What you must know about Vraj Iron and Steel IPO?

About Vraj Iron and Steel Ltd

Vraj Iron and Steel Ltd was incorporated in the year 2004 and was formerly known as Phil Ispat Private Ltd. Vraj Iron and Steel Ltd has currently 2 manufacturing units at Raipur and Bilaspur in the state of Chhattisgarh and is one of the manufacturers of iron and steel in Central India. The company is also adding fresh capacities and captive power plants and diversifying into related segments. Its product palate is spread across 4 verticals; sponge iron, power, MS Billets, and TMT Bars. The first vertical sponge iron, is a critical raw material for the steel industry, when it comes to manufacturing high quality steel. Sponge iron is very versatile and can be used in induction furnaces and also in electric arc furnaces (EAF). Vraj Iron and Steel Ltd has an installed capacity of 1,20,000 MT annually. The second vertical is power. Vraj Iron and Steel Ltd currently has a capacity of 5MW of Power Plant for its captive use based on WHRB (waste heat recovery boilers) method. Further, the company is in the process of adding another 15MW captive power plant at Bilaspur.

The third vertical of Vraj Iron and Steel Ltd  is the MS Billets vertical. Now, MS Billets are semi-finished casting product produced in a steel melting shop. The advantage with MS Billets is that they just need to be further processed to transform them into a finished good. It is round or square cross-sectioned metal length which is created directly. The fourth vertical pertains to the TMT bar vertical. These TMT steel bars of exceptionally robust quality are manufactured through a hot rolling process. In this process, heated iron billets are continuously passed through rollers of decreasing diameters. These TMT Bar are passed through a water cooling system for Thermax treatment after they exit the last rolling mill. As per of the group, the holding company is Gopal Sponge and Power Private Ltd, while Vraj Metaliks Private Ltd is one of the associate companies of the group. The company was founded by Late Shri Ram Gopal Jhawar, and since his demise in the year 2013, the entire group is run by his son Vijay Anand Jhawar.

The IPO of Vraj Iron and Steel Ltd  is entirely a fresh issue, and the funds will be used funding capex at Bilaspur plant, repayment of borrowings and for general corporate expenses. The promoters of the company are Gopal Sponge and Power Private Ltd, VA Transport Private Ltd and Vijay Anand Jhawar. The promoters hold 99.99% stake in the company, which will get diluted post the IPO to 74.95%. The IPO will be lead managed by Aryaman Financial Services Ltd; while Bigshare Services Ltd will be the IPO registrar.

Highlights of the Vraj Iron and Steel IPO Issue

Here are some of the key highlights to the public issue of Vraj Iron and Steel IPO.

•    Vraj Iron and Steel IPO will be open from June 26th, 2024 to June 28th, 2024; both days inclusive. The stock of Vraj Iron and Steel Ltd has a face value of ₹10 per share and the price band for the book building IPO has been set in the range of ₹195 to ₹207 per share. 

•    The IPO of Vraj Iron and Steel Ltd will be entirely a fresh issue of shares with no offer for sale (OFS) component. The fresh issue brings in fresh funds into the company, but is also EPS and equity dilutive. The OFS is just a transfer of ownership; and hence neither EPS nor equity dilutive.

•    The fresh issue portion of the IPO of Vraj Iron and Steel Ltd comprises the issue of 82,60,870 shares (82.61 lakh shares approximately), which at the upper price band of ₹207 per share will translate into a fresh issue size of ₹171.00 crore.

•    Since there is no offer for sale component in the IOP, the fresh issue size will double up as the overall IPO size too. Therefore, the total IPO of Vraj Iron and Steel Ltd will also comprise of a fresh issue of 82,60,870 shares (82.61 lakh shares approximately) which at the upper end of the price band of ₹207 per share aggregates to total issue size of ₹171.00 crore.

The IPO of Vraj Iron and Steel Ltd will be listed on the NSE and the BSE on the IPO mainboard.

Key dates for Vraj Iron and Steel IPO and how to apply?

The IPO of Vraj Iron and Steel Ltd opens on Wednesday, 26th June 2024 and closes on Friday, 28th June 2024. The Vraj Iron and Steel Ltd IPO bid date is from 26th June 2024 at 10.00 AM to 28th June 2024 at 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is 28th June 2024.

Data Source: Company RHP

Investors can apply either through their existing trading account or the ASBA application can be directly logged through the internet banking account. This can only be done through the authorized list of self-certified syndicate banks (SCSB). In an ASBA application, the requisite amount is only blocked at the time of application and the necessary amount is debited only on allotment. It must be noted that in ASBA applications, there is no refund concept. The total application amount is blocked under the ASBA (applications supported by blocked amounts) system. Once the allotment is finalized, only the amount is debited to the extent of the allotment made and the lien on the balance amount is automatically released in the bank account. The credit of shares to the demat account on July 02nd 2024, will be visible to investors under the ISIN Code – (INE0S2V01010). This allocation to the demat account is only applicable to the extent of the allocation of shares and if no allocations are made in the IPO, then no credit would be visible in the demat account.

Promoter holdings and Investor Quota Allocation 

The promoters currently have a 99.99% stake in the company, which will get diluted post the IPO to 74.95%. As per the terms of the offer, not more than 50% of the net offer is reserved for the qualified institutional buyers (QIBs), while not less than 35% of the net offer size is reserved for the retail investors. The residual 15% is kept aside for the HNI / NII investors. The table below captures the allocation to various categories.

It may be noted here that the Net Offer above refers to the quantity net of employee and promoter quota, as indicated above. There is no specific and dedicated employee quota of shares as per the red herring prospectus (RHP). The anchor portion, will be carved out of the QIB portion and the QIB portion available to the public will be reduced proportionately.

Lot sizes for investing in the IPO of Vraj Iron and Steel IPO

Lot size is the minimum number of shares that the investor has to put in as part of the IPO application. The lot size only applies for the IPO and once it is listed then it can be even traded in multiples of 1 shares since it is a mainboard issue. Investors in the IPO can only invest in minimum lot size and in multiples thereof. In the case of Vraj Iron and Steel Ltd, the minimum lot size is 40 shares with upper band indicative value of ₹14,760. The table below captures the minimum and maximum lots sizes applicable for different categories of investors in the IPO of Vraj Iron and Steel Ltd.

Data Source: Company RHP

It may be noted here that for the B-HNI category and for the QIB (qualified institutional buyer) category, there are no upper limits applicable.

Financial highlights of Vraj Iron and Steel Ltd

The table below captures the key financials of Vraj Iron and Steel Ltd for the last 3 completed financial years. 

Data Source: Company RHP filed with SEBI (FY refers to Apr-Mar period)

There are few key takeaways from the financials of Vraj Iron and Steel Ltd which can be enumerated as under

a)    In the last 3 years, revenue growth has been rather strong, with the FY23 sales revenues over 77% higher than that of the FY21 sales revenues. We are not comparing the data for previous year as FY23 has shown a sharp growth over previous years and hence may not be reflective. However, net margins have been quite steady and robust at around 10.47%.

b)    While the net margins of the company have been quite strong, even the ROE at 38.32% and the ROA at 28.19% are very healthy by industry standards. These are the latest year figures, but previous figures have steadily grown. Even the debt levels of the company are very low compared to the total asset base and the equity base of the company.

c)    The company has relatively healthy sweating of assets at around 2.69X in the latest year, and this is gets further accentuated by the healthy ROA levels of 28.19% in the latest year. The Sweating ratio or the asset turnover ratio has been steady in last 3 years.

Overall, the company has reported strong and steady growth in sales and profits while the net margins and the capital margins are relatively steady and robust in last two years. Let us now turn to the valuation story.

Valuation metrics of the Vraj Iron and Steel IPO

Let us turn to the valuations part. On the latest year diluted EPS of ₹21.84, the upper band stock price of ₹207 gets discounted at a P/E ratio of 9-10 times. If one looks at the average growth in top line and bottom line and also as the margins on sales and capital; the pricing does look OK; although that is the general standard for most steel and metal companies. More importantly, in an industry that caters to a very exclusive market segment, valuations tend to be on higher. If you look at the numbers for the first 9 months of FY24, the extrapolated EPS works out to ₹24.04 per share, so now the P/E looks relatively more compelling at 8-9 times. This looks relatively reasonable valuations, especially with the consistent performance and the segment targeted.

Here are some qualitative advantages that Vraj Iron and Steel Ltd brings to the table. 

•    The company has a strong presence in the central India market, which is not too crowded, but has the potential to see exponential growth in demand in the coming years. The proximity to source of inputs is an added advantage to this company.

•    Most of the capacity expansion plans of the company are directed towards value added products and that is a major advantage. It is likely to improve margins in the coming years with better realizations and even justify better valuations.

If you add up the qualitative factors and the valuation on P/E of FY24, the story looks to be reasonably good; and also, it must be said that the pricing leaves something on the table for investors in the short to medium term too. Investors must look at the investment from a positioning in the central India market and its diversified product mix. The merits appear to outweigh the risks.