Looking East, Vibhor Steel Tubes goes to market
Vibhor Steel Tubes Ltd (VSTL), a Haryana-based high-quality steel tubes and pipes manufacturer, is entering the capital market with its initial public offering (IPO). Promoted by the first-generation entrepreneur Vijay Kaushik and his son Vibhor Kaushik, a technocrat. The promoter group holds around 99 per cent of the company's pre-issue capital.
VSTPL manufactures steel products such as electric resistance welded pipes, hot-dipped galvanized pipes, hollow section pipes, primer painted pipes, SS pipes and crash barriers at its plants multi located in Maharashtra, Telangana and Haryana with a total capacity of 2,23,160 tonne per annum (TPA). The company manufactures and exports steel pipes and tubes to various heavy engineering industries. The products are used for frames and shafts, bicycle frames, furniture, shockers, and structural besides engineering purposes.
VSTL operates its business through two manufacturing units – one is in Raigad, Maharashtra, through which it caters to domestic sales and 100 per cent of the company’s export sales. The second unit is located in Mahabubnagar district, Telangana. The company supplies its products to western and southern market – Maharashtra, Gujarat, Madhya Pradesh, Telangana, Karnataka and Tamil Nadu.
On track with expansion
The company has also initiated a new facility at Sundargarh in Odisha, which is expected to be completed by the end of the first quarter, ending June 2024. The company has already acquired the land for the project, and orders for plant and machinery have already been placed and funded through internal accruals.
With the commissioning of the new project, Vibhor Steel's capacity will increase by 1,20,000 MT to 3,41,000 MT – a total gain of 35 per cent. This expanded capacity will enable it to tap the dealers’ network in East India and provide the headroom for offering value-added products, which would lead to improved margins.
Vijay Kaushik, Chairman and Executive Director, Vibhor Steel Tubes, says, “We are looking to manufacture high-margin products like round and galvanised steel products to improve our operating margins. Moreover, we are also exploring to tap the export markets once the new production facility goes on stream. Also, approximately to raw material supply will be an added advantage for the company to cut its freight cost once the current expansion plan is completed."
Efficiency and quality at the core
VSTL reported steady performance for the last fiscals, with net profit growing from Rs11.33 crore in the year ended March FY22 to Rs 21.06 crore as of March 2023. Revenue from operations increased to Rs1,113.12 crore from Rs818 crore during the same period. VSTL, which has a long-term contract manufacturing agreement with Jindal Pipes to manufacture and supply finished goods under the brand name Jindal Star, currently sees nearly 88 per cent of its total turnover coming from a single client. However, the management showcases this arrangement as a win-win partnership.
Vibhor Kaushik, MD, adds, “With single client accounting for 88 per cent, we focus on only one debtor. The relationship spans more than two decades now, and we get to cater to the dealers of Jindal Pipes across southern and western markets. Our new plant will also help expand Jindal Star Pipes’ presence to eastern India. We will also use our expanded capacities to focus on value-added products, which is expected to improve our margins by 100-150 basis points in the coming quarters. At the same time, we will also aim at a higher play in the overseas markets”.
Attractively priced
VSTL is in the process of completing its expansion plan at Odisha through internal accruals. The additional funds collected through the initial public offer will help the company improve its working capital requirement and margins. Moreover, the demand for steel pipes continues to remain strong. Further, the initial public offering is attractively priced at just 10-11 times its March 2023 earnings. Investors should invest in this issue from a mid-long-term perspective.
Prashanth Tapse, SVP (Research Analyst) at Mehta Equities Ltd adds, “Vibhor Steel Tubes IPO offers a chance to invest in a well-established steel pipes manufacturer with over two decades of history and a strong association with Jindal Pipes. The company's strategic location near ports enhances its focus on future export business. Financially, it has demonstrated robust growth in revenue and net profit for FY22 and FY23. With a reasonably priced P/E of 16.8 times compared to industry peers, we recommend subscribing to the issue for potential listing gains, supported by its exclusive supply arrangement with Jindal Pipes.”
According to Avinash Gorakshakar, Research Head at Profitmart Securities, “Vibhor Steel Tubes is catering largely to Jindal Pipes group as on date. What is unique about the company is its focus on capital efficiency in a largely volume driven commodity market. Also, the management has kept production costs low and has generated a higher return on capital employed (ROCE) via acquiring healthy assets at very attractive prices thus ensuring healthy margins.
Going forward, the company plans to increase its value-added product mix to ensure that as it scales volumes it also improves its operating margins The only negative in the near term is the high dependence on the Jindal Pipes group but here also it enjoys a 20-year plus relationship, which is profitable and protects its margins also. The issue is being offered at a attractive valuation of 10 times which we believe looks attractive from.a long term point of view."
Finally, VSTL is entering the market to raise Rs72.17 crore. The issue price has been priced at price-earnings of 9.49 times the ratio to the higher end of the floor price. Other peers in a similar business are APL Apollo Tubes Limited (with a P/E of 64.88), Hi-Tech Pipes Limited (with a P/E of 47.91), Goodluck India Limited (with a P/E of 31.01), and Rama Steel Tubes Limited (with a P/E of 37.75).