Sensitivity to fluctuations in the steel industry and gross underutilisation of installed capacities make Vaswani Industries? IPO prone to risks. On the positive side, the debt burden will get a lot lighter

BILLETS and ingots manufacturer, Vaswani Industries, is raising 50 crore through an initial public offer of equity shares to pre-pay long-term loans and meet working capital requirements. The company's business is highly sensitive to fluctuations in the steel industry. Its installed capacities are grossly under-utilised. These factors may prove to be a dampener in the long run.

BUSINESS:

Incorporated in 2003, Vaswani Industries (VIL) is a relatively new player in the metal sector. It manufactures sponge iron, steel billets and ingots, forgings and castings at its facilities in Sondra, near Raipur. Though it tripled its sponge iron capacity over the last six years from 100 tpd (tonnes per day), it operated at a little over half its total capacity last fiscal. The company's operations in the power sector contribute about 25% to its topline. It uses a portion of the 7.5 mega watt power for captive use and the rest is sold to private power companies, including Lanco Electric Limited and Chhattisgarh State Electricity Board.

FINANCIALS:

Between 2006 and 2010, the company's net sales grew 60% and net profit 65% when compounded annually. During FY10, however, VIL's sales dropped 30% to Rs 90 crore; but it was able to increase its operating profit margin by 500 basis points over the previous year to 15%.

The company's cash flows from operating activities turned positive, post FY07. For the year ended FY10, VIL's cash on books surprisingly jumped 18 times to Rs 95 lakh. In the first six months of FY11, the company generated Rs 23.12 cash. Post IPO, its debt will come down to Rs 45.3 crore from Rs 70 crore, but it will

still be twice as high as its equity.

CONCERNS:

VIL is utilising only 12% of its sponge iron capacity and 53% of its billets and ingots capacity. It makes future capacity expansion less feasible. Given this, the company's debt-equity ratio looks far too high. Its profitability is under pressure due to increasing costs of raw materials, including coal. Also, the company's revenue growth is highly dependent on demand from secondary steel manufacturers.

VALUATION:

Based on its earnings

for the first six moths of FY11, a shareholder would earn Rs 2.9 per equity share held on an annualised basis. At the higher end of the IPO price band, the company demands a P/E of 16.4. This looks expensive when compared with P/Es of 6-7 for Godawari Power and Ispat and MSP Steel.