Capacity expansion to provide impetus to growth
The company is in the process of enhancing the capacities of its existing manufacturing
plants and captive power plants. This expansion is expected to increase its aggregate
installed metal capacity from 5.7 MTPA to 11.6 MTPA. Further, the aggregate installed
capacity of captive power plants will increase from 227 MW to 357 MW. Both these
expansions are expected to become operational between FY22 and FY25. The expansion
of its capacities will result in further integration of its Sambalpur and Jamuria
manufacturing plants, augmentation of its revenues, better cost controls and consequent
increase in profitability and presence across the steel value chain. In addition,
its expansion plans and strategy will allow to meet the anticipated increase in
steel demand in the future and enable to supply growing markets more efficiently
and drive profitability.
Wide variety of products with strong focus on value added products
The company has wide variety of products constituting (i) long steel products, which
range from intermediate products, such as, iron pellets, sponge iron and billets
and final products, such as, TMT, customized billets, structural products and wire
rods; and (ii) ferro alloys with a specific focus on high margin products, such
as, specialized ferro alloys for special steel applications. Their TMT and structural
products are sold under the brand ‘SEL’ and the company logo. They also
undertake conversion of hot rolled coils to pipes, chrome ore to ferro chrome and
manganese ore to silico manganese. Further the company also sell their products
to institutional customers and end consumers through their distribution network
and also customize and sell their products as per the customer’s specifications.
Integrated operations across the steel value chain
The company is a leading integrated metal producing company based in India and one
of the leading integrated steel and ferro alloys producers in the eastern region
of India in terms of long steel products, as of March 31, 2020. Currently it operates
two ‘ore to metal’ integrated steel manufacturing plants one each in
Sambalpur, Odisha and Jamuria, West Bengal. The integrated nature (backward and
forward integration) of its manufacturing plants has resulted in the control over
all aspects of its operations (with the exception of sourcing of primary raw materials)
as well as operating margins, thereby enabling the company to focus more on quality
and create multiple points of sale across the steel value chain. The backward integration
activities include, setting up of iron pellet plants and installation of rotary
kilns to produce sponge iron. Whereas, the forward integration activities, include,
diversification of its product mix by utilizing the billets to produce value added
products, such as, TMT bars, structural products and wire rods, which enable it
to de-risk its revenue streams and expand product offerings.
Proximity to raw material sources & key demand clusters
The company manufacturing plants are strategically located in close proximity to
its raw material sources, which lowers its transportation costs and provides significant
logistics management and cost benefits thereby improving operating margins. Its
manufacturing plants are located within 250 kilometers of the mineral belt in eastern
India, including, iron ore, iron ore fines, manganese ore, chrome ore and coal mines,
its primary raw materials. The strategic location of its manufacturing plants has
aided in creating synergies as well as achieving economies of scale and operational
efficiencies. Further, it is well connected by roads, railways and ports and are
located close to its raw material sources and are supported by strong logistics
infrastructure, such as private railway siding, which enables to reduce the logistical
costs associated with the transportation of raw materials and products. The company
is able to export its products to its international customers in a cost efficient
manner and also achieved cost efficiencies by utilizing waste materials or by-products
as raw material inputs for other products and processes due to its strategic location.
Better financial strength in long steel space
The company’s focus on continuous efficiency improvements, improved productivity
and cost rationalization has enabled to deliver consistent and strong financial
and operational performance. The company has a relatively better financial strength
as compared to other companies operating in the long and intermediary steel sector.
Further it is the least leveraged group among its peers and its gearing ratio was
one of the lowest amongst its competitors as of March 31, 2020. Further the company
intends to use the net proceeds from the offer to prepay its and its Subsidiary,
Shyam SEL and Power Limited’s debt. We believe this prepayment of debt will
lead in savings on finance cost, freeing up of working capital, reduce debt to equity
ratio for future leverage as well as increase its profits.
Peer comparison
Jindal Steel trades at PE of 10 times FY21 whereas P/BV of 1.5 times FY21, with
Debt to equity of 0.6x which has come down recently with large debt reduction, EV/sales
of 1.5 times, EV/EBITDA of 5 times FY21 and ROE of 15--16%. Tata Steel trades at
PE Multiple of 18 times FY21 along with P/BV of 1.8 times and EV/sales of 1.5 times.
EV/EBITDA of 8 times, Debt to equity of 1 time, and ROE of 12--13%. JSW steel
trades at 25 times FY21 PE Multiple, with Debt to equity of 1 times, P/B of 4.5
times, EV/sales of 2.8 times and EV/EBITDA of 12--13 times FY21 and ROE of 20%.
Company Profile
Shyam Metalics and Energy Limited (SMEL) is a leading integrated metal producing
company based in India with a focus on long steel products and ferro alloys. It
is amongst the largest producers of ferro alloys in terms of installed capacity
in India, as of February 2021. The company has the ability to sell intermediate
and long steel products, such as, iron pellets, sponge iron, steel billets, TMT,
structural products, wire rods, and ferro alloys products with a specific focus
on high margin products, such as, customized billets and specialized ferro alloys
for special steel applications. The company operates three manufacturing plants
that are located at Sambalpur in Odisha, Jamuria and Mangalpur in West Bengal with
aggregate operating capacity of 5.7 MTPA. Its manufacturing plants also include
captive power plants with an aggregate installed capacity of 227 MW, as of December
31, 2020.
Outlook & Valuation
We believe the company shall capitalize on growth opportunities led by i) rising
demand growth from long steel and ferro alloys ii) planned capacity expansion in
new high growth segments iii) strong focus on value added products and exports and
iv) continuous focus on cost efficiency and increase profitability. The stock is
trading at P/E of 11.6x TTM EPS and 2.18x its P/BV on upper price band, hence we
recommend to “Subscribe” this issue.
Use of Proceeds:
Objects of this Issue: The proposed Rs 909 crore IPO comprises of a fresh issue worth Rs 657 crore and
an offer-for-sale of up to Rs 252 crore. The company proposes to utilize the funds
which are being raised through the fresh Issue, after deducting the offer related
expenses to the extent payable by the company with respect to the fresh issue (the
“Net Proceeds”), towards funding the following objects: Repayment
and/or pre-payment, in full or part, of debt of company and SSPL, one of SMEL’s
subsidiaries worth Rs.470 crores; and general corporate purposes.
Book running lead managers: Axis Capital, ICICI Securities, IIFL Securities, JM Financial, SBI Capital Markets
Management: Mahabir Prasad Agarwal is the Promoter, Non-Executive Chairman of the company. He is also the founder of, and has been a director of, their Subsidiary, Shyam SEL and Power Ltd. (“SSPL”), since its inception. He has over 3 decades of experience in the steel and ferro alloys industry. Brij Bhushan Agarwal is the Promoter, Vice Chairman and Managing Director of the company. He is also the Vice Chairman and Managing Director of SSPL. He has over 3 decades of experience in the steel and ferro alloys industry. He is primarily responsible for strategic planning, future expansion, business development, marketing, human resources and corporate affairs of the company. Sanjay Kumar Agarwal is the Promoter, Joint Managing Director of the company. He has over 17 years of experience in the steel and ferro alloys industry. He is primarily responsible for the operations of their manufacturing plants at Sambalpur, Jamuria and Mangalpur, with focus on cost control, production efficiency and competitive procurement of raw material.
Yr End March (Rs Cr) | FY18 | FY19 | FY20 | 9MFY21 |
---|---|---|---|---|
Net Sales | 3843.00 | 4606.00 | 4363.00 | 3933.00 |
Material Cost | 2466.00 | 2786.00 | 2678.00 | 2455.00 |
Employee Cost | 106.00 | 145.00 | 168.00 | 125.00 |
Other Expenses | 569.00 | 730.00 | 871.00 | 634.00 |
EBITDA | 701.00 | 945.00 | 646.00 | 720.00 |
EBITDA Margin | 18.00% | 21.00% | 15.00% | 18.00% |
Depreciation & Amortization | 215.00 | 195.00 | 296.00 | 220.00 |
EBIT | 486.00 | 750.00 | 350.00 | 500.00 |
Other Income | 78.00 | 78.00 | 32.00 | 63.00 |
Interest & Finance Charges | 49.00 | 64.00 | 86.00 | 56.00 |
Profit Before Tax - Before Exceptional | 515.00 | 764.00 | 296.00 | 506.00 |
Tax Expense | 11.00 | 127.00 | -45.00 | 50.00 |
Effective Tax rate | 2.00% | 17.00% | -15.00% | 10.00% |
Net Profit | 504.00 | 637.00 | 341.00 | 456.00 |
Net Profit Margin | 13.00% | 14.00% | 8.00% | 12.00% |