Sambhv Steel Tubes Limited (Avoid)

Highlights

Sambhv Steel Tubes Limited (SSTL), incorporated in 2017, is one of the key manufacturers of electric resistance welded (ERW) steel pipes and structural tubes (hollow section) in India in terms of installed capacity as of FY24 with a market share of around 2 pct with a wide-spread presence in Chhattisgarh, Maharashtra, Gujarat, Haryana, Rajasthan, U.P., M.P., Telangana.

SSTL holds significant market share in narrow width coil ERW pipe segment to cater requirements of large section of designated end use industries (automobile, electrical appliances, etc.) and the only company producing narrow-width HR coils through a secondary manufacturing route and DRI.

Company has a wide product portfolio ranging from sponge iron to mild steel, SS blooms/slabs, HR coils, pipes, tubes, value-added products such as GI/GP pipes, steel door frames with complete integration giving added advantage in highly competitive domestic steel industry.

They are the only company with single location (Raipur) and only player with backwardly integrated manufacturing facilities as it starts with production of sponge iron through DRI process to reduce inventory management and logistics costs. They are the sole Indian manufacturer refining steel directly from iron ore instead of making products from aftermarket coil.

Out of the total proceeds of Rs. 5,400 mn, Rs. 3,900 mn would be utilised for pre-payment or re-payment of portion of certain outstanding borrowings availed by the company, Rs. 500 mn would be utilised towards general corporate purposes and ~Rs. 1,000 mn would go towards existing selling shareholders of the company.

Key Highlights

• India emerged as 3^rd/5^th largest producer of welded/seamless pipes with volumes of 5.8 mt/1.1 mt in FY22. Infra is 2^nd largest steel consumer for 25-30 pct of finished steel demand. East India is biggest producer of crude steel for ~41 pct share in FY24. Steel imports grew at 3.4 pct CAGR for FY19-25, pipe demand grew at 6 pct during FY19-25 with 9 pct CAGR for FY25-29. ERW segment accounted for 59 pct of overall pipes exports. Steel pipe production capacity rose 17.9-21.8 MTPA in FY19-24, projected 29 MTPA in FY29.
• Their key strategy is expanding production capacity with focus on valued added products. Sarora plant spread ~334,540 sqm has installed capacity of 1,122,400 MTPA as of FY24 and 1,540,000 MTPA as of FY25 and Kuthrel facility which is spread ~73,980 sqm. has installed capacity of 158,000 MTPA as of FY25.
• In FY25, they expanded product portfolio to GP/pre-GP coil pipes through and commissioned production of GP/pre-GP, SS HRAP and SS CR coils. SST has capacity to produce ~1.7 mn PA of high-quality steel products as of 9MFY25.
• The key process innovation technique adopted by them is manufacturing SS through argon oxygen decarburization (AOD) process and recovery of desirable metals from slag. The company is among limited no. of SS blooms/slabs manufacturers involved in the AOD process, consuming lower raw material, giving higher metallic yields.
• Sambhv Steel’s narrow-width HR coil manufacturing capabilities, led to reduced capital expenditure and costs during pipe manufacturing process reducing dependency on HR coil suppliers. They use sponge iron or DRI as feed in induction furnaces, as a substitute for costly and scarcely available steel scrap.
• Backward integration helps in achieving operational efficiency, reducing costs, controlling raw materials supply, giving competitive advantage as captive availability of sponge iron is used to produce slabs/blooms which are processed to form coils/sheets, to make value added products such as GI/GP pipes and steel door frames.
• They have an integrated HAGC system controlling coil thickness which can gauge thickness tolerance of ~0.05 mm, at par with best industry standards. Company’s WHRB based power plant, powers steel making process using gases generated during sponge iron manufacturing process and thus uses no fuel, results in energy conservation.
• The Company manufactures ERW steel pipes, structural tubes at Sarora, strategically located in mineral rich belt of Raipur, in proximity to key raw material suppliers sourcing iron ore from Navratna PSU, known for producing India’s highest grade of iron ore, giving access to DRCLO grade iron ore and sources coal from Maharatna PSU through its one of the highest coals producing subsidiary whose mines are Asia’s largest coal mines.
• As of 9MFY25, SSTL has 37 distributors with 2 distributors distributing through 6 branches in 15 states, 1 UT taking total distributor network to 43, which in turn distribute through 700 making Raipur an emerging logistics and distribution hub in India with more than 60 pct sales coming from just 3 states, namely Chhattisgarh, Maharashtra, Gujarat.
• They have reported a sales CAGR of 13.88 pct, growing from Rs. 8,208 mn/FY22 to Rs. 12,894 mn/FY24. EBITDA rose from Rs. 1,158 mn/FY22 to Rs. 1,604 mn/FY24, at a CAGR of 17.82 pct. PAT rose from Rs. 722 mn to Rs. 1,033 mn over FY22-24, reflecting a CAGR of 19.52 pct.

Key Risk

• A reduction in import duties on steel products might lead to rise in global competition, reducing market share and margins on their products.
• The company had negative CFOs in past and may continue to have the same in future.
• Due to high cyclicity in steel industry, the pricing is subject to market demand, volatility, economic conditions, hence, business may be adversely affected by fluctuations in industry dynamics including steel prices.
• SSTL’s business is highly reliant on performance of operating or end-use industries. Economic cyclicality, reduction in demand and availability of substitute could materially affect their business operations.

Financial Performance (Rs. in million)

Peer Comparison based on 9MFY25 Financials (Rs. in million)

Valuation

Sambhv Steel Tubes Limited is one of the key manufacturers of electric resistance welded (ERW) steel pipes and structural tubes (hollow section) in India. They are the only company in India with a single location backward integrated manufacturing facility for ERW steel pipes and tubes with presence across the value chain. At the upper end of the price band of Rs. 82, the issue is priced at annualized EV/EBITDA of 18.2x of FY25E earnings. The issue looks fully priced. Hence, one can avoid this issue and wait for listing for investment decision.

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