Widely read:
In our previous part of Hariom Pipe Industries IPO story, we read about the key details of the IPO along with important information about the company. Here we will answer some questions about Hariom Pipe Industries and evaluate it on parameters like management, financials, valuations, etc.
IPO questions
The company/business
1) Are the company's earnings before tax more than Rs 50 crore in the last 12 months?
No. The company's earnings before tax for FY21 were Rs 21 crore.
2) Will Hariom Pipe Industries be able to scale up its business?
Yes. The company is looking to increase its manufacturing capacity using the proceeds from the IPO which will help expand its business.
3) Does the company have recognisable brands truly valued by its customers?
No. The concept of brand recognition does not exist in this space and it also directly competes with several other major steel product manufacturers which makes it difficult for them to have solid recognition among their customers.
4) Does Hariom Pipe Industries have high repeat customer usage?
Yes. The company has long-term relationships with several of its customers.
5) Does the company have a credible moat?
No. Hariom Pipes does not offer anything unique that other players don't.
6) Is the company sufficiently robust to major regulatory or geopolitical risks?
Yes. The company derives all of its revenue only from domestic sales and is also self-sufficient for raw materials and intermediates.
7) Is the business of the company immune from easy replication by new players?
No. While there are high capital expenditure requirements for an entity outside of the steel industry to replicate the company's business, those within the steel industry can choose to do so with minimal capital expenditure.
8) Is the company's product able to withstand being easily substituted or outdated?
No. Although Hariom Pipes offers products that are important in various industries, there are other players who offer similar products.
9) Are the customers of the company devoid of significant bargaining power?
No. The company derived 60.7 per cent of its revenue from its top 10 customers and 24.5 from its top customer. Since it does not have any long-term contract with them and depends heavily on these top customers, they may have significant bargaining power.
10) Are the suppliers of Hariom Pipe Industries devoid of significant bargaining power?
Yes. The company is mostly self-sufficient for its raw materials and intermediates. Although the local suppliers fulfil the company's requirements of additional sponge iron, the top 10 suppliers account for 56.3 per cent of total purchases, and it does not, in any way, affect the operations.
11) Is the level of competition the company faces relatively low?
No. Hariom Pipe Industries operates in a highly competitive space with major players operating at larger scale.
Management
12) Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
Yes. Post-IPO, the promoter and promoter group will hold about a 66 per cent stake in the company.
13) Do the top three managers have more than 15 years of combined leadership at the company?
Yes. Managing Director Rupesh Kumar Gupta (also a promoter) has been associated with Hariom Pipes since its incorporation in 2007.
14) Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
Yes, we have no reason to believe otherwise.
15) Is the company free of litigation in court or with the regulator that casts doubts on the management's intention?
Yes, the company is free from any material litigation.
16) Is the company's accounting policy stable?
Yes, the company's accounting policy is stable.
17) Is Hariom Pipe Industries free of promoter pledging of its shares?
Yes. The company's shares are free of any pledge.
Financials
18) Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
Yes, the company managed to generate a three-year (FY19-21) average return on equity of 24.3 per cent and a return on capital employed of 20.5 per cent. For FY21, the company generated a return on equity of 25.4 per cent and a return on capital employed of 21.5 per cent.
19) Was the company's operating cash flow positive during the last three years?
Yes, the company has reported positive operating cash flow during the last three years.
20) Did Hariom Pipes increase its revenue by 10 per cent CAGR in the last three years?
Yes. The company's revenues increased from Rs 133.6 crore in FY19 to Rs 254.1 crore in FY21 at a CAGR of 37.9 per cent.
21) Is the company's net debt-to-equity ratio less than one, or is its interest-coverage ratio more than two?
No. The company's net debt-to-equity ratio stood at 1.05 as of September 30, 2021, and its interest-coverage ratio stood at 3.82 as of FY21.
22) Is the company free from reliance on huge working capital for day-to-day affairs?
No, Hariom Pipe Industries has a working capital cycle of 89 days for FY21. In fact, the company will be using a part of the proceeds to fund its working capital requirements.
23) Can the company run its business without relying on external funding in the next three years?
Yes. The company's business has been booming off-late. It has clocked about 79 per cent of its FY21 revenue in the first six months of FY22 itself. Moreover, the IPO proceeds would fund the company's capital expenditure and working capital requirements.
24) Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?
No. Short-term borrowings have increased by nearly 2.5 times from Rs 24 crore in FY19 to Rs 60 crore as of September 2021.
25) Is the company free from meaningful contingent liabilities?
No, the company's contingent liabilities as a percentage of post-IPO net worth stand at 28 per cent. As of September 30, 2021, there are certain claims not acknowledged as debt of about Rs 60 crore, by the company.
Stock/valuations
26) Does the stock offer an operating-earnings yield of more than 8 per cent on its enterprise value?
No, the stock will only offer an operating-earnings yield of 6 per cent on its enterprise value.
27) Is the stock's price-to-earnings less than its peers' median level?
Yes. Post-IPO, the company's stock will trade at a P/E of around 25.8, which is less than its peers' median P/E of 26.3.
28) Is the stock's price-to-book value less than its peers' average level?
Yes. Post-IPO, the company's stock will trade at a P/B of around 1.8, which is less than its peers' average P/B of 6.7.
Also, read our earlier story of Hariom Pipe Industries IPO to learn about key IPO details and important company information.
Disclaimer: The author may be an applicant in this Initial Public Offering.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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