Hariom Pipe Industries

Integrated steel manufacturer

Expanding MS Pipe manufacturing capacity from 84,000 mtpa to 1,32,000 mtpa and furnace unit capacity to 1,04,232 mtpa from 95,832 mtpa

Incorporated in 2007 by Mr. Rupesh Kumar Gupta and Mr. Sailesh Gupta, HariomPipe Industries is an integrated manufacturer of mild steel (MS) pipes, scaffolding, HR (hot rolled) strips, MS billets, and sponge iron. The company uses iron ore to produce sponge iron which is then processed across various stages to manufacture final products viz. MS pipes and scaffolding.

The company has two manufacturing units strategically located in and around key industrial hubs that provides it with certain advantages over peers, like ease of logistics and adequate supply of power, water, raw materials, and manpower. Unit I is an integrated plant located in Mahabubnagar District in Telangana, which is in proximity to Hyderabad and the Jadcherla industrial area and manufactures finished steel products from iron scrap and sponge iron. Unit II exclusively manufactures sponge iron and is in Anantapur District in Andhra Pradesh, which is around eighteen 18 km away from Bellary, one of the hubs in South India for iron ore production. The company had acquired sponge iron Unit situated at, Anantapur in August 2020 with a capacity of 36,000 mtpa.

The iron ore required to produce sponge iron at Unit II is mostly procured through the online bidding process. Most of the sponge iron produced at the Unit II is transported to the Unit I and used as a raw material for manufacturing MS billets, HR strips, MS pipes and scaffolding. 

The manufacturing of Sponge Iron at Unit II has reduced its dependence on external sources for raw materials since its acquisition in September 2020. The integration of Unit I and II has optimized operations and profitability through backward integration which helps with efficient logistics, inventory management, procurement, energy savings and quality control.

The company manufacture MS pipes and scaffoldings of more than one hundred fifty different specifications and cater, directly and indirectly, to customer requirements in various sectors such as housing, infrastructure, agriculture, automotive, power, cement, mining, solar power, and engineering.

The company mainly sells MS pipes through more than two hundred distributors and dealers. It also sells MS pipes and scaffoldings to certain developers and contractors directly as B2B sales.

The company caters to the southern and western Indian markets for its products. Its MS pipes are marketed and sold under the brand name Hariom Pipes. Substantial portion of the sponge iron, MS billets and HR strips produced are used for captive consumption in the manufacturing MS pipes and scaffolding.

The Offer and the Objects

The offer comprises fresh issue of 8500000 equity shares aggregating up to Rs 130.1 crore at upper price band of Rs 153 and Rs 122.4 crore at lower price band of Rs 144

Price band for the IPO is Rs 144 to Rs 153 per equity share of face value Rs 10 each.

The company proposes to utilize the net proceeds from the issue towards funding capital expenditure requirements amounting Rs 50.05 crore, funding the working capital requirements amounting Rs 40 crore and balance towards general corporate purposes.

The company is setting up two additional pipe mills adjacent to the Unit I which will increase its production capacity from 84,000 mtpa to 1,32,000 mtpa. Further, it will be undertaking expansion of its existing furnace capacity by setting up of a new 15 tonne electric melting furnace at its existing unit thereby enhancing production capacity to the extent of 1,04,232 mtpa from the existing capacity of 95,832 mtpa. This expansion will ensure the availability of primary raw materials i.e. an MS billet which is used in the production of HR strips. HR strips are used as main raw material in pipe mills. This new electric melting furnace will also help in ensuring availability of HR strips for its additional pipe mills. The board in its meeting dated September 2, 2021, had approved an amount of Rs 50.05 crore for funding the proposed capital expenditure from the net proceeds. The company had applied with Telangana state pollution control board (TSPCB) for enhancement of the licensed capacity of Unit I from of 1,26,000 mtpa to 6,86,400 mtpa and the same has been obtained from TSPCB on July 28, 2021.

Strengths

The company started with a furnace unit to manufacture mild steel (MS) billets and over the years, has forward integrated into hot-rolled (HR) strips, MS tubes and scaffoldings. The company use iron ore to produce sponge iron which is then processed across various stages to manufacture final products viz. MS pipes and scaffolding making its manufacturing process cost-effective. All intermediate products required for the manufacturing of final products are produced in-house viz. sponge iron, MS billets and HR strips. Integrated operations led to high operating margin of 12-13.4% in the past two fiscals.

The company can change the product mix as per market demand and supply dynamics giving it the flexibility to serve a wider spectrum of customers across various sectors.

Unit I is located around 70 kms from Hyderabad in the Mahabubnagar district, state of Telangana and close to Jadcherla industrial area. This proximity enables ease of logistics, power, water supply and raw materials for operations in Unit I. Skilled personnel for Unit I also come from Hyderabad. Unit II is located at Anantapur District, Andhra Pradesh which is around 18 kms from Bellary, which is one of the hubs in South India for iron ore production. The connectivity between Unit I and southern markets provides the benefits of logistics considering accessibility and proximity.

The company intends to further enhance its value proposition by manufacturing value added products which have better margins and wider markets. MS pipes and scaffoldings are the end products that are manufactured from the conversion of sponge iron to HR MS billets and HR strips. Certain value-added products require a certain modifications and extensions to its existing lines which are in the development phase.

Steel sector in India is experiencing a vital growth and is anticipated to witness high gains in next years. Growth in the oil and gas industry is leading to an increased demand for the steel pipes and tubes market. Innovations across the oil and gas industry, such as horizontal drilling in the US, are leading to an increase in the consumption of steel pipes because of their ability to access remote locations and deep-water regions.

India GP pipe market is anticipated to witness strong growth in forecast timeframe due to its strong performance, rust free nature and corrosion resistant properties. Rapid urbanization in Southern India has resulted in growing demand for GP pipes in residential, commercial and industrial construction, which is anticipated to drive regional product demand by 2026.

The company has a strong hold on steel products with wide distribution network across India and especially in South and Western India. The company has able to build a strong brand name for itself with the steel products under the brand name of Hariom which has a strong brand recall value, thereby resulting in strong sales across the country.

Weaknesses

The Indian steel industry is highly competitive due to low entry barriers and limited product differentiation. Moreover, the industry is inherently cyclical and strongly correlated to the economic environment. Further, large scale players benefit from the economies of scale while power costs and limited ability to control market prices constrain the profitability for small sized players. Hariom Pipe Industries is expected to mitigate some of these risks to a certain extent on account of the backward integrated nature of its operations.

Operating profitability is susceptible to volatility in input cost, such as sponge iron, steel scrap and power costs and steel prices. The prices are market driven and individual players are price takers. Hence, any sharp fluctuation in steel price can impact the operating margin, as the company has no price contracts with suppliers or customers.

Some of biggest customers contribute to a considerable part of revenue and thus, a loss of any of these customers can adversely impact its revenue. Top 10 customers represented 62.37%, 60.74% and 49.78%, respectively, of revenue from operation for six months period ended September 30, 2021, and for FY 2021 and FY 2020, respectively. Further, its largest customer represented 24.18%, 24.46% and 19.51% of revenue from operations for six months period ended September 30, 2021, and for FY2021 and FY 2020, respectively.

The industry is regulated, and the company's operations are subject to environmental and workers’ health and safety laws and regulations

The company had reported negative cash flow from operations of Rs 1.503 crore in H1FY2022

The company manufacturing operations are concentrated in Telangana and Andhra Pradesh and any political disruptions, natural calamities or civil disruptions, opposition, and protests, particularly in locations where it operates, could adversely affect business operations or strategy.

Top 10 suppliers contributed 69.74%, 56.32%, 50.35% and 42.13% of total purchases for six months period ended September 30, 2021, and for fiscals 2021, 2020 and 2019 respectively. Further, top 10 suppliers of raw materials include a related party which has supplied 29.56%, 20.98%, 10.75% and 3.34% of cost of materials consumed for six months period ended September 30, 2021, and for FYs 2021, 2020 and 2019, respectively

Valuation

For FY 2021, consolidated sales were up by 58% to Rs 254.14 crore. OPM fell 110 bps to 14.6% which led to 46% increase in operating profit to Rs 34.28 crore. Other income increased 83% to Rs 68 lakh while interest cost rose 2% to Rs 7.51 crore and depreciation increased 21% to Rs 6.26 crore. PBT increased 87% to Rs 21.2 crore. Tax expenses were 78% higher at Rs 6.07 crore. Net profit increased 891% to Rs 15.13 crore.

At the higher price band of Rs 153, the offer is made at around 26 times its EPS of Rs 5.9 for the period ended March 31, 2021, on a post-issue equity share capital of Rs 25.48 crore of face value of Rs 10 each with OPM of 13.5% and RoE of 21.4%. Listed industry peer of the company is APL Apollo tubes, Hi- Tech pipes, Rama Steel pipes and JTL Infra.

In comparison APL Apollo tubes trades at 31 times its FY2021 EPS of Rs 28.9 at the current market price of Rs 906 with sales of Rs 8499.75 crore, profit of Rs 407.7 crore with OPM of 8.4% and RoE 26.7%.

Hi- Tech Pipes trades at 27 times its FY2021 EPS of Rs 19 at the current market price of Rs 507 with sales of Rs 1340.63 crore, profit of Rs 22.8 crore with OPM of 5.3% and RoE 12%.

Rama Steel pipes trades at 651 times its FY2021 EPS of Rs 0.5 at the current market price of Rs 319 with sales of Rs 352.81 crore, profit of Rs 43 lakh with OPM of 5.5% and RoE 13.2%.

JTL Infra trades at 23 times its FY2021 EPS of Rs 9.9 at the current market price of Rs 231 with sales of Rs 229.93 crore, profit of Rs 10.08 crore with OPM of 8.9% and RoE 25.4%.