Vibhor Steel Tubes IPO Sees High Demand; But Is It A Solid Long-Term Investment Bet?

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The initial public offer (IPO) of Vibhor Steel Tubes Ltd, which kicked off on Tuesday, February 13, will close for subscription tomorrow, February 15. The steel pipe maker is looking to raise Rs 72.17 crore through its IPO. The firm has announced a price band of Rs 141 to Rs 151 per share for its IPO. Prospective investors can bid in lots, with each lot consisting of 99 shares. To apply for the IPO, the minimum investment is set at Rs 14,949 (calculated as 99 x 151).

According to market observers, shares of Vibhor Steel Tubes are trading at a grey market premium of Rs 120 (a premium of 79% over IPO price) as of today. The public offer is anticipated to debut on BSE and NSE on the 20th of February, 2024.

Vibhor Steel Tubes Anchor Round

Prior to issue opening, on February 12, Vibhor Steel Tubes successfully secured Rs 21.5 crore from anchor investors through an anchor round. This round witnessed contributions from just three investors, namely Saint Capital Fund, Chhattisgarh Investments Ltd, and Neomile Growth Fund - Series I.

Vibhor Steel Tubes Subscription Status

The IPO of Vibhor Steel Tubes saw a strong interest from retail and non-institutional investors (NIIs), achieving full subscription within just an hour of its opening. By the end of the first day of bidding, the subscription rate reached 27.63 times the available shares. 

The retail investors' segment was oversubscribed by 32.51 times, the NII segment by 48.33 times, and the Qualified Institutional Buyers (QIB) segment by 3.56 times. Additionally, the employee segment saw a subscription rate of 27.45 times.

About Vibhor Steel Tubes

Vibhor Steel Tubes Ltd (VSTL) specializes in manufacturing and exporting a wide range of steel products, including mild steel and carbon steel ERW (electric resistance welded) black and galvanized pipes, hollow steel pipes, as well as cold rolled steel (CR) strips and coils. These products are utilized across various sectors such as construction, domestic, agriculture, and industry. 

Operating from two manufacturing plants located in Maharashtra and Telangana, VSTL has embraced sustainability by installing 2-MW solar rooftop power systems, with each facility hosting a 1 MW unit, to cater to its energy needs.

Strengths

  • Impressive Financial Growth: Between FY21 and FY23, VSTL demonstrated substantial financial growth. This includes a Compound Annual Growth Rate (CAGR) of 48% in Revenue from Operations, an increase of 53% in EBITDA, and a remarkable 453% surge in Net Profit.
  • Significant Enhancements in Return Ratios: Over the last three fiscal years, VSTL has achieved considerable improvements in its Return on Capital Employed (ROCE) and Return on Equity (ROE), which reached 25.5% and 16.5% respectively by the end of FY23.
  • Strategic Partnership with Jindal Pipes: In April 2023, VSTL entered into a six-year memorandum of understanding (MoU) with Jindal Pipes. This agreement guarantees a minimum offtake of 100,000 tonnes per annum, along with compensation at Rs 2,000 per tonne for any shortfall, effectively covering a significant portion of its major manufacturing expenses.

Key Concerns 

  • Low Profit Margins: Despite consistent improvements in EBITDA and Net Profit Margins over the last three fiscal years, the margins remain modest at 4.21% and 1.89% respectively as of FY23.
  • Reliance on a Single Customer: Approximately 88-92% of VSTL’s revenue in the past three years has come from sales to Jindal Pipes. Given Jindal's extensive dealer network in India and the sale of pipes and tubes under the Jindal Star brand, the company's heavy reliance on this single customer introduces a risk of customer concentration. However, this risk is partially offset by a minimum offtake agreement.
  • Negative Cash Flow: VSTL has experienced negative cash flows from operating activities in FY22 and the six months ending on September 30, 2023, as well as negative cash flows from investing activities over the last three fiscal years and the six months ending on September 30, 2023. Persistent negative cash flows could negatively impact the company’s operations, financial stability, and overall success.
  • High Working Capital Demand: The business requires substantial working capital, with estimates for FY24 and FY25 at Rs 209.79 crore and Rs 274.18 crore, respectively. Of the working capital required in FY24, Rs 62 crore will be covered by issue proceeds, with the remainder potentially sourced from internal accruals and/or borrowing. Inadequate cash flows to cover these working capital needs could negatively affect the company's operational results.
  • High Trade Receivables and Inventories: Trade Receivables and Inventories are a significant portion of the firm’s current assets and overall net worth. As of September 2023, Trade Receivables accounted for 24.5% of Total Current Assets, while Inventories constituted about 50% of Total Current Assets. Inefficient management of these assets could negatively impact net sales, profitability, cash flow, and liquidity. 

Final Verdict: Subscribe for Listing Gains

VSTL has demonstrated impressive financial growth over the last three years, with two operational manufacturing facilities in Telangana and Maharashtra, and a third soon-to-be-launched unit in Odisha. This upcoming plant is anticipated to lower input costs due to local steel procurement. 

Nonetheless, it is critical to point out that as of FY23, the firm had the highest debt-to-equity ratio at 1.63 among its competitors, indicating the necessity for prudent evaluation and attention to additional risk factors mentioned below.

The IPO is attractively priced with a Price-to-Earnings (P/E) ratio of 10x, based on FY23 earnings, which is significantly lower when compared to its industry counterparts. The grey market premium (GMP) for the IPO indicates a strong debut on the stock exchange.

Given these aspects, investors are advised to participate in the IPO for potential listing gains. Nonetheless, for long-term investment, it is crucial to monitor the company's performance in the upcoming quarters, especially the progress of the Odisha facility, which is at a nascent stage and carries execution risks.

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