Hariom Pipe Industries, a manufacturer of iron and steel products, has come out with an IPO. Find out if you should bid.
Based out of Hyderabad, Hariom Pipe Industries is an integrated manufacturer of steel products such as MS (mild steel) pipes, scaffolding, HR strips, MS billets, and sponge iron. Out of this, a significant portion of sponge iron, MS billets and HR strips are used by the company itself for manufacturing MS pipes and scaffolding. The company manufactures over 150 specifications of MS pipes and scaffoldings based on customer requirements, which are used in various sectors such as housing, automotive, infrastructure, agriculture, and many more. Its products are primarily sold in Southern and Western India under the brand name "Hariom Pipes" in two ways; through the 200 distributors and dealers that it has and directly to developers and contractors in the form of B2B sales.
Hariom Pipe Industries has two manufacturing units located in Telangana (Unit 1) and Andhra Pradesh (Unit 2). In Unit 1, the company manufactures finished steel products while in Unit 2, it manufactures only sponge iron. To increase their operational efficiency and reduce dependence on others for raw materials, the company follows an interesting strategy. It procures the required iron ore in Unit 2 to produce sponge iron, which is then sent to Unit 1 to be used as a raw material. The necessary intermediate products such as MS billets and HR strips are produced by the company itself, making them self-sufficient to manufacture their main final products - MS pipes and scaffoldings.
The Indian MS pipe market is expected to grow from $1.25 billion in 2021 to $1.69 billion in 2026, and the Telangana MS pipe market is expected to grow from $254 million in 2021 to $397 million in 2026. This growth will be on the back of a strong infrastructure push from the government, rapid urbanisation, and increasing demand from industries such as automotive and agriculture. This is expected to augur well for the company and propel its growth in the region.
1) Integrated operations: As stated above, Hariom Pipe Industries produces its own raw materials such as sponge iron, MS billets and HR strips, which are then used to manufacture its final products. This makes them self-sufficient and better inventory managers as they will have the required amount of materials whenever they desire. The manufacturing units are also located in close proximity to the iron ore hub and industrial area making the logistics much more efficient.
2) Wide range of product offerings: Instead of sticking to one specification, the company offers over 150 specifications of MS pipes and scaffoldings. This has allowed them to cater to a wider range of customers from different sectors. When demand emerges the company also sells sponge iron, MS billets and HR strips independently, which adds to its revenues.
3) Attractive financials: Hariom Pipe Industries has grown tremendously in the last three years with revenue, EBITDA and profit growth of 37.9, 42.0, and 37.5 per cent respectively. It also has an impressive three-year average ROE and ROCE of 24.3 and 20.5 per cent. Post-IPO the company will trade at a price to earnings of 25.8 times and price to book of 1.8 times, which is less than its competitors and industry.
1) Geographical concentration of facilities: Both of the company's manufacturing facilities are located in the same geographical region. Any region-specific issue could affect production. Since manufacturing Unit 1 requires materials from Unit 2, any delay or halt in production in the latter unit may affect the production of final products too.
2) Revenue concentration: Hariom Pipe Industries derived around 60.7 per cent of revenue from its top ten customers, and 24.5 per cent of revenue from its top customer during FY21. Since the company does not have any kind of long-term agreements with its customers, any change in relationship or management inefficiency can severely affect its topline.
3) Highly competitive: Hariom Pipes operates in a highly competitive environment where market giants such as Tata Steel and JSW Steel operate. Although the company claims to offer products at affordable prices, sustaining in such a capital-intensive and competitive industry might be difficult in the long term.
Also read about Hariom Pipe Industries IPO: How good is it? to learn how we evaluate Hariom Pipe Industries on various metrics.
Disclaimer: The author may be applicants in this Initial Public Offering.