 MT manufacturing capacity.

Products:
Hollow Steel Pipes & Tubes:
The company manufactures premium quality steel pipes and tubes, ranging from 19.5mm to 127.5mm outer diameter (OD) with thickness ranging from 1 to 3.5mm. The pipes and tubes are made from stripes of Hot rolled steel passed through forming rolls and welded into various shapes such as square, round, rectangular and railing sections.

Scaffolding Systems
Scaffolding Systems are a series of temporary work platforms on a constructions site. The company manufactures scaffoldings systems which have longer life, accurate & customizable dimensions as per the customer requirements. These Scaffolding systems are helpful for conducting construction activities above the ground level.

H.R. Skelps/Coils
The company manufactures H.R Skelps and Coils in various shapes and sizes as per the requirement of customers. The H.R Skelps are manufactured through latest technology and these are highly durable. It is majorly used in Industrial cable trays and different industrial setups.

Mild Steel Billets
The company manufactures wide range of MS Billets and offers specific and customised dimensions are per customer requirements. Mild Steel Billets are used in structural steel products and rolling of TMT rebars of Fe415 and Fe500 grades. *(Fe-Ferrous material)

Capacity Utilisation

Details of manufacturing unit Particulars FY19 FY20 FY21
Unit I - Mahbubnagar
Installed Capacity 37,200 95,832 95,832
Induction Furnace Capacity Utilized 31,000 46,276 44,788
Utilized Capacity (in %) 83.33% 48.29% 46.74%
Rolling Mill Installed Capacity 24,000 84,000 84,000
Capacity Utilized 20,771 34,280 43,546
Utilized Capacity (in %) 86.55% 40.81% 51.84%
Piping Mill Installed Capacity 20,000 84,000 84,000
Capacity Utilized 18,282 24,183 29,303
Utilized Capacity (%) 91.41% 28.79% 34.88%
Scaffolding Installed Capacity 1,000 1,000 1,000
Capacity Utilized 655 980 282
Utilized Capacity (%) 65.50% 98.00% 28.20%
Unit II – Anantapur
Sponge Iron Installed Capacity 36,000
Capacity Utilized 22,578
Utilized Capacity (%) 62.72%

Valuation

Hariom Pipes offers a diverse range of finished steel products to a variety of industries. The company has a strong hold on steel products and has a large distribution network throughout India, particularly in South and Western India. It also prioritises backward integration of its manufacturing line, which aids the company in efficient logistics, inventory management, procurement, energy savings, and quality control.

At the upper end of the IPO price band the stock is offered at 15.1x its FY22 annualized earnings.

The Company have delivered good growth in Sales over past few years along with stable margin profile. When compared to its listed peers, Hariom Ppes is fairly valued. We recommend a “Subscribe” rating to this IPO.

Key Information

Use of Proceeds:
The total issue size is Rs. 130 crores, which is entirely a Fresh issue

The company will utilize INR 40 cr for working capital, while INR 50 cr will be deployed for:

The expansion of MS Pipe manufacturing capacities (from 84,000 MTPA to 132,000 MTPA) at Mahbubnagar facility.

The expansion of sponge iron furnace capacity from 95,832 MTPA to 104,232 MTPA at Anantapur facility.

The remaining amount of INR 40 cr will be utilized for general corporate purpose.

Book running lead managers:
ITI Capital Ltd

Management:
Pramod Kumar Kapoor(Chairman and Independent Director), Rupesh Kumar Gupta(Managing Director), Sailesh Gupta(Whole-time Director), Chirag Partani(Company Secretary and Compliance Officer).

Financial Statement

Profit & Loss Statement:- (Consolidated)

Particulars (Rs. in Crores) FY19 FY20 FY21 H1FY22
Revenue from Operations 133.60 160.78 254.14 200.87
COGS 84.15 90.66 172.86 135.32
Gross Profit 49.44 70.12 81.28 65.56
Gross Margin (%) 37.01% 43.61% 31.98% 32.64%
Employee Benefit Expenses 5.81 8.30 9.51 9.89
Other Expenses 26.60 38.34 37.49 30.09
EBITDA 17.03 23.49 34.28 25.57
EBITDA Margin (%) 12.75% 14.61% 13.49% 12.73%
Depreciation 2.15 5.16 6.26 3.98
EBIT 14.87 18.32 28.03 21.59
EBIT Margin (%) 11.13% 11.40% 11.03% 10.75%
Finance Cost 3.55 7.37 7.51 4.17
Oher Income 0.32 0.37 0.68 0.29
Profit Before Exceptional Items & Tax 11.65 11.32 21.20 17.71
Exceptional Items - - - -
Profit Before Tax 11.65 11.32 21.20 17.71
Tax 3.63 3.42 6.07 4.84
Effective Tax Rate (%) 31.15% 30.17% 28.61% 27.32%
Profit After Tax 8.02 7.91 15.13 12.87
PAT Margin (%) 6.00% 4.92% 5.95% 6.41%
Earnings Per Share (Rs.) 7.34 5.98 10.64 15.12