IPO Analysis: Venus Pipes and Tubes

Venus Pipes & Tubes Limited (Venus) is a Gujarat-based manufacturer and exporter of stainless-steel pipes and tube

IPO Rating: Invest for long-term 

About the issue:

Venus Pipes & Tubes Limited (Venus) is a Gujarat-based manufacturer and exporter of stainless-steel pipes and tubes, primarily catering to industry-grade requirements with end uses spanning across chemicals, pharmaceuticals, food processing industries and other engineering needs. The company is hitting primary capital market with its initial public offering (IPO) of equity shares of the face value of Rs 10 per equity share. The maiden offer comprises an entirely fresh issue of shares worth Rs 165.42 crore at upper price band. The price band of the issue has been fixed at Rs 310 to Rs 326 per equity share. At upper and lower price band post issue the company will have market cap of Rs 630 and Rs 690 crore, respectively. The IPO opening date is May 11, 2022, while it will be closing on May 13, 2022. The IPO market lot size is 46 shares and is expected to be listed on May 24, 2022.

Out of the net proceeds, Venus intends to use around Rs 108 crore to fund ongoing capacity expansion and Rs 25 crore for working capital requirement and general corporate purposes.

Venus Pipes & Tubes IPO Details: 

About the company: 

Venus manufactures and exports stainless steel (SS) pipes and tubes with a total production capacity of 10.8 ktpa and a manufacturing facility in Dhaneti (Kutch), Gujarat. It broadly deals in the B2B supply of two types of SS pipes and tubes - seamless and welded. The manufacturing location is approximately 55 km and 75 km from the Kandla and Mundra ports, respectively. The manufacturing facility is spread over 33,994 sqm of land, with the current set-up occupying 22,400 sqm. Of the 10.8 ktpa capacity, 3.6 kt is dedicated to seamless SS pipes and 7.2kt to welded SS pipes. Due to its proximity to the Kandla and Mundra ports, the company can procure raw materials and export the products at low logistic costs. Venus commenced exporting its products in 2017 and has exported to 18 countries, including Brazil, the UK, Israel, and countries in the European Union. Venus has separate divisions for production of seamless and welded stainless steel pipes and tubes. The end use is mostly towards industry, and Venus does not cater to the retail/furniture market. SS pipes and tubes are used in high-pressure and high temperature applications such as pressure vessels, heat exchangers, and instrumentation tubes. They have the latest product specific equipment and machinery, including tube mills, pilger mills, draw benches, swaging machines, pipe straightening machines, TIG/MIG welding systems, and plasma welding systems. Additionally, the manufacturing facility has a storage area for raw material and finished goods inventory and a warehouse facility at Ahmedabad

Seamless:

At the end of FY21, seamless SS pipes corners 33 per cent of total capacity of company. As of FY21, the total capacity for seamless pipes/tubes stood at 3.6ktpa. Currently, the company manufactures seamless pipes/tubes of 6–114.3 mm in size. Company produced 3.3kt in FY21, operating at a utilisation rate of 92 per cent. The company aims to increase capacity from 3.6ktpa to 9.6ktpa and produce high-diameter pipes of up to 168.3 mm. This includes the installation of a pilger plant.  To produce such pipes, SS mother hollow pipes are mainly imported from China, Malaysia, Indonesia, etc. The company plans to backward integrate the manufacturing of mother hollow pipes.

Welded

Welded, which shares 67 per cent of capacity as of FY21, has a total capacity for welded pipes/tubes stood at 7.2 ktpa. The company currently manufactures welded pipes/tubes of 6–219.3 mm in size and produced 6.6 kt in FY21, operating at a utilisation rate of 92 per cent. The company aims to increase capacity from 7.2 ktpa to 14.4 ktpa, in addition to 9.6 ktpa of mother hollow pipes through backward integration and produce diameters of up to 1,219.2 mm. This includes the installation of an LSAW (A358) plant. Raw material for SS coils/strips are imported or domestically sourced.

Global stainless steel (SS) pipes & tubes industry was estimated to be valued at USD 32.4 bn in 2019 and is expected to grow at a CAGR of 4 per cent through 2025. India's per capital stainless steel consumption at 2.5 kg in 2019 is significantly lower compared to the world average of 6 kg per capita indicating the opportunities existing in the sector. Indian per capita consumption of steel pipes and tubes is less than half of the global average (21-22 kg) and about one-fifth of the Chinese consumption.

Company Financials: 

During FY19-21, company has grown well with sales CAGR of 61% to Rs309 crore and EBITDA CAGR of 105 per cent to Rs 34.8 crore in FY21. During 9MFY22, it has already surpassed FY21 numbers and recorded EBITDA of Rs 35.5 crore. The EBITDA margins improved from 7 per cent in FY19 to 12.8 per cent in 9MFY22. Blended EBITDA/t inched up sharply from Rs19,813/t in FY19 to Rs38,906/t in Q1FY22. As a result, profit after tax increased by 94 per cent CAGR to Rs 27.2 crore. Significant higher earnings improved return ratios. ROE improved sharply from 31 per cent in FY19 to 59 per cent in FY21 while ROCE improved from 14.7 per cent in FY19 to 36 per cent in FY21.

The gross debt of company amounts to Rs 70.51 crore as on 31.12.2021, and net debt at Rs 63.19 crore translating into 0.4x debt/equity. The return ratios have jumped sharply due to strong asset utilization & improved profitability. With the continued expansion & diversification of product portfolio, the utilization would decline over the short term due to frequent change in production plans to accommodate orders.

(Amt in Rs million)

Recommendation: 

The company is proposing to expand existing manufacturing capacity for welded pipes/ tubes and seamless pipes/tubes for manufacturing higher diameter welded pipes/tubes (up to 1219.2 mm) and seamless pipes/tubes (up to 168.3 mm), to gain competitive advantage over its competitors. What will drive the additional demand for the product of company is recently announced Production Linked Incentives (PLI) Schemes by the Government of India. It is expected to boost domestic production in the pharmaceuticals, food processing and automobiles sectors translating into a better order book for the company. Policy initiatives such as Atmanirbhar Bharat and the recently announced Domestically Manufactured Iron & Steel Products Policy (DMISP, 2020) would give push to domestic manufacturing and strengthen the supply side dynamics along with supporting a favourable demand scenario from the various end user industries. On the back of gradual improvement in industrial demand, domestic SS pipes and tube industry is expected to grow from about 1 MTPA currently to 1.45 MTPA by 2025, growing at a CAGR 7.7 per cent.

Besides, China factor will also help company’s growth outlook. China accounted for 54 per cent of India's total SS pipes & tubes imports in FY21. The cancellation of export rebates on Chinese steel products including welded and seamless steel pipes, as announced by the Chinese Government on 28 April 2021, is expected to erode away the cost advantage enjoyed by Chinese manufacturers, providing impetus to domestic pipes and tubes manufacturers. Domestic manufacturers are also protected with the stipulation that only BIS-certified products can be used for projects in the country.

Ratnamani Metals & Tubes Limited, Jindal SAW, Maharashtra Seamless Limited, Man Industries and Welspun Corp are a few major players in the Indian steel pipe & tube segment. Ratnamani and Jindal SAW have an established SS pipes & tubes business, placing them as market leaders in the segment.

Offer is available at price to earnings of around 28-30 times is FY21 earnings and considering expanded equity base. It is lower than what industry leader is commanding. Nonetheless, what makes the issue investable is its future growth prospects. The profit for the company is going to increase in next few years on back of volume expansion (capacity increasing from 10,800tpa to 24,000 tpa), improved customer mix by shifting sales from stockiest to direct sales/tender based, backward integration and improving operating efficiencies. Hence, readers can consider this entirely fresh issue to invest for long-term.