Loha Ispaat: Too many risks to neglect

Loha Ispaat, which is looking to raise Rs 206-214 crore through its on-going initial public offering (IPO), faces several hurdles given its business model and high debt levels. Also, the proceeds of the IPO will be utilised for working capital (largely to provide credit to customers).

Rating agency CARE, too, has assigned a grade of three on a scale of five indicating that the fundamentals of the company are average. The rating agency highlights several positives like the promoters’ long experience in steel and allied industry, successful execution of expansion project, large customer base and the favourable prospects for Steel Service Centre (SSC) segment in India.

However, the risks highlighted are also worth noting and include high working capital intensity, long inventory holding period (70-90 days) and high susceptibility to steel prices. The company is sitting on debt of around Rs 800 crore on an equity of Rs 548 crore, which is high considering that interest coverage is just about two times.

While there are business risks, on the expanded equity capital, the offer is priced at about 12 times annualised FY14 earnings which is way higher than about eight-nine times that some of the bigger players like JSW Steel, JSPL and SAIL are available.

“The business is an interesting concept and Loha Ispaat has the advantage over others. However, the company is a supplier to the MSME segment in a big way and being in a capital intensive industry where value addition is low, margins are always under pressure and get further affected when the economy slows down,” said Arun Kejriwal of Kejriwal Research and Investment Service.

Loha Ispaat, which is mainly into processing of flat steel products, intends to diversify by entering the non-ferrous metals processing segment in the next two years. “We have expanded our capacity to 2.2 million tonnes by adding new processing lines which are not only automated but are even flexible to be used for processing of non-ferrous metals apart from steel (at present),” Loha Ispaat’s Senior Vice-President, Rishi Vyas, told Business Standard.

Loha Ispaat has a raw material procurement centre in Hong Kong and a subsidiary in Dubai which is more into trading. Though Loha Ispaat is currently catering to only the domestic market, it also intends to target the West Asia and North Africa region.

The company’s consolidated revenue has grown from Rs 2,086 crore in FY11 to Rs 3,411 crore in FY13, while net profit has increased from Rs 52 crore to Rs 70 crore during the same period. In the first half of FY14, Loha Ispaat registered a net profit of Rs 34.53 crore on total operating income of Rs 1,955.2 crore, versus profit of Rs 33.06 crore on total operating income of Rs 1,608.36 crore during the first half of FY13.

The company has converted its loan to long-term from short-term, which will reduce the interest outgo. “Reducing credit to buyers is also one measure we plan to take to bring down finance cost,” Vyas added. Since domestic steel processors are mostly dealing with mid to small-sized customers, ‘on-credit’ is a common function of the business. “We have our customers graded and so credit limit is decided well in advance and this is how we keep our credit line in the safe zone,” said Vyas.

The company plans to increase its Ebitda margin (ranging between seven and nine per cent at present) in coming quarters by reducing its total expenses and improving customer base. It also intends to reduce its cost of material procurement by producing cold-rolled coils in-house at its Taloja plant instead of buying it entirely from steel manufacturers.