Narayani Steels- IPO Analysis

About the issue

Vishakhapatnam based Narayani Steels Ltd., is coming up with its IPO from September 01, 2016 to September 06, 2016. Narayani Steels belongs to medium and small scale enterprises and will get listed on BSE SME platform. The company proposes to raise Rs 11.52 crore through IPO by issuing 36,00,000 equity shares at fixed price of 32 per share with face value of Rs 10 per share.  
              
Purpose of the IPO

The capital to be raised through the IPO will be utilised for working capital requirements and issue expenses.

Industry

Narayani Steels belongs to the Steel industry. The company deals in domestic steel sector. Steel industry was struggling due to slow growth rate and muted demand in past few years. Now we can see gradual revival in steel industry. Indian steel demand rose by 4.5 per cent in FY15-16, which is slightly better than previous year. The demand for steel is driven by higher public sector spending (civil infrastructure projects) and jump in railway sector capital expenditure. The momentum in domestic demand has continued through April 2016 with steel consumption in the country growing by 5.2 per cent as compared to the same month last year to 5.7 million tonnes. We see this sector growing, supported by all micro and macro factors.

Company Business

Narayani Steels Ltd., is engaged in trading and manufacturing of hot rolled long products of value added steel. The company trades in blooms, billets, TMT bars, pellets, etc., and also manufactures TMT bars and other long products such as rounds, flats, angles, channels etc. Narayani Steels has two manufacturing units at Vizianagaram. Company has strong roots in Vishakhapatanam steel industry area. Company procures its raw material from RINL which lies in same geography. Company manages to distribute its products to clients through a 100 dealers' network across the country. Company is eyeing on entering the export business in future. Capacity utilisation of the company is 27 per cent; and in future remaining capacity can be used to cater to rise in demand.

Financial performance

Company’s topline is rising continuously with CAGR of 20% over FY11-15. EBITDA margin of company is very low to 2 per cent throughout FY11-15, largely affected by raw material cost. PAT of the company is growing with CAGR of 14 per cent over FY11-15.

Peer Comparison and Valuation

Narayani Steels with EPS of 1.85 has PE of 17.31x. Company’s RoNW is 5.50% and D/E is 3.3x which gives off a repulsive message about the company in comparison with peers. Considering weak financials, we recommend to stay away from the subscription.