Guest Post: Overcoming Financing Hurdles in the Nuclear Industry
September 21, 2010Ramky Infrastructure Analysis – Good Sector and Company but Valuation leaves Little for Investors
September 21, 2010Electrosteel Integrated is coming out with an IPO to raise around $50mm to fund its 2.2 million ton plant in Jharkand,India.The company is promoted by its listed parent Electrosteel Castings which has been running for the past 30 years and is leader in the Ductile Pipe Category.This company will have ECL holding of 34% post IPO with the other major shareholders being a bunch of PE firms and Stemcor.The plant construction will require around $1.5 billion capex out of which around 40% has been already been spent.Debt will be around $1.1 billion mostly at 12.25% interest rate.The company is issuing shares at par value of Rs 10-11 which means at the book value.Since the money being raised will lead to around 10% dilution,the IPO is not very crucial for the company’s success.The reason for the IPO is to allow the exit of some PE investors.Here are the pros and cons of the project
Advantages
1) Management seems good – Despite some time and cost overruns,the management of the company seems quite good.They have long experience and good international network.The PE investors bring more sophistication and management checks into the equation.
2) Good Backward Linkages – In times of high commodity prices,the company will remain relatively insulated as it has tied up fixed prices for 100% of its iron ore and 30% of its coking coal requirements.Sister company ECL has been contracted to supply these mineral at cost+20%.Note the iron ore environment clearance has not been received till now.
3) Cheap Valuation – The shares are being offered to the public at the same price as the promoters and the PE investors.With the time value ,it is cheaper for the new investors in the company.At Rs 10-11,the investors will get the company near at its book value leaving little downside risks in case the plant is built on time.
4) Steel Demand in India is growing at rapid pace especially the DI segment – India is growing at a rapid clip with Steel Capacity 1/10th that of China.Big plants by Arcelor,POSCO,Tata Steel and other have run into land acquisition and environmental hurdles.This makes the Indian demand situation more favorable.
Disadvantages
1) Huge Debt – The company will have a debt/equity ratio of around 2.5x which is quite high.Though the steel industry has high debt ratios ,it can get the company in trouble if the company does not execute on its plans.Like Ispat expect huge losses as a bid debt burden makes the company risky.
2) Cyclical Industry – Despite the secular growth expected in the steel industry,it is prone to a cyclical nature with periodic booms and busts.That makes the company more vulnerable since it won’t be running at full capacity for the next couple of years.
3) Competition – Electrosteel is a relatively small player compared to the steel giants like SAIL,Tata Steel and JSW.In case of a big global downturn,smaller players will be more affected than the larger players.
Summary
The company has pluses as well as risks,however the plant should start operating in Oct 2010.While the investment is risky,the valuation being offered is cheap with good promoters.For people looking at lesser risk,ECL the parent company also makes a lot of sense.It is trading at 8x trailing P/E and around 1 P/Bx which is again cheap.It has a 34% share in the new company so will gain from any upside as well.Its investment in the company is Rs 700 crore with a total market cap of around Rs 1600 crore.Investing in ECL might be a safer way to invest in