IPO: Vraj Iron and Steel

Vraj Iron and Steel, a leading iron and steel producer, is launching its IPO (initial public offering) on June 26, 2024. Below is a breakdown of the company's strengths, weaknesses and growth prospects to help investors make an informed decision.

In a nutshell

• Quality : Between FY21-23, the company reported a three-year average ROE and ROCE of 30.1 and 32.6 per cent, respectively.
  
• Growth : Between FY21-23, its revenue and net profit grew by 33.2 and 121.6 per cent per annum, respectively.
  
• Valuation : Post the IPO, the stock will be valued at a P/E and P/B ratio of 15.3 and 1.9 times, respectively.
  
• Overview: Given the rise in public and private expenditure on infrastructure development and manufacturing, the demand for iron and steel in India is expected to remain strong. This, in turn, will benefit the company. However, factors such as a highly competitive business environment, volatile profit margins, and fluctuating commodity prices may hamper its growth prospects.

About Vraj Iron and Steel

Formerly known as Phil Ispat Private Limited, Vraj Iron and Steel was incorporated in 2004. It manufactures products such as sponge iron, MS billets and TMT bars under the brand name 'Vraj'. Presently, the company operates two manufacturing facilities in Bilaspur and Raipur in Chhattisgarh. Sponge iron is its key product, which generated nearly 53 per cent of its revenue, followed by TMT bars, which comprised a 30.3 per cent revenue share as of nine months ending December 2023.

Strengths of Vraj Iron and Steel

• Efficient operations: In an industry with usually low and volatile profitability and highly leveraged balance sheets, the company has maintained a double-digit PAT margin since FY22, which is among the highest in the industry, due to low debt and efficient operations.

Weaknesses of Vraj Iron and Steel

• Highly competitive environment: Since the company operates on a small scale in a market comprising industry giants such as Tata Steel, JSW Steel and Jindal Steel & Power, it may be difficult for it to generate new business and acquire large clients.
  
• Client concentration: In the nine months leading up to December 2023, almost 64 per cent of the company's revenue came from its top 10 clients. This raises concerns because the company's financials could be seriously impacted if any of these clients choose to switch to a different supplier in the future.

Risk report

Company and business

• Are Vraj Iron and Steel's earnings before tax more than Rs 50 crore in the last 12 months?
  No. The company reported a profit before tax of Rs 45 crore as of FY23.
  
• Will Vraj Iron and Steel be able to scale up its business?
  Yes. Iron and steel are primary requirements in manufacturing and infrastructure development. The rapidly growing Indian economy and the increasing capital expenditure will boost the company's growth in the future.
  
• Does Vraj Iron and Steel have a recognisable brand recall with client stickiness?
  Yes. The company has built long-standing relationships with its existing clients and continues to focus on them to drive revenue growth in the future.
  
• Does the company have a credible moat?
  No. The company operates in a highly competitive environment and competes with much larger companies offering the same products.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters have over 25 per cent stake in the company?
  Yes. Post the IPO, the promoters will hold a stake of 75 per cent.
  
• Do the top three managers have over 15 years of combined leadership at Vraj Iron and Steel?
  Yes. The three executive directors have combined 25 years of experience with the company.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information that suggests otherwise.
  
• Is the company's accounting policy stable?
  Yes. No information suggests otherwise.
  
• Is Vraj Iron and Steel free of promoter pledging of shares?
  Yes. The company's promoters have not pledged any shares.

Financials

• Did the company generate a current and three-year average ROE of more than 15 per cent and a ROCE of more than 18 per cent?
  Yes. Vraj Iron and Steel's three-year average ROE and ROCE were 30.1 and 32.6 per cent, respectively. As of the nine months ending December 2023, they were 23.8 and 25.3 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  Yes. The company's operating cash flows were positive between FY21 and FY23. However, as of the nine months ending December 2023, it reported a negative operating cash flow of Rs 10.2 crore.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. Vraj Iron and Steel has a net debt-to-equity ratio of 0.1 as of December 2023.
  
• Is Vraj Iron and Steel free from reliance on huge working capital for day-to-day affairs?
  No. The company runs a capital-intensive business, and high working capital requirements are an industry-wide trait.
  
• Can the company run its business without relying on external funding in the next three years?
  No. The company plans to more than double its production capacity by the end of FY27. Despite the IPO proceeds, expansion of existing manufacturing plants may require additional capital in the future.
  
• Is Vraj Iron and Steel free from meaningful contingent liabilities?
  No. Its contingent liabilities as a percentage of equity stood at around 26.3 per cent as of December 2023.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  Yes. The stock offers an operating earnings yield of 8.2 per cent on its enterprise value.
  
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The stock will trade at a P/E of 15.3 times compared to its peers' median P/E level of 17.8 times.
  
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The stock is valued at a P/B of 1.9 times compared to its peers' average level of 2.5 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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