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Two IPOs in One Day - Shyam Metalics and Sona Comstar

Jun 15, 2021 12:56 PM 5 min read

After almost a two-month hiatus, the IPO market is now back in action. 

Today, two companies - Shyam Metalics and Sona Comstar - have lined up to issue their public offerings. We bring you the insights. 

Shyam Metalics and Energy Limited

This is an integrated steel and ferroalloys producing company. Based out of Kolkata, it has three manufacturing facilities, all in the eastern region - Sambalpur, Jamuria and Mangalpur. It is chiefly engaged in the production of the following - iron pellets, sponge iron, steel billets, TMT, wire rods etc. 

The company is almost two decades old and is amongst the largest ferro alloy producers in the country. Why is it opting for a public issue now? 

Capex. It wants to achieve better economies of scale, boost healthy capitalisation metrics, expand manufacturing capacities (particularly the commissioning of an aluminium mill in Pakuria, West Bengal) etc.


IPO stats:

  • IPO dates: Open - June 14th. Close - June 16th.
  • Issue type: Book built issue IPO.
  • IPO price: ₹303-306 ($4) per share.
  • Face value: ₹10 per share.
  • Market lot: 45 shares.
  • Issue size: ₹909cr ($124.5m) (Fresh: ₹657cr ($90m) + Offer for sale: ₹252cr ($34.5m)).

As of yesterday's end, the issue has been subscribed 1.23 times.


Net debt/EBITDA as of December 2020 stood at 0.2x and 0.8x respectively, which is better than its industry rivals and as such indicates a fairly comfortable balance sheet. Post listing, the company is likely to have a market capitalisation of nearly ₹78,055m ($1bn) and a PE of 14.6x. This is less than the PEs of Tata Steel (16.6x) and JSW Steel (21.6x) respectively and suggests only modest growth priced in. 

During the nine months leading up to December 2020, the company saw a massive upshot in revenues (almost 20%) to ₹3,933cr ($538.7m) which seemed irregular. The upswing certainly translated into lofty EBITDA figures but with the higher IPO price band of ₹306 ($4.1), the EV/EBITDA multiple has also pushed to 8.6x (which is at a premium-to-peer average of 6.4x), making the company appear somewhat overvalued compared to industry peers.

However paying a single-digit EV/EBITDA multiple for a double-digit EBITDA growth stock, with a fairly unleveraged balance sheet, appears quite attractive. 


Performance Landscape:

If one knows anything about the steel industry, it's that it is a capital-intensive sector and therefore needs high capacity utilisation. Plus the industry is characterised by volatility in raw materials, energy and prices.  Added to that, the competition in the sector is high with big players like Jindal Steel, Tata Steel, SAIL, JSW, Kalyani Steel etc. Operating at full force.

However, if macro analysts are to be believed, then with metal stock prices on the rise, this is a good time for this offering. Domestic steel sector is also observing the shift in global opportunities brought about by the increasing call for climate commitment from countries like China. With China (the world's largest steel producer and exporter) clearing out its cart, Indian steel makers could tap into that void. 

And as for Shyam Metalics, the company has shown a growing interest in diversification of operations into pig iron, ductile iron pipes and aluminum foils which will help in de-risking its revenue streams.

It is also planning on increasing the installed metal capacity of its manufacturing plants to 11.6 million tonnes per annum (almost double) and captive power plants to 357 MW (almost by a third). 

So with an expected uptick in steel demand and the company's strong focus on increasing capital expenditure and maximising its operating capacities, the market reaction to this IPO looks upturned. 


Sona BLW Precision Forgings

Sona BLW or Sona Comstar is an auto component maker for the electric vehicle (EV) segment. It is a fast-growing sector with a rise in investment advances (like Tesla entering the Indian markets) and growing Government promotion on the use of clean-energy vehicles that is cemented with each new policy incentive (like the 40% cost-coverage on two-wheeler EVs).

Point is, this IPO could benefit from the EV-centric momentum in the markets. Sona Comstar is backed by the global private equity behemoth Blackstone. It designs, manufactures and supplies highly-sophisticated and mission-critical automotive systems and equipment for the electric vehicle industry. As of FY21, it commands 8.7% market share globally in the BEV (Battery Electric Vehicle) differential assemblies.


IPO stats:

  • IPO dates: Open - June 14th. Close - June 16th.
  • Issue type: Book built issue IPO.
  • IPO price: ₹285-291 ($3.9) per share.
  • Face value: ₹10 per share.
  • Market lot: 51 shares.
  • Issue size: ₹5,550cr ($760.3m) (Fresh: ₹300cr ($41m) + Offer for sale: ₹5,250cr ($719.2m))
  • Issue break-up: 75% (QIBs), 15% (NIIs) and 10% (Retail investors).

The company has already raised ₹2,498cr ($340m) from anchor investors which amounts to 45% of the total issue size. As of day-end, the issue has been subscribed 11%. 


The issue is valued at 74.1x FY21 P/E on a post-issue basis at the upper end of the price band. 

At such a multiple, the valuation certainly appears fairly stretched. To be fair, the company does post good growth prospects. Revenues rose 20% annually during FY19-21. EBITDA margins kept above 27% and the return on investments over the same period was over 35%. 


Performance Landscape:

The company has strong margins, infact much superior margins than its peers and as per experts, this is due to the inclusion of critical component parts in its manufacturing roster. In addition, it has a good working relationship with the leading original equipment manufacturers in India as well as those abroad. 

The possible impediments to its growth, however, could be a result of two or three reasons. 

The first - slower-than-anticipated revival in auto sales. Consumer optimism and expenditure both are at significant lows in the country post the Second Wave's impact. So, until those apprehensions subside and demand picks up, auto sales in the fuel grade as well as electric grade are unlikely to receive a fillip.


Metal prices are also at considerable highs, which indicates rising raw material costs for companies like Sona Comstar. Plus, the automotive industry functions in a cyclical way, meaning that transactions remain largely confined to the same circles and parties. Sona derives a large amount of its revenue from its top 10 clients which could mean that any imbalance in their accounts could immensely impact Sona's business. 

Having said that, the company's return on net worth remains an impressive 16.5% and there is a huge market sentiment to give premium to an emerging growth story like Sona Comstar.

(Read some of our other IPO pieces here: Go First, Zomato, Coinbase, MTAR, RailTel Corp, IRFC, Burger King, Brookfield REIT, Gland Pharma, Happiest Minds, CAMS and UTI AMC.)


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