Shyam Metalics IPO: Listing Gain On Cards?

The Kolkata-based Shyam Metalics and Energy Ltd (NS: SHYE) is ready to take off its IPO when the steel demand is high and prices are reaching new heights. It opened for subscription on 14th June 2021 and will remain open till 16th June 2021. The price band for the IPO is between Rs.303 and Rs.306.

IPO Snapshot

Source: News Reports

Shareholding Pattern of Shyam Metalics

Objective of the Issue

The basic objective of the issue is for the repayment of the company and its subsidiary’s debt. The remaining would be used for other general corporate expenses. 

Industry Profile

India was the world’s second-largest steel producer with production at 111.2 million tonnes (MT) in 2019. The cost-effective labor and domestic availability of raw materials are the main drivers for the growth in the Indian steel sector. The Indian steel industry has always strived for continuous modernization and up-gradation to higher energy efficiency levels. 

The national Steel Policy was implemented by the government to encourage the industry to reach global benchmarks. India steel demand has risen at a modest 5.4% CAGR during the past five years of Fiscal 2015 to Fiscal 2020. CRISIL forecasts steel demand to continue at 5% to 6% CAGR through Fiscal 2025. 

Source: World Steel Association

Company Profile

Shyam Metalics and Energy is an integrated metal producing company incorporated on December 10, 2002. Its primary focus is on long steel products and ferroalloys. As of 2021, it is among India’s largest producers of ferroalloys in terms of installed capacity. It is also the fourth-largest player in the sponge iron industry. 

The company serves institutional customers and end-users. Jindal Stainless Limited, Rimjhim Ispat Limited, Vijayshri Steel Pvt Ltd are some of its domestic clients. JM Global Resources, POSCO International Corporation, World Metals & Alloys are some of its international clients. The company has a partnership with 42 distributors to offer its products across 1 union territory and 13 states.

Production Capacity

The company currently operates three manufacturing plants that are located in Jamuria and Mangalpur in West Bengal and Sambalpur in Odisha. The company is looking to expand its capacity from 5.71 MTPA to 11.60 MTPA by 2025. The capacity expansion is on the existing land, which will help the company with cost control, revenues, and profitability.

It is in the process of construction of an aluminum foil rolling mill at Pakuria in West Bengal with a proposed installed capacity of 0.04 MTPA. It is expected to become operational in FY22.

Product Portfolio

Financials

Shyam Metalics red herring prospectus contained data only up to December 31, 2020. Despite a moderate rise in revenue, the company’s profits surged in the period ended December 31, 2020. This could be because of the increase in steel prices.

Source: Company DRHP

Source: Company DRHP

Source: Company DRHP

Peer Comparison

Tata Steel, JSW Steel, SAIL, Jindal Steel, and Tata Steel Long Products are shown as the peers in the red hiring prospects of the company, though they are not directly comparable in terms of volumes of business.

Things that work in favour of Shyam Metalics

• Steel Industry demand is expected to stay resilient and rise given the growing state of our economy and rapid urbanization.
• The manufacturing units which are located in West Bengal and Odisha are strategically located closer to the mineral-rich belt of coal, chrome, and iron ore mines, which helps in better costing and logistics.
• The company uses non-fossil fuels, such as waste, rejects, heat, and gas that is generated from the company’s operations which are used to produce electricity, this reduces their power cost. 80 percent of their electricity is generated by the use of non-fossil fuels.
• The company is not dependent on only one kind of end product. They provide a diversified portfolio of steel products and are flexible enough to customize the products. They also sell intermediate steel products to capitalize on the market opportunity.
• The company has lesser debt when compared to its peers.
• They are expanding continuously through forward and backward integration. They are planning to expand further in terms of capacity and also new products.

Risks

• Shyam Metalics is into the heavy industry which is highly dependent on minerals and energy, thus making it more dependent on the raw materials cost and fuel prices.
• The demand and pricing in the steel industry are very volatile and cyclical in nature. The decrease in steel prices can have a huge effect on the revenue and margins of the business.
• The company does not have any long-term contracts with current customers. If the current customers do not continue the business with the company, there could be drastic effects on the revenues.
• The major portion of the revenue for the company is from exports. If any new tariffs are implemented by the foreign governments on the exports, it could affect the business.
• Climate change is one of the major concerns for the world. A lot of countries are aiming towards sustainable business models. Since Steelmaking is an energy-intensive industry, there could be certain environmental laws that could impact the business in the long run.
• Stringent labor laws could lead to an increase in the wages cost.
• The questionable legal disputes on the promoters can harm the reputation of the company

Anchor Book

Of the 22 anchor investors in the Shyam Metalics IPO, Edelweiss Alternative Investment Opportunities Trust, Abakkus Growth Fund, Aditya Birla Sun Life, Kotak Mutual Fund and SBI General Insurance were amongst the top anchor investors.

Grey Market Premium

As per news reports, Shyam Metalics was trading at a grey market premium of Rs 155 per share. It has constantly been rising from Rs 100-110 to Rs 150-160 over the past week.

What can investors expect?

The company’s performance is highly affected by the cyclical nature of the steel sector. While there have been new policies introduced by the government for improvements in the railways and infrastructure sectors, the next uptick in metal stocks could well be on the backdrop of increase in spending.

But any downturn in the steel demand will affect the company’s revenues and margins. The competition-intensive steel sector can also put higher pressure on the company’s revenues. The industry is highly capital intensive, which will require the company to frequently innovate and capture the market share.