Vraj Iron and Steel Limited (formerly known as Phil Ispat Pvt Ltd) is a subsidiary company of Gopal Sponge and Power Private Limited (GSPPL), Raipur, with interest in steel and power. In FY2012, GSPPL bought a majority stake (i.e., 74%) in Phil Ispat Private Limited, incorporated in 2004. Subsequently, the name of the company changed to Vraj Iron and Steel Limited (VISL) in November 2023.

VISL manufactures sponge iron, MS billets, and TMT bars under the brand Vraj. It currently operates through two manufacturing plants located at Raipur and Bilaspur in Chhattisgarh. These are spread across 52.93 acres.

The product offerings of sponge iron, TMT bars, and MS billets and by-products dolochar, pellet and pig iron cater to a mix of customers consisting of industrial customers and end-users. Products are sold directly as well as through brokers and dealers. The environment management system certification, under the new standard of ISO 14001: 2015, has been obtained for the Raipur plant. TMT bars formed 30.31%,sponge iron 52.58%, and MS billets 13.99% of total revenue in 9MFY2024. The capacity utilization of sponge iron was 70.57%, capacity utilization of MS billets 55.22%, and TMT bars 36.13%. The capacity utilization of captive power plant was 36.88%.

Induction furnaces are used for production of steel. Induction furnaces convert steel scrap and sponge iron into liquid steel by induction heating. This further gets processed into billets, blooms, and ingots. Sponge iron is a critical raw material for the steel industry. Sponge iron is the key raw material required to manufacture high quality steel. It is quite versatile and can be used in both induction as well as electric arc furnaces. TMT steel bars of exceptional quality are manufactured through the hot rolling process.Heated iron billets are continuously passed through rollers of decreasing diameters. The TMT saria is passed through a water-cooling system for thermo mechanical treatment before they exit the last rolling mill. Mainly the products are used in construction. MS billets are semi-finished casting products produced insteel mill and needs to be further processed to transform them into a finished good. Theround or square cross-sectioned metal length is created directly by continuous casting or by indirectly hot rolling an ingot.

The current installed capacity of sponge iron of the Raipur plant is 60,000 tpa and the Bilaspur plant 60,000 tpa,taking the total sponge iron installed capacity at 1,20,000 tpa,where the backward integration begins.The current production capacity is 57,600 tpa of MS billets. Theseare used by the rolling mills at Raipur to manufacture TMT bars, with a production capacity of 54,000 tpa.The manufacturing plant at Raipur includes a captive power plant, with an aggregate installed capacity of 5 MW, as of 31 December 2023. The aggregate installed capacity of the manufacturing plants was 2,31,600 tpa.

The principal raw materials used in the manufacturing process are iron ore, coal, iron ore pellet, and dolomite. The company fulfil its raw materials requirement from domestic market. Except for procurement of coal and iron ore, it has not entered into any long-term agreements with any of its raw material or inputs suppliers. Such raw materials and inputs are purchased on a spot order basis.

The promoters are Vijay Anand Jhanwar, Kusum Lata Maheshwari, Gopal Sponge and Power Private Limited, V A Transport Private Limited, Kirti Ispat Private Limited, Bhinaswar Commercial Private Limited, and Utkal Ispat Private Limited.

The Offer and the Objects

The offer comprises a fresh issue of up to 8260870 equity shares at the upper price band of Rs 207 and 8769231 equity shares at the lower price band of Rs 195, aggregating to Rs 171 crore.

The net proceeds from the fresh issue will be used to repay or prepay borrowings from HDFC Bank for the Rs 70-crore capital expenditure towards the expansion project of the Bilaspur plant and Rs 59.5-crore capital expenditure towards the expansion project of the Bilaspur plant. The balance is towards general corporate purposes.

Capacities of the existing manufacturing plants and captive power plant at Bilaspur plant are being increased from 231,600 tpa to 500,100 tpa and the captive power plants aggregate installed capacity from 5 MW to 20 MW. These proposed expansions of sponge iron and the captive power plant are expected to become operational in Q4 of FY 2025. The MS billet capacity is expected to become operational in Q1 of FY 2026. Sponge iron capacity is expected to increase by 115500 tpa to 235500 tpa and MS billets by 153000 tpa to 210600 tpa. Total expected capex plan of the Bilaspur plant is Rs 164.5 crore.

Strengths

The demand for steel is rising due to rapid urbanization and infrastructure development, growing population, government investments in infrastructure, thriving automobile sector, environment sustainability awareness and increasing demand for reconstruction and replacement activities.

The World Steel Association forecasts steel demand to increase by 1.8% to 1,814.5 tonnes in CY2023 and 1.9% to 1,849.1 tonnes in CY2024 as compared to a decline of 3.3% in CY2022.

The per capita finished steel consumption in India was 81.1 kg in CY2022, significantly lower than the world average of 222 kg per capita. The National Steel Policy 2017 envisages that per capita finished steel consumption will increase to 158-160 kg by FY2031. Thus, the steel industry has significant domestic potential and is expected to play a key role in the future economic growth of the country.

Doemstic steel consumption is expected to see a healthy growth of 9-11% in FY2024. Steel consumption is expected to reach between 151-155 tonnes by FY 2026, indicating a CAGR of 7-8% between FY2024 and FY2026.

The manufacturing operations are semi-integrated in nature, with sponge iron plants, ingots and billets and rolled products derived from sponge iron and billets. There is a gradual shift in the product sales mix to downstream products via the increasein production and sales of billets and TMT bars. Sponge iron is captively consumed for manufacturing billets. The rest is sold.

The iron-and-steel industry is a power-intensive industry.Stable supply of power is required favourably at a minimum possible cost. Power cost minimisation is possible through the utilisation of captive power sources, leading to a relatively stable and low-cost supply source for power requirements. VISL and Gopal Sponge and Power Private Limited (GSPPL) have captive power of 10 MW, catering to most of the power requirements of the two entities. This helps to reduce the dependency on external power sources and reduces power costs.

Freight cost constitutes a significant portion in the manufacturing of steel products, as a large amount of bulky raw materials are required to be sourced to the manufacturing site. The manufacturing facilities are near the sources of the main rawmaterials (i.e., iron-ore and coal) required for manufacturing of products. The plants are well connected through road (state highway and national highway) and rail transport (Raipur railway station), facilitating easy transportation ofraw materials and finished goods.

Agreements for purchase of iron ore lump have been entered with NMDC. Fuel-supply agreements have been signed for purchase of coal with South-Eastern Coalfields Limited, enabling a smooth flow into production plants. The main advantages of buying raw materials from the existing suppliers are their enormous capacity, allowing them to meet the requirements of raw materials under any circumstance, the reduced lead times, and seamless material flow, on-time deliveries, and direct line of communication.

The Bilaspur plant has been chosen for the capacity expansion mainly due to lack of manufacturing facility for MS billets and lack of power plant to reduce the cost and availability on the existing land in the Bilaspur plant. Thereby no additional cost is to be incurred for the land andsite development for this expansion. By undertaking the expansion at the Bilaspur plant, the cost of the project will reduce,and the margin improve.

The integrated nature of the manufacturing plants has resulted in control over all aspects of its operations (with the exception of sourcing of primary raw materials) as well as the operating margins, thereby enabling focus on quality and creatingif multiple points of sale across the steel value chain.

Weaknesses

Steel is a cyclical industry correlated to economic cycles as key users, viz., construction, infrastructure, automobiles, and capital goods, are heavily dependent on the state of the economy. Apart from local factors, the globaldemand-supply situation, especially in China, is a major factor impacting steel prices and volumes. Producers of steel products are essentially price-takers in the market, directly exposing their cash flows and profitability to volatility insteel prices.

The major raw materials (i.e., iron ore and coal) form the largest component of the total cost of sales of steel products. The basic raw materials such as iron ore, coal, pig iron, dolomite, manganese ore, used for production of sponge iron billets and silicomanganese are directly sourced from the domestic market (less than 10% of the total coal purchase is imported). Their prices are volatile.

Cash flows from operations was negative in 9M of FY 2024.

There is intense competition in the Indian steel market from various domestic and multinational companies in India. Some key peers including Tata Steel, JSW Steel, Steel Authority of India (Sail), Jindal Steel and Power (JSPL), Godawari Power and ISPAT (GPIL), ESL Steel (ESL), Sarda Energy & Minerals (SEML), and Shyam Metalics and Energy (SMEL).

Promoters Gopal Sponge and Power Private Limited, Kirti Ispat Private Limited, and Utkal Ispat Private Limited and group company Vraj Metaliks Private Limited are engaged in activities similar to its business. This may be a potential source of conflict of interest may have an adverse effect on its business, financial condition and results of operations.

Strict quality requirements mean any product defect issues may lead to the cancellation of existing and future orders, recalls and exposure to potential product liability claims.

Penalty is required to be paid to suppliers of coal in the event liftingis below specified percentage of the annual contracted capacity.

Certain statutory and regulatory licenses, registrations and approvals are required to operate the business. Failure to renew, maintain or obtain the required licenses or approvals, or cancellation, suspension, or revocation of any of the licenses, approvals and registrations could result in the interruption of operations and can have a material adverse effect on the business.

Tariffs, import restrictions on trade, and export bans by governments worldwide, can hamper the growth of the steel industry, causing disruptions in trade globally

Valuation

For FY2023, consolidated sales were up by 25% to Rs 515.67 crore. The OPM rose 330 bps to 14.9%, leading to 60% increase in OP to Rs 76.68 crore. OI rose to Rs 1.75 crore as compared to Rs 34 lakh. Interest cost decreased 24% to Rs 2.99 crore. Depreciation fell 10% to Rs 6.44 crore. PBT increased 86% to Rs 69 crore. Tax expenses were 82% higher at Rs 17.89 crore. Net profit increased 88% to Rs 44.58 crore.

The FY2023 EPS on post-issue equity works out to Rs 16.4. At the upper price band of Rs 207, P/E works out to be 12.6

As of 21 June 2024, listed peers such as Sarda Energy and Minerals Limited traded at TTM P/E of 15.2, Godawari Power and Ispat Limited at TTM P/E of 16.5, Shyam Metalics and Energy Limited at TTM P/E of 17.8, Jindal Steel and Power at TTM P/E of 18.5, and SAIL at TTM P/E of 17.4.

For FY2023, Vraj Iron and Steel’s Ebitda margin and ROE stood at 15.8% and 38.3% as compared to 26.4% and 18.8% for Sarda Energy and Minerals Limited, respectively, 21.5% and 22% for Godawari Power and Ispat Limited, 11.8% and 13.1% for Shyam Metalics and Energy Limited, 18.9% and 8% for Jindal Steel and Power, and 9.2% and 3.6% for SAIL.