Vibhor Steel Tubes IPO Overview

IPO Details:

Price Band: ₹141 – ₹151 per share
Lot Size: 99 shares
Cost per Lot: ₹14,949
Issue Size: Approx. ₹72 crore

The offer and objects

➡️The offer includes a fresh issue of up to 4,779,444 equity shares at the upper price band of Rs 151 and 5,118,411 equity shares at the lower price band of Rs 141, totaling Rs 72.17 crore.

➡️The company intends to use the net proceeds from the fresh issue to meet the company’s working capital needs, totaling Rs 62 crore, with the remaining funds allocated for general corporate purposes.

Company Overview

Vibhor Steel Tubes Ltd is engaged in the manufacturing and supply of steel pipes and tubes to various industries in India. The company’s product portfolio includes Mild Steel/Carbon Steel ERW Black and Galvanized Pipes, Hollow Steel Pipes, and Cold Rolled Steel (CR) Strips/Coils.

Manufacturing Units and Workforce

Currently, the company operates two manufacturing units and one warehouse located in Raigad, Maharashtra, and Mahabubnagar, Telangana. The Raigad unit serves as an ideal location for 100% export of the company’s products. As of September 2023, the company employs a total of 636 individuals, including laborers.

Association with Jindal Pipes for 6 Years

The company has entered into a strategic agreement with Jindal Pipes Ltd for a duration of six years to manufacture and supply finished goods under the brand name “Jindal Star.” The agreement stipulates two main terms: 1) a minimum order of 1,00,000 MT per annum and 2) a turnover discount of 2% of the net sales price to Jindal Pipes Limited. This collaboration provides the company with a stable business outlook for the next six years.

Terms and conditions of the Agreement with Jindal Pipes

➡️The selling price will be determined periodically through mutual agreement, taking into consideration the prevailing market prices for the end product. However, it shall never fall below the sum of raw material costs (steel plus consumables) and variable expenses (labor and power).
➡️JPL commits to placing orders with a minimum quantity of 1,00,000 MT per annum to maximize the utilization of Unit I & Unit II capacities of our Company.
➡️In case of any shortfall in off-take by Jindal Pipes Limited or in supply by Vibhor Steel Tubes Limited, the defaulting party will compensate at the rate of Rs. 2,000 per MT for the deficit. This compensation obligation ceases once the minimum order quantity is achieved.
➡️Vibhor Steel Tubes Limited agrees to grant a turnover discount of 2% on the net sales price to Jindal Pipes Limited.
➡️The duration of this agreement is six years from April 01, 2023, with the option for renewal if mutually agreed upon by both parties.

Revenue Concentration Risk – 93% Sales from Jindal Pipes

The company’s revenue heavily relies on its top customer, Jindal Pipes, contributing to 93% of the total revenue for FY23. While this concentration poses a risk, minimum offtake clauses help mitigate potential downsides. Other customers include De Wit Bouwmachines BV and Macro Metal Handelsgesellschaft MBH.

Capacity Utilization stood at 71.6%

Over the past three years, the company has increased its capacity utilization from 41.82% to 71.68%, indicating a growing demand for its products. Despite this improvement, the plants are not operating at full capacity, with a 30% reserve to meet future demand.

Negative Cash Flow Impact on Working Capital

The company reported negative cash flows from its operating activities in H1FY2024 and FY2021. The steel business’s working capital intensity poses a challenge, and insufficient cash flows may adversely affect working capital requirements.

Expansion Plans in Telangana and Odisha

Vibhor Steel Tubes plans to enhance manufacturing and galvanizing capacity at the Telangana plant and establish a new plant in Odisha. The company has added new products to its portfolio, such as crash barriers and square pipes. The total capex for these expansions is approximately Rs 60 crore, funded through a mix of debt and internal accruals.

Peers of Vibhor steel tubes

1.APL Apollo Tubes Limited
2.Hi-Tech Pipes Limited
3.Rama Steel Tubes Limited
4.Goodluck India Limited (listed)

These companies operate in the same industry, manufacturing similar products to Vibhor Steel Tubes. However, it’s important to note that while they are part of the peer group, they are not direct competitors. This is because these companies sell their products in the open market, whereas Vibhor Steel Tubes has a unique business model. Vibhor Steel Tubes exclusively serves one customer, Jindal Pipes Limited, and supplies all finished goods/products on behalf of Jindal Pipes Limited.

Financials and Valuation

For FY2023, consolidated sales increased by 36% to Rs 1113.12 crore. The OPM rose by 50 bps to 4.1%, leading to a 54% increase in OP to Rs 45.59 crore. The FY2023 EPS on post-issue equity is Rs 11.1, and at the upper price band of Rs 151, the P/E works out to be 13.7. Compared to its listed peers, Vibhor Steel Tubes demonstrates competitive financials with an EBITDA margin of 4.2% and ROE of 25.5%.

Conclusion

Vibhor Steel Tubes Ltd operates in the steel pipes and tubes manufacturing sector, with a strategic collaboration with Jindal Pipes providing a stable revenue stream. While facing a concentration risk with 93% of sales from Jindal Pipes, the company shows positive signs of growth, increased capacity utilization, and expansion plans in Telangana and Odisha. However, negative cash flows and the highly competitive market warrant careful monitoring of its financial performance.

The image added is for representation purposes only