Shyam Metalics and Energy IPO opens; Should you subscribe to the issue?

Shyam Metalics and Energy Ltd (SMEL), an integrated steel manufacturer in West Bengal, opened their initial public offering (IPO) for subscription on Monday at a price band of Rs 303-306 per share.

The Rs 909 crore public issue comprises a fresh issue of up to Rs 657 crore and an offer for sale (OFS) of Rs 252 crore by existing shareholders. The three-day offer will close on June 16.

The OFS consists of a sale of up to Rs 37 crore worth of shares by Subham Capital, Rs 63 crore by Subham Buildwell, Rs 30 crore by Dorite Tracon, Rs 97 crore by Narantak Dealcomm, and Rs 25 crore by Kalpataru Housefin & Trading.

Shyam Metalics IPO opens today: Key things to know before subscribing

The company has been able to offer continuous and good financial and operational performance owing to increased productivity and cost reduction. Analysts have advised subscribing to the issue based on the company's strong financial and operational performance.

Shyam Metalics & Energy, with its operational efficiencies, stands to benefit as it will be nearly double its capacity slated to come onstream FY23E onwards, if not earlier. At 9.2x TTM EV/EBITDA, valuations are optically high but volume + realisation growth and improving EBITDA/tonne (higher value-added contribution) are resulting in reasonable FY23E EV/EBITDA. Hence, we recommend “Subscribe” on the issue.

SMEL is bringing the issue at a price band of Rs 303-306 per share at p/e multiple 13 on a post-issue annualized FY21 eps basis. We like the financial performance posted by the company with healthy balance sheet status. The company’s plans to strengthen its leading market position in India and achieve better economies of scale by expanding existing manufacturing capacities and setting up additional manufacturing plants is indicating the bright future prospects of the company. Hence looking after all the above, we recommend “Subscribe” on the issue for a short & long term basis.

We value the stock at Rs 436.4 (FY23 EV/EBITDA 6X) on the post-issue equity and initiate coverage with a “Subscribe”. Our price target represents an upside potential of 42.6 percent over 18-24 months from the IPO price.

Although we envisage a continuance of a super cycle in steel given the global dynamics, our forecast is based on normalised levels of EBITDA/tonne hence, any firmness in steel prices and sustenance of the finished product spreads will lead to expansion of EBITDA/tonne given the fact that the company is focused on maximising the contribution to revenue in favour of value-added products

At a higher price band of Rs 306, SMEL is demanding a TTM EV/EBITDA multiple of 8.6x, which is at a premium to the peer average of 6.4x. Despite factoring in an exponential rise in EBITDA in Q4 FY21, the company still appears to be overvalued compared to its peers.

With favourable macros for steel consumption, a cautious view of the international steel prices, and a higher demanded valuation, we assign a “Subscribe with Caution” rating for the issue.

Over FY18-20, SMEL reported a decent set of operating and financial performance, which was mainly due to capacity expansion. However, unfavourable movement in the steel prices dented the profitability.

While business was impacted by the Covid-19 induced lockdown and lower demand during the initial few months of FY21, the unlock process saw a massive spike in the economic activities positively impacting the demand for SMEL’s products.

Improving international steel prices and relatively subdued raw material prices aided in profitability improvement. During 9M FY21, the company reported a 19.8 percent YoY higher revenue with EBITDA and PAT margin expansion by 450 bps and 367 bps, respectively.