Vibhor Steel Tubes

Manufactures steel products

A fixed off-take arrangement from Jindal Pipes assures minimum offtake of 100,000 tonnes per year

Vibhor Steel Tubes was founded by Vibhor Kaushik and Vijay Kaushik in 2003. The company is a manufacturer and exporter of mild steel and carbon steel ERW (electric resistance welded) black and galvanized pipes, hallow steel pipe, and cold rolled steel (CR) strips and coils.

The company’sproducts find application in the construction, domestic, agriculture and the industrial sectors. It operates out of two manufacturing facilities.The first is based at Sukheli, Maharashtra, with a production capacity of 125,000 tonnes per annum (tpa). The second is based out of Mehboob Nagar, Telangana, with a production capacity of 96,000 tpa. The company has installed 2-MW solar rooftop solar power units (1 MW each at both the units) for captive consumption.

The company manufacture steel pipes and tubes in various shapes and sizes such square, round, rectangular and elliptical or any special shape.Steel pipes and tubes can be used for many purposes. Steel pipesare used for frames and shafts. Steel pipes are used for bicycle frames, steel pipes for furniture. CDW (cold drawn welded) pipes are used for shockers.

The company is working with Jindal Pipes since 2003. It manufacturesand supplies finished goods to Jindal Pipes via a renewed agreement of 01 April 2023 under the brand name Jindal Star. It has a long-term agreement for the six years with the Jindals. Under the agreement, Jindal will provide orders with a minimum quantity of 1,00,000 tpato fill majority of capacity of Unit I and Unit II of the company. In the event of any shortfall in offtake by Jindal Pipes or in supply by Vibhor Steel Tubes, compensation at Rs 2,000 per tonne of shortfall will be paid by the erring party. However, there will be no compensation liability once the minimum quantity of orders is achieved.

The company has a long-term agreement but no exclusive agreement. As per the agreement, there are no restrictions on selling products in the open market without the brand name of Jindal Star.

In November 2023, the company received an allotment letter for land to set up a new facility of Vibhor Steel Tubes in Odisha as the stateis the biggest market of iron. This will help it to reduce the cost of raw material and improve the margins in future. The company expects to start production in FY2025.

The capacity utilization of the plants was 77.84% in H1FY2024 and 71.68% in FY2023.

The Offer and the Objects

The offer comprises fresh issue of up to 4779444 equity shares at the upper price band of Rs 151 and 5118411 equity shares at the lower price band of Rs 141, aggregating Rs 72.17 crore.

The company proposes to utilize the net proceeds from the fresh issue towards funding working capital requirements of the company amounting Rs 62 crore and balance towards general corporate purpose.

Strengths

The company signed in April 2023 a memorandum of understanding (MoU) with JPL for six years, assuring a minimum offtake arrangement of 100,000 tpa and compensation at a rate of Rs 2,000 per tonne for any shortfall. Furthermore, it also takes care of the company’s major manufacturing costs.

Production of steel tubes and pipes recorded a CAGR of about 10% in the past five years from FY2019. In these years, the industry witnessed a decline only in FY2021 due to the outbreak of Covid-19. In FY2023, production increased 27.3%, backed by healthy domestic demand. In YTD FY2024, production of steel tubes and pipes increased by 16.2% over the year.

Consumption of steel tubes and pipes in India has recorded a CAGR of 8.5% from 5,253 thousand tonne in FY2019 to 7,282 thousand tonne in FY2023. After witnessing an uptrend till FY2020, the industry observed a de-growth of 14.7% in consumption in FY2021 due to the pandemic.In FY2023, the industry witnessed a strong growth of around 29.3% in consumption on account of the factors such as improvement in construction and real estate activities and continuous investment in infrastructure and policy support by the government. The industry observed a growth rate of 18.9% in YTD FY2024 over the corresponding period of last year.

The company exports its manufactured goods under the brand of Jindal. It directly deals with foreign customers and delivers the products directly to customers and invoices them directly instead of Jindal.

The company considers Unit-I’s location at Raigad, Maharashtra, the best place for export of goods. It exported 100% of sales from Unit-I. Unit-II is located around 70 km from Hyderabad in the Mahabubnagar District, Telangana, and close to the Jadcherla industrial area. This proximity enables ease of logistics, power, water supply and raw materials for its operations in Unit-I. Skilled personnel for Unit-I also comes from Hyderabad.

The per capita finished steel consumption in India was 81.1 kg in CY2022. This is significantly lower than the world average of 222 kg per capita. The National Steel Policy 2017 envisages that per capita steel consumption will increase to 158-160 kg by FY2031.

The usage of steel tubes and pipes is significant in construction activities and building infrastructure. These materials are used in the construction sector for creating structural elements such as columns, beams, and trusses to provide strength and support the formation of building. They are also used in water infrastructure such as drinking water supply, plumbing, drainage, and sewerage systems. Apart from this, they are also used by the manufacturing sector including for oil and gas pipelines, agricultural equipment, automobile components, and electrical cable conduits.

Weaknesses

The company derived approximately 88-92% of revenue in the last three years ended FY2023 from sales to Jindal Pipes. In FY2023, the quantity sold to Jindal more than the minimum offtake. Jindal has a network of dealers across India and sells pipes and tubes under the brand, Jindal Star. Higher dependence on a single customer exposes the company to customer concentration risk, which is partly mitigated by minimum offtake clause. Other customers of the company include companies De Wit Bouwmachines BV and Macro Metal Handelsgesellschaft MBH.

The company reported negative cash flows from its operating activities in H1FY2024 and FY2021 as well.

The company’s business is working capital intensive. If it experience insufficient cash flows to meet required payments on its working capital requirement, there may be an adverse effect on the results of operations.

Compliance with, and changes in, safety, health and environmental laws and various labour, workplace related laws and regulations, including terms of the approvals granted to it, may increase the compliance costs and as such adversely affect business, prospects, results of operations, and financial conditions.

The pricing in the steel industry is subject to market demand, volatility and economic conditions. Fluctuations in steel prices may have amaterial adverse impact on business, results of operations, prospects, and financial conditions.

The company is required to obtain consents under certain environmental laws, which are critical for operating its manufacturing facility.

The company is in the process of enhancing its manufacturing and galvanising capacity at the Telangana plant and is setting up new plant in Odisha. Furthermore, it added new products such as crash barriers and square pipes to its product portfolio in the current fiscal. The capex of around Rs 60 crore (Rs 20 crore towards Telangana unit and Rs 40 crore towards setting up the Odisha unit) is expected to be incurred over FY2024-FY2025, which is funded through a mix of debt and internal accruals. While the company has incurred close to 30% of cost for Telangana capex (funded through term loan of Rs 6 crore and rest through internal accruals), the Odisha-based project is in nascent stage, with land acquired and pending financial closure pending. The Odisha unit is expected to commence operations in the near term. As it is ata nascent stage of completion, it is exposed to execution risk.

The company operates in the steel pipes and tubes manufacturing industry, which is highly fragmented in nature with presence of manyunorganised players. Operating in the fragmented industry with low entry barriers restricts bargaining power against suppliers and customers, resulting in lower profitability

Valuation

For FY2023, consolidated sales were up by 36% to Rs 1113.12 crore.The OPM rose 50 bps to 4.1%, leading to a 54% increase in OP to Rs 45.59 crore.OIrose to Rs 1.26as compared to Rs 48 lakh. Interest cost increased 41% to Rs 12.26 crore. Depreciation rose 4% to Rs 6.37 crore. PBT went up84% to Rs 28.22crore. Tax expenses were 78% higher at Rs 7.16 crore. Net profit spurted85% to Rs 21.01 crore.

The FY2023 EPS on post-issue equity works out to Rs 11.1. At the upper price band of Rs 151, P/E works out to be 13.7

As of 09February 2023, its listed peers such as APL Apollo Tubestradedat TTM P/E of 48.9, Hi-Tech Pipestrades at TTM P/E of 41.5, Rama Steel Tubestrades at TTM P/E of 65.5, andGoodluck India trades at TTM P/E of 26.9.

For FY2023, Vibhor Steel Tubes’Ebitda margin and ROE stood at 4.2% and 25.5%, respectively, as compared to 6.6% and 21.4% for APL Apollo Tubes, 4.2% and 9% for Hi-Tech Pipes,4.5% and 11% for Rama Steel Tubes, and7.2% and 14.2% for Goodluck India