Newmalayalam Steel NSE SME lPO review (May apply)

•    The company is engaged in the manufacturing and marketing of galvanized pipes, tubes and sheets on a B2B2C segments.
•    While it posted inconsistency in its top and bottom lines from FY21 to FY24, the sudden boost in bottom line for H1-FY24 surprises and raise eyebrows.
•    Based on H1-FY25 annualized super earnings, the issue appears fully priced. 
•    It is operating in a highly competitive and fragmented segment. 
•    Well-informed investors may park moderate fund for long term.

ABOUT COMPANY: 
Newmalayalam Steel Ltd. (NSL) was incorporated in 2017, for taking over the entire business of M/s. Demac Steel along with its assets and liabilities in entirety, on a going concern basis (the “Transfer”). The Company entered into an agreement to sell business undertaking executed dated August 7, 2017 with M/s. Demac Steel and undertook the transfer of the Assets and Liabilities as per agreed terms. 

In 2018, the Company commenced manufacturing of galvanised pipes, tubes, and sheets by installing another electric resistance welding tube mill of an installed capacity of 3500 MT in manufacturing unit. Its products find extensive application in the general households of Kerala. Galvanised pipes and tubes are used for building the roofs to reduce heat and avoid leakage, further the galvanisation process offers an added advantage of increasing the life of the product and enhancing its quality by making it rust-free. Its products are therefore manufactured to provide an effective solution to the continuous damage caused to houses in Kerala on account of inclement weather condition. 

Accordingly, its products experience a constant demand on account of being an indispensable raw material in the construction industry in Kerala. In order to capture the market and cater to the growing demand, in the year 2019, it increased manufacturing capacity by installing another electric resistance welding tube mill of an installed capacity of 4000 MT in manufacturing unit. 

In order to market and sell its products, it has established a widespread dealer base in Kerala through which it sells products to local contractors and retailers. As of September 30, 2024, it had 121 Dealers and 214 direct customers. GP Pipes had a lion share in its top lines for the reported periods, followed by coils. Its average capacity utilization for the last three fiscals were 60.61%, and for H1-FY25 it was at 48.23%. As of September 30, 2024, it had 140 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 46400000 equity shares of Rs. 10 each to mobilize Rs. 41.76 cr. at the upper cap. It has announced a price band of Rs. 85 – Rs. 90 per share. The issue opens for subscription on December 19, 2024, and will close on December 23, 2024. The minimum number of shares to be applied is for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.84% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO, the company will utilize Rs. 2.88 cr. for IT/Technological upgradation of manufacturing facility, Rs. 2.34 cr. for expansion of solar power facility, Rs. 2.56 cr. for expenses on new factory civil construction and storage facility, Rs. 14.20 cr. for working capital, Rs. 5.06 cr. for advertising, marketing and branding., and the rest for general corporate purposes. 

The IPO is solely lead managed by Khandwala Securities Ltd., and KFin Technologies Ltd. is the registrar to the issue. Aftertrade Broking Pvt. Ltd., is the Market Maker for the company. Khandwala Securities Ltd. is also the syndicate member. The issue is underwritten up to 15% by Khandwala Securities and 85% by Aftertrade Broking.

The company has issued entire equity shares at par value so far. The average cost of acquisition of shares by the promoters is Rs. 9.90, Rs. 9.94, Rs. 10.00, and Rs. 28.75 per share. 

Post-IPO, company’s current paid-up equity capital of Rs. 12.65 cr. will stand enhanced to Rs. 17.29 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 155.59 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 323.61 cr. / Rs. 6.73 cr. (FY22), Rs. 359.96 cr. / Rs. 6.01 cr. (FY23), and Rs. 303.15 cr. / Rs. 4.27 cr. (FY24). For H1 of FY25 ended on September 30, 2024, it earned a net profit of Rs. 5.19 cr. on a total income of Rs. 155.34 cr. The sudden boost in its bottom lines for H1-FY25 raises eyebrows.

For the last three fiscals, the company has reported an average EPS of Rs. 4.16 and an average RoNW of 14.52%. The issue is priced at a P/BV of 2.49 based on its NAV of Rs. 36.11 as of September 30, 2024, but its post-IPO NAV data is missing from its IPO price band ad.

If we attribute FY25 annualized super earnings on post-IPO fully diluted equity capital, then the asking price is at a P/E of 15.0, and based on FY24 earnings, the P/E stands at 36.44.  The issue relatively appears fully priced. 

For the reported periods, the company has posted PAT margins of 2.08% (FY22), 1.67% (FY23), 1.41% (FY24), 3.34% (H1-FY25), and RoCE margins of 24.18%, 21.74%, 17.60%, 17.19%, respectively for the referred periods. 

DIVIDEND POLICY:
The company has not paid any dividends for the reported periods of the offer documents. It will adopt a prudent dividend policy, based on its financial performance and future prospects. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Apollo Pipes, Hariom Pipe Ind., as their listed peers. They are trading at a P/E of 49.4, and 29.2 (as of December 13, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER’S TRACK RECORD:
This is the 9th mandate from Khandwala Securities in the last two fiscals. Out of the last 7 listings, 1 opened at discount, 1 at par and the rest with premiums ranging from 5% to 90% on the date of listing.