Company Overview
Incorporated in 2003, Vibhor Steel Tubes Limited is a manufacturer and exporter of Mild Steel/Carbon Steel ERW Black and Galvanized Pipes, Hallow Steel Pipe, and Cold rolled Steel (CR) Strips/Coils to various heavy engineering industries in India. Its product portfolio comprises of ERW pipes which find application in water transport, oil, gas, and other non-toxic supplies, while hot-dipped galvanized pipes find extensive application in agriculture and infrastructure. In addition, the company makes hollow section pipes in square and rectangular forms, primer-painted pipes as well as crash barriers for application in railways, highways, and roads. The company has established a longstanding partnership with Jindal Pipes Limited since 2003. It has a contract to manufacture and supply 100,000 MT of pipes for Jindal Pipes annually till 2029 starting April 2023, under the renowned brand name ‘Jindal Star’. Currently, the company has two manufacturing facilities located at Raigad in the state of Maharashtra and Mahabubnagar district in the state of Telangana. The total capacity of the company combining the two plants is at 2.21 MTPA, which the company plans to expand by 1.2 MTPA to 3.41 MTPA in the next few years. For storing its products, VSTL also has a warehouse in Hisar in the state of Haryana. The Maharashtra unit’s stability is ensured by the company’s existing presence in the export market, while the Hyderabad unit is safeguarded by the company’s experience in producing highway guardrail products. The company has been granted an allotment letter for land to establish a new facility of Vibhor Steel Tubes Limited in Odisha. Given that Odisha is the largest iron market, this move is poised to reduce the company’s raw material costs and enhance profit margins in future. As on 30 September 2023, the company had a total of 636 employees on its rolls.
Objects of the issue:
The net proceeds from the fresh issue will be used towards the following purposes:
- Funding of long-term working capital requirements of the Company;
- General corporate purposes.
Investment Rationale:
Strategic alliances and efficient operations driving growth
The association between VSTL and Jindal Pipes Limited (JPL) underscores a strategic partnership that has propelled the company’s growth trajectory. Leveraging a long-standing relationship between the promoters of both entities, VSTL benefits from a seamless business relationship with JPL, marked by transparency in pricing and effective procurement processes. Through the production of pipes under the renowned brand “Jindal Star,” VSTL not only secures a steady stream of orders but also taps into JPL’s extensive network of customers. This symbiotic alliance not only ensures consistent demand but also fosters trust and reliability in the market. Additionally, VSTL’s strategic manufacturing locations in Raigad, Maharashtra, and Mahabubnagar district, Telangana, further optimize operational efficiency. The proximity to key industrial areas facilitates streamlined logistics, access to essential resources, and a skilled workforce, thereby enabling the company to meet customer demand effectively. The combined expertise of the promoters, Mr. Vijay Kaushik and Mr. Vibhor Kaushik, with decades of experience in the steel pipes and tubes industry, underscores VSTL’s commitment to excellence and innovation. Through strategic alliances, efficient operations, and experienced leadership, VSTL is poised for sustained growth and market leadership in the steel tubes segment.
Global expansion strategy and diversified operations enhance resilience
VSTL’s commitment to diversification and global expansion positions the company for long-term success and resilience in the competitive marketplace. By leveraging its partnership with Jindal Pipes Limited and capitalizing on established networking channels, VSTL has successfully exported its products to ten countries worldwide under the prestigious brand “Jindal Star.” This strategic approach not only enhances the company’s brand visibility but also mitigates risks associated with operating in limited geographical areas. By diversifying its operational footprint, the company guards against the impact of localized economic fluctuations and ensures sustained revenue streams. Furthermore, VSTL’s distribution and marketing network, coupled with a focus on customer service excellence, facilitate efficient supply chain management and short turnaround times for product delivery.
Valuation and Outlook:
VSTL emerges as a pivotal player within the Indian steel industry, set against the backdrop of a burgeoning demand landscape and ambitious national targets for per capita steel consumption. Despite India’s per capita finished steel consumption standing at 81 kg, significantly below the global average of 222 kg, the National Steel Policy 2017 envisions a substantial increase to 158-160 kg per capita by FY31, highlighting the sector’s significant domestic potential in driving economic growth. The qualitative advantages of VSTL underscore its competitive positioning and operational strengths. With an integrated in-house design, engineering, and execution team, the company maintains meticulous control over quality and costs, enhancing its ability to meet client requirements efficiently. Moreover, its longstanding client relationships, built on a foundation of strong execution and quality, further reinforce its market standing. Notably, the company’s specialization in certain products has established it as a preferred supplier, fostering an advantage within a limited competitive landscape. Delving into the financials of VSTL reveals a pattern of robust and stable revenue growth, with sales nearly doubling over the past three years. Despite relatively lower net profit margins compared to industry peers, attributed to a lack of pricing power, extra discounts to their largest customer, and front-loading of costs, the company maintains attractive returns on equity of 25.5% and return on capital employed of 16.5%, supported by lean equity and asset base. Of particular note is the company’s commendable asset turnover rate, averaging around 3.8X in the latest fiscal year, signifying efficient asset utilization and operational excellence. However, the rising debt cost in the last two years need to be monitored going forward. While the value-added steel products business entails front-loaded costs, the trajectory suggests higher risks in the initial phases, gradually transitioning to lower risks as operations mature. In terms of valuation, the upper band pricing translates to a P/E of 10.2x based on FY23 EPS. This valuation appears attractive, especially considering the company’s outperformance compared to its listed peers by a considerable margin in terms of both valuation and returns. We, therefore, give a “SUBSCRIBE” rating to the IPO
