Scoda Tubes IPO analysis

Scoda Tubes IPO (initial public offering) will open for subscription on May 28, 2025, and close on May 30, 2025. Below is a breakdown of the steel pipes manufacturer’s strengths, weaknesses and growth prospects to help investors make an informed decision.

Scoda Tubes IPO in a nutshell

• Quality: Between FY22 and FY24, Scoda Tubes reported a three-year average return on equity (ROE) and return on capital employed (ROCE) of around 21 and 13 per cent, respectively.
• Growth: Between FY22 and FY24, its revenue and net profit grew annually by 44 and 235 per cent, respectively.
• Valuation: At the upper price band of Rs 140, the stock is expected to be valued at a P/E and P/B ratio of around 46 and 2.3 times, respectively. In comparison, its peers are valued at a median P/E ratio of 33 times and an average P/B ratio of 6 times.
• Overview: Scoda Tubes is looking to capitalise on the growing global and domestic infrastructure investments, with the stainless steel market expected to see robust demand from sectors like oil & gas, power, and pharmaceuticals. However, the business remains exposed to raw material price volatility, sectoral cyclicality and pricing pressure from both domestic and foreign competitors.

About Scoda Tubes

Scoda Tubes manufactures and sells seamless stainless steel and welded tubes and pipes for industrial applications across oil & gas, power, chemicals, pharmaceuticals, and transportation sectors. As of December 2024, it operated with an installed capacity of 10,068 million tonnes per annum (MTPA) for seamless tubes and 1,020 MTPA for welded tubes at its manufacturing facility in Mehsana, Gujarat. 

The company is backward integrated with an in-house hot piercing mill (machines to make hollow tube/shell) for producing mother hollow, key raw material for seamless tubes. It caters to both domestic and global clients across more than 15 countries. As of FY24, the company generated 21 per cent of the revenue from exports. 

It derives nearly 47 per cent of revenue from engineering companies while domestic dealers contribute 23 per cent. Another 21 per cent of revenue comes from selling leftover mother hollow and scrap.

Strengths of Scoda Tubes

• Backward integration: Scoda is among the few Indian players with a hot piercing mill to produce mother hollow used in seamless stainless steel pipes. This backward integration gives it control over input quality, reduces dependence on external suppliers, lowers costs and improves turnaround time.

Weaknesses of Scoda Tubes

• Revenue concentration: The top 10 customers made up nearly 58 per cent of the revenue for nine months ending December 31, 2024. The loss of any one of these customers can significantly impact its financials.
• Cyclical nature: Scoda’s revenues are closely linked to capex-driven sectors like oil & gas, power, chemicals, pharmaceuticals, and infrastructure, which are all cyclical in nature. During economic slowdowns or periods of low investment, demand for industrial tubes and pipes may decline, impacting Scoda’s order inflow and capacity utilisation.

Risk report

Company and business

• Will the company be able to scale up its business?

Yes. The domestic demand for stainless steel tubes and pipes is expected to increase by 8 per cent per annum till FY29. This will be led by strong growth in major end-use industries such as building and construction, automobile, oil and gas, chemical manufacturing etc., indicating a favourable growth environment.

• Does the company have recognisable brands with client stickiness?

No. Scoda Tubes’ stainless steel, tubes and pipes are indifferentiated products.

• Does the company have a credible moat?

No. The company operates in a highly competitive market with low entry barriers.

Financials

• Was the company's operating cash flow positive during the last three years?

No. The company’s operating cash flow was positive in only two of the last three financial years.

• Is the company free from reliance on huge working capital for day-to-day affairs?

No. Scoda Tubes has a high working capital cycle of 135 days as it receives payment from its customers in nearly 82 days, while it has to pay its suppliers in around 50 days.

• Can the company run its business without relying on external funding in the next three years?

No. The company had a high debt-to-equity ratio of 1.4 times as of December 31, 2024, and the capital-intensive nature of the business may require it to take on more debt. The management has acknowledged that internal accruals alone are not sufficient to meet all projected operational needs and expansion plans in the coming years.

Assessing an IPO requires a careful evaluation of a company's strengths, weaknesses, and growth potential, just like we've outlined for Scoda Tubes. But wealth creation can only be achieved through a well-researched, balanced stock portfolio.

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Disclaimer: This story is not a stock recommendation. Investors should do their due diligence before investing.

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