Decoding the Hariom Pipes IPO

IPO

The IPO of Hariom Pipe Industries Ltd opened for subscription last week to a good deal of reception.

Here’s an explainer on the details involving the issue.

IPO Stats

● Issue Size: ₹130cr ($17.1m)

● Issue Type: Book-built

● Issue Price: ₹144–153 ($2) per equity share

● Market Lot: 98 shares

● Issue Breakup: QIBs (30%), NIIs (35%), Retail (35%)

● IPO Close Date: April 5th 2022

● IPO Listing Date: April 13th 2022

As of April 4th, end of day, the IPO has been subscribed 3.44 times (7.18 times in retail, 0.83 times in QIB and 1.93 times in NII categories). The proceeds from the issue will be primarily used to fund the capital expenditure and working capital requirements — typically a good precursor for growth expectations.

Indian steel market

Company Profile

Hariom Pipe is a premium manufacturer of iron and steel products. The portfolio of its products includes: Mild Steel (MS) pipes, Scaffolding, Hot Rolled (HR) strips, MS Billets, Sponge Iron etc. The company is based out of Hyderabad and largely markets and sells its products in the western and southern parts of the country.

It has two plants — one in Mahabubnagar District (Telangana) and the other in Anantapur District (Andhra Pradesh). The former specialises in the manufacturing of finished steel products from scrap iron and sponge iron. The latter deals largely with the making of sponge iron. A plan to set up a third plant at Sangareddy is currently underway.

Total number of employees surpass 200 while the retailer distribution network spans around 1,400 for the company which boasts of an annual manufacturing capacity of 300,832 MT.

As per the prospectus, the key differentiator that sets Hariom aside from rivals is the sheer range of its product specifications (at least over 150) in terms of thickness, length, quality, availability and customisation. The location of the manufacturing unit is also quite strategic seeing as the Bellary region is famous for being a hub of iron ore production. The products of Hariom also cater to a wide range of industries like housing, infrastructure, agriculture, automotive, power, cement, mining etc. which therefore ensure direct channels of contract with developers and contractors in the form of B2B sales.

The company has been in operation since 2007 and has established itself as a recognised brand and a key producer of iron and steel products. This is particularly pronounced in Southern India due to the presence of its plants and a large part of its commercial operational footprint in the region.

Financials

Hariom Pipe had a substantial gain in its financial profile over the past year. The company managed to increase its total revenue from ₹161.15cr ($21.2m) in FY20 to ₹254.82cr ($33.6m) in FY21. This translated to an EBITDA of ₹23.4cr ($3m) in FY20 and ₹35cr ($4.6m) in FY21 implying a fairly solid 13–15% EBITDA margin.

Hariom Pipe financials

The operating cash flow remains positive for three years in the running now which is an additional upside. This has been cemented by the improved operational proficiency over the years, especially due to its integrated manufacturing strategy which reduces the company’s dependence on external raw materials.

Here’s what that means. The two units of Hariom Pipe work in complementary fashion because while Unit 2 produces sponge iron, Unit 1 uses the same raw materials to produce finished products. Any necessary intermediate products (like MS billets or HR strips) are also produced by the company itself which makes it self-sufficient and its inventory better-managed to manufacture its chief final products — MS pipes and scaffoldings. Besides these, the company also sells sponge iron independently when the demand emerges for the same, which further boosts its revenues.

This sort of backward integration proves exceptionally productive in a capital-intensive sector like iron and steel. It also offers a substantial cost advantage over competitors in the market by ensuring product offerings at reasonable valuations.

Given the client concentration risk and the cyclical nature of the business, there are reasons to be cautiously optimistic. However, considering the FY22 (annualised)/FY21 EPS of ₹10.10/5.94 on a post-issue basis, the company is likely to list at a P/E of 15.14x/25.76x at a discount to its listed industry peers like JTL Infra and APL Apollo, who are working at PE multiples of 30.5x and 44.3x respectively. A debt/equity of over 1x also somewhat justifies a depressed valuation of Hariom Pipe vis-a-vis its peers.

Reading Between the IPO Lines

The demand and pricing in the iron and steel industry is famously volatile which indicates how closely the price of raw materials and energy continue to drive its growth. Consequently, the ongoing price escalation in global oil and energy prices is unnerving for production companies like Hariom as it could spell uncertainties in the short-to-medium term thereby affecting profitability.

In addition, the industry is extremely competitive. Some of the players in the sector are large multinational companies with broader product ranges, greater brand recognition, stronger sales forces and greater financial resources which plays immensely to their favour.

Hariom Pipes industry

Hariom Pipe has a regional advantage in South India but it is still a new and evolving player that is navigating the contours of the industry. One thing that’s going well for the company is its reasonable product offering and a complementary product mix that is supported by cost advantages due to the integrated backward integration as explained earlier. But as it plans to expand operations and capex, it is likely to see some working capital pressure. It is uncertain, if under those circumstances, the company will continue to sustain the cost advantages it is getting now.

But it is worth mentioning that the Indian MS pipe market is expected to grow from $1.25bn in 2021 to $1.69bn in 2026. The market in the state of Telangana alone is projected to grow to $397m in 2026 which will likely be cemented on account of a strong infrastructural push from the government, favourable policy incentives, rapid urbanisation and an increasing demand from industries like automobiles, agriculture etc.

Perhaps this will bode well for Hariom Pipe which is poised for its public debut and is imminently positioned to capitalise on these growth prospects. The environment-friendly manufacturing process of the company also does it a great credit in a climate of shifting manufacturing strategies that is increasingly focused on sustainable means of production. Nevertheless, the modest valuation and decent growth outlook is somewhat offset by the company’s debt profile coupled with uncertainties in the commodity markets.

(Originally published April 4th 2022 in the TRANSFIN E-O-D Newsletter)

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