Vraj Iron and Steel IPO: A Critical Look at the Risks Before You Invest

Vraj Iron And Steel Limited (formerly known as Phil Ispat Pvt. Ltd) Introduction

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 having interest in steel, power. Vraj Iron And Steel Limited has currently two manufacturing units at Raipur and Bilaspur in Chhattisgarh. The Company has pride to declare itself as one of the leading Iron & steel manufacturers of Central India. We are in the process of adding fresh capacities to our manufacturing plants and captive power plants and diversifying into related segments.

Brief about Vraj Iron and Steel (Phil Ispat Pvt. Ltd)

Summary of the business of Vraj Iron and Steel (Phil Ispat Pvt. Ltd)

Company is engaged in manufacturing of Sponge Iron, M.S. Billets, and TMT bars. We currently operate through two manufacturing plants which are located at Raipur and Bilaspur in Chhattisgarh spread across 52.93 acres and having major presence in Chhattisgarh. Our manufacturing plant at Raipur also includes a captive power plant with an aggregate installed capacity of 5 MW, as of December 31, 2023. After implementation of the Expansion Project

History of Vraj Iron and Steel (Phil Ispat Pvt. Ltd)

Vraj Iron and Steel Limited (VISL) has its roots in June 2004, when it was incorporated as Phil Ispat Private Limited [Goodreturns]. It started as a private limited company under the Companies Act, 1956.

Here’s a glimpse into their journey:

• 2004: Founded as Phil Ispat Private Limited.
• Operations: Manufactures Sponge Iron, M.S. Billets, and TMT bars under the brand name Vraj.
• Manufacturing Plants: Operates two facilities in Raipur and Bilaspur, Chhattisgarh with a total area of 52.93 acres.
• Production Capacity (as of March 31, 2023):
  • 231,600 tons per annum (TPA) for a combination of intermediate and final products.
  • 57,600 TPA of MS Billets.
  • 54,000 TPA of TMT Bars.
• Recent Developments: Vraj Iron and Steel Limited has been expanding its capacity and looking to diversify into related segments of the steel industry.

Promoters & Board of Directors of Vraj Iron and Steel (Phil Ispat Pvt. Ltd)

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

Holding company of Vraj Iron and Steel (Phil Ispat Pvt. Ltd)

Gopal Sponge and Power Private Limited is the holding company of Company.

Share Holding pattern of Vraj Iron and Steel (Phil Ispat Pvt. Ltd)

Qualitative Factors of Vraj Iron and Steel (Phil Ispat Pvt. Ltd)

• Integrated and well-established manufacturing setup.
• Manufacturing plants are strategically located, supported by robust architecture, leading to cost efficiencies and a stable supply chain.
• Quantity and Average price of Coal procured by the Company
• Diversified product mix with strong focus on value added products.
• Experienced Promoters, Board and management team.
• Consistent track record of growth and financial performance.

Industry Outlook [Vraj Iron and Steel (Phil Ispat Pvt. Ltd)]

• the global steel production capacity reached 2,452.7 million tonnes (MT) in CY22 with Asia accounting for the largest share of 60%. China holds a dominant position in steelmaking capacity, production, and consumption, boasting the highest steel production capacity globally, followed by India and Japan. Additionally, the European Union, North America, Latin America, the Middle East, and Oceania also contribute significantly to the global steel production capacity.
• The global crude steel production has grown at a 5-year CAGR of about 0.8% to 1,885 MT in CY22 from 1,828 MT in CY18. However, it declined by ~4% y-o-y in CY22 from 1,962 MT in CY21 due to a slowdown in China, monetary tightening in the United States and Europe, inflationary pressures leading to increased input costs, and supply chain disruptions caused due to the Russia-Ukraine war.

Key Demand Drivers

• Rapid Urbanization and Infrastructure Development: The demand for steel is rising due to rapid urbanization in developing economies, further leading to infrastructure development including residential housing, commercial buildings, and transportation. This will drive construction and infrastructure-related projects, thereby increasing the usage of steel.
• Growing Population: The rising global population increases demand for various products, such as consumer goods, electronics, automobiles, etc., which, in turn, boosts the demand for steel. Additionally, growing disposable income and easy access to credit will also aid the growth in demand.
• Government Investments in Infrastructure: The investments in infrastructure by the governments in various countries will drive the demand for steel as it is essential in providing structural support. These investments provide job opportunities for individuals across the countries and contributes to the overall economic growth.
• Thriving Automobile Sector: The automobile sector is one of the major steel consumers globally. The steel demand is expected to be driven by the expanding global automobile industry, particularly in emerging countries. Furthermore, several countries are transitioning to electric vehicles (EVs). EVs require sizable investments in battery manufacturing, which heavily relies on steel. Thus, this transformation is likely to boost the steel demand in the auto industry.
• Environment Sustainability Awareness: There is a growing need for sustainable development leading to the shift toward renewable energy sources, such as solar panels and wind turbines, which require substantial usage of steel. This will increase the global consumption of steel.
• Growing Demand for Reconstruction and Replacement: The steel demand for replacement and maintenance activities is on the rise. There is a regular need to replace existing infrastructure, mainly water and transportation infrastructure, and industrial facilities to provide better facilities to the individuals across the economies.

Key Challenges

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• Global Slowdown:
  • According to the International Monetary Fund (IMF), the global economic growth for CY23 is estimated at 3%, down from 3.5% in CY22, a de-growth of about 14.3%. This is largely due to the turbulence in the financial sector, geopolitical tensions, supply chain disruptions, tightening monetary policies, persistent inflation, and hikes in interest rates. The slowdown is expected to continue in CY24 and the growth rate for the same is projected at 2.9%. The decline in economic activity may lead to reduction in steel consumption.
• Availability of Raw Materials and Price Volatility:
  • The availability of raw materials, such as iron ore and coking coal, is critical in the steel industry. The supply chain disruptions caused by the onset of COVID-19 resulted in many fluctuations in the price trend of raw materials. Additionally, the prices were affected by the Russia-Ukraine war, impacting the steel industry operations and profitability of the players. Volatility in availability and price of raw materials may impact the steel producers in future.
• Trade Barriers:
  • Tariffs, import restrictions on trade, and export bans by governments worldwide, may hamper the growth of the steel industry, causing disruptions in trade globally.
• Environmental Concerns and Regulations:
  • The production of steel involves releasing high carbon emissions. Steel manufacturers are under pressure to adopt cleaner technologies and comply with rigid environmental regulations as governments globally strive to decrease their carbon footprint and fulfil climate change commitments. Moreover, the recent implementation of the Carbon Border Adjustment Mechanism (CBAM) – a tariff on carbon-intensive imports, which is aimed at preventing carbon leakage commenced in October 2023 by the European Union (EU), is likely to impact global trade market competitiveness. The first phase of CBAM will cover the iron & steel, cement, aluminium, fertilizer, electricity, and hydrogen sectors and the first reporting period for importers is 31st January 2024.

Domestic Crude Steel Production

• The domestic crude steel production has grown at a CAGR of 3.3% in the past five years to reach 126.3 MT in FY23 from 110.9 MT in FY19. Large steel manufacturers’ capacity utilization has been in the range of 80% to 90% in FY23 and most players have announced the expansion of crude steel capacities. The National Steel Policy 2017 envisages achieving 300 MT of production capacity from the current level of 153-157 MT to cater to the expected steel demand of 230 MT by FY31.
• The crude steel production in India increased by 14.1% y-o-y to 69.7 MT in H1 FY24 (April 2023-September 2023) from 61.1 MT in H1 FY23 (April 2022-September 2022).

Domestic Finished Steel Production and Consumption

• In the last 5 years, the finished steel production has grown at a CAGR of 4.8% to 122.3 MT in FY23 from 101.3 MT in FY19. The growth in production has been supported by the rising domestic steel consumption due to increasing economic activities in the country. This is further supplemented by increased infrastructure and construction spending by the government and a rise in automobile and consumer durable demand, among others.
• During H1 FY24, the production of finished steel grew by 13.3% on a y-o-y basis, backed by strong demand in the domestic market.
• The domestic finished steel consumption has increased at a CAGR of 5% to 119.9 MT in FY23 from 98.7 MT in FY19. After a steady increase in steel production, India witnessed a de-growth of 6.3% y-o- y in FY21 due to the outbreak of COVID-19. The rebound in domestic demand from the impact of COVID-19 in the previous financial years, continuous investment in infrastructure and policy support by the government, and pick-up in real estate construction during FY23 have led to an increase in consumption of finished steel to 119.9 MT, implying a y-o-y growth of 13.3%.
• During H1 FY24, the consumption of finished steel reported a growth of 14.8% y-o-y on account of increased demand from the infrastructure and real estate sectors, mainly due to the pre-election year.

Size of Industry in terms of Consumption in Value Terms

The steel industry in India has grown steadily with a CAGR of 16.4% from FY19-FY22 in value terms, driven by volume and realisation growth. The size of the industry reached Rs. 9 lakh crore in FY22 as the average prices of finished steel rose by 45% on a y-o-y basis. During FY23, the size of the industry stood at 9.2 lakh crore, indicating a growth of 2.7% y-o-y. This growth can be attributed to increased volumes of finished steel by 13.3% y-o-y and high prices of steel

Trend in Finished Steel Trade

• Exports:
  • Finished Steel exports from India have contributed to the total offtake of steel, in addition to the domestic demand, supported by India’s increasing capacity and production. For instance, exports increased at a CAGR of 28.5% over the period of 4 years from 6.4 MT in FY19 to 13.5 MT in FY22. In addition, India was a net steel exporter for three years FY20-FY22.
  • Further, exports witnessed a reversal in trend during FY23 after an upward trend of exports in 3 consecutive years, i.e., FY20, FY21, and FY22 and declined to 6.7 MT compared to 13.5 MT in FY22, a sharp fall of 50.2% y-o-y. This was mainly due to the imposition of a 15% export duty on steel products by the government from May 2022 to November 2022, which made exports from India less competitive. Exports were also impacted by weak international demand, continued geopolitical tensions, and inflationary headwinds globally.
  • Accordingly, the sharp reversal in the steel trade led to a withdrawal of export duty on steel products by the government in November 2022. Although the shipments have increased sequentially during the initial months post the export duty removal, export growth has been constricted due to the weak demand in European nations mainly in Italy, the UAE, and Belgium who are the top importers of Indian finished steel products. In addition, the decline in shipments to Spain, Germany, Turkey, and the USA has affected the overall outbound shipments.
  • Moreover, during H1 FY24, the exports plunged to 3.2 MT from 3.6 MT in H1 FY23, a de-growth of around 10% on a y-o-y basis. Also, India turned a net importer of steel during Q2 FY24 with increasing inbound shipments by about 8.2% y-o-y. Further, the exports dropped to 157 thousand tonnes in September 2023, the lowest in the last 5 years. Accordingly, the exports may not reach the highs achieved in FY22 due to sluggish global demand and an increase in steel exports from China due to slower than expected ramp up in local demand in CY23.
• Imports:
  • India mainly imports special-grade steel used in end-user segments such as automobiles, defence, shipbuilding, power, railways, etc., and is witnessing good traction in the domestic market, leading to growth in imports.
  • The finished steel imports declined from 7.8 MT in FY19 to 4.7 MT in FY22. This is accredited to a healthy increase in domestic supply. However, during FY23, India’s finished steel imports grew by 29% y-o-y to 6 MT due to the rise in low-cost imports from Russia. In H1 FY24, the finished steel imports have increased by 13.3% y-o-y to 2.9 MT.
  • South Korea, China, and Japan continue to be the leading suppliers to India with a 72% share in the total imports of finished steel in FY23. The inbound shipments from Russia increased drastically by 544% in FY23 as compared to the previous year and accounted for a 4.5% share of the total imports to India. During 5M FY24 (April 2023 to August 2023), the imports from Russia decreased by 33% from 49,000 tonnes to 33,000 tonnes during 5M FY23 (April 2022 to August 2022).

Trend in India’s Consumption of Sponge Iron, Billets and TMT Bars/Rods

• Sponge Iron
  • The domestic sponge iron consumption has grown at a CAGR of 5.7% over the past five years from 34 MT in FY19 to 43 MT in FY23
  • CareEdge Research expects sponge iron consumption to grow by 10-12% y-o-y in FY24. This growth is likely to be driven by a ramp-up in infrastructure activity and upcoming elections. In the medium term, the growth is likely to moderate and grow at a CAGR of 7.5-8.5% between FY24 and FY26. The moderation in growth is likely to be due to a high base and moderation in infrastructure activity.
• Billets
  • Billets consumption has grown at a CAGR of 7.8% over the past five years from 47 MT in FY19 to 64 MT in FY23.
  • CareEdge Research expects billets consumption to grow by 10-12% y-o-y in FY24. In the medium term, the growth is likely to moderate to a CAGR of 7.5-8.5% between FY24 and FY26 on account of high base and expected moderation in capital expenditure post the elections.
• TMT Bars/Rods
  • TMT Bars and Rods consumption has grown at a CAGR of 8.7% over the past five years from 36 MT in FY19 to 52 MT in FY23.
  • CareEdge Research expects TMT bars & rods consumption to grow by 10-12% y-o-y in FY24. In the medium term, the growth is likely to moderate to a CAGR of 7.5-8.5% between FY24 and FY26 on account of high base, expected moderation in capital expenditure post the election period.

Key TMT Bars and Wire rods Players in India (organized and unorganized)

TMT bars are high strength re-enforcement bars with a hard-outer core and a soft inner core. They are manufactured through a process called thermo-mechanical treatment. They are mainly used in construction and real estate projects. TMT bars are supplied in India by multiple players including small unorganized players. Most large organized players manufacture TMT bars as part of their forward integration. However, most of the unorganized players manufacture TMT bars using steel billets which are then rolled into TMT bars in the rolling mills.

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Trend in TMT Bars Production by Key Players (in MT)

Long Steel dispatched in Eastern and Central India
Long steel, also known as non-flats, includes TMT bars & rods, structural, and railway materials. Over the last two years, the dispatches of long steel in India’s eastern region have seen steady growth, largely supported by increased dispatch from Bihar, Jharkhand, and Odisha.

Indian Crude Steel Production by Technology
There are three types of technologies, namely oxygen route, electric arc furnace, and induction furnaces, used for the production of crude steel in India. The oxygen route, also known as basic oxygen furnace, is a blast furnace that turns carbon-rich hot metal or pig iron into steel. It is the preferred technology for the production of crude steel. Oxygen route-based crude steel production has grown at a CAGR of 4.4% between FY19 and FY23 to reach 58.8 MT in FY23 and accounted for 46.2% of the total crude steel produced in FY23.

Electric Arc Furnace (EAF) is a steel-making furnace, in which steel scrap is heated and melted by heat of electric arcs striking between the furnace electrodes and the metal bath. Electric Arc Furnace (EAF) accounted for 22.2% of total crude steel produced in FY23. Crude steel is produced by using electrical current to melt scrap steel, direct reduced iron, and/or pig iron, to produce molten steel. However, electric arc furnace-based crude steel production has de-grown from 28.5 MT in FY19 to 28.2 MT in FY23.

While induction furnaces convert steel scrap and sponge iron into liquid steel by induction heating. This further gets processed into billets, blooms, ingots, etc. The induction furnace-based crude steel production has grown at a CAGR of 5.1% between FY19 and FY23 to reach 40.2 MT in FY23 and accounted for 31.6% of the total crude steel produced in FY23.

Geographic Importance of Resource Rich Region of Eastern & Central India

• Iron Ore
  • India is a major global producer of iron ore, possessing around 6,411.9 million tonnes of reserves and 35,285.5 million tonnes of total resources of iron ore [magnetite (Fe3O4) and Haematite (Fe2O3)] as of April 2020.
  • The Eastern States account for 40.3% while the Central States account for 14.3% of the domestic iron ore resources.

State-Wise Break-up of Iron Ore Reserves and Resources (in Million Tonnes) as of April 2020

• Coal
  • India has coal reserves of 177 million tonnes and total resources of around 352 million tonnes as of April 2021, including prime-coking, medium-coking, blendable/semi-coking, and non-coking/high sulphur grades.
  • The Eastern States account for 60% while the Central States account for 29% of the domestic total resources of coal.

State-Wise Break-up of Coal Reserves and Resources (in Million Tonnes) as of April 2021

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• Chromite
  • FeCr2O4, often known as iron chromium oxide, is the chemical name for chromium (Cr) and the only metal resource that is economically feasible. The characteristics of chromium that make it the most useful and adaptable are its improved hardenability and resistance to oxidation, corrosion, wear, and galling.
  • As of April 2020, the country’s projected chromite reserves were 79 million tonnes and total resources were 332 million tonnes, 99% of which are located in Eastern States.

State-Wise Break-up of Chromite Reserves and Resources (in Million Tonnes) as of April 2020

Production of Chromite in FY21(P)

• Manganese Ore
  • Manganese ore resources in India are primarily metamorphosed bedded sedimentary deposits associated with the Gondite Series (Archaeans) of Madhya Pradesh (Balaghat, Chhindwara & Jhabua districts), Maharashtra (Bhandara & Nagpur districts), Gujarat (Panchmahal district), Odisha (Sundargarh district), and Kodurite Series (Archaeans) of Andhra Pradesh (Srikakulam & Visakhapatnam districts). Manganese in alloy form is a vital ingredient in steel production. It is also utilized in the production of disinfectants, plastics, paints, and electric batteries.
  • Further, the country’s reserves and total resources of manganese ore as of April 2020 were estimated to be 75 million tonnes and 504 million tonnes, respectively. The Eastern States account for 37% while the Central States account for 12% of the domestic manganese ore resources.

State-Wise Break up of Manganese Ore Reserves and Resources (in Million Tonnes) as of April, 2020

Business Data of Vraj Iron and Steel (Phil Ispat Pvt. Ltd)

• Company is engaged in manufacturing of Sponge Iron, M.S. Billets, and TMT bars under the brand Vraj.
• currently operate through two manufacturing plants which are located at Raipur and Bilaspur in Chhattisgarh spread across 52.93 acres. As of December 31, 2023, the aggregate installed capacity of our manufacturing plants was 2,31,600 tons per annum (“TPA”) (comprising of intermediate and final products). Our manufacturing plant at Raipur also includes a captive power plant with an aggregate installed capacity of 5 MW, as of December 31, 2023. We are in the process of increasing the capacities of our existing manufacturing plants and captive power plant, which is expected to increase our aggregate installed capacity (comprising of intermediate and final products) from 2,31,600 TPA to 5,00,100 TPA and captive power plants aggregate installed capacity from 5 MW to 20 MW. The proposed expansion of Sponge Iron and Captive Power Plant are expected to become operational in Q4 of FY 2024-25 whereas MS Billets is expected to become operational in Q1 of FY 2025-26

Verticals of Vraj Iron and Steel (Phil Ispat Pvt. Ltd)

• Sponge Iron
• MS Billets
• TMT Bars
• Power

Product wise break-up of Vraj Iron and Steel (Phil Ispat Pvt. Ltd)

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Customer dependency

(₹ in million)

Supplier dependency

(₹ in million)

Machinery/Plants/Factory

• Raipur Plant – Siltara Industrial Area, Siltara, Raipur, Chhattisgarh – 493111
• Bilaspur Plant – Village: Dighora, Tehsil, Takhatpur, District- Bilaspur, Chhattisgarh -495002

Capacity Utilisation

Competition

Company operates in highly competitive industry. Our manufacturing plants are set up in State of Chhattisgarh which is known as hub for iron and steel industry in India. Our Company faces intense competition in the Indian steel market, from various domestic and multinational companies in India. Some of our key peers include Tata Steel Limited, JSW Steel Limited, Steel Authority of India Limited (SAIL), Jindal Steel and Power Limited (JSPL), Godawari Power and ISPAT Limited (GPIL), ESL Steel Limited (ESL), Sarda Energy & Minerals Limited (SEML), Shyam Metalics and Energy Limited (SMEL).

Peer companies comparison

(₹ in million, except percentages and ratios)

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(₹ in million, except percentages and ratios)

 consolidated financial metrics of peer companies for the financial year 2022-23

Associate companies

Company has 1 (one) Associate. The Associate of our Company is set out as below:

• Vraj Metaliks Private Limited Corporate Information
  • Vraj Metaliks Private Limited was originally incorporated as Vraj Colliery Private Limited on January 30, 2015 under the Companies Act, 2013. The name was changed to Vraj Metaliks Private Limited
• Nature of Business
  • Vraj Metaliks Private Limited is engaged in the business of manufacturing Sponge Iron

Group companies

• Vraj Metaliks Private Limited;
• Vraj Commercial Private Limited; and
• MVK Industries Private Limited.

Business risk factors

• Both of existing manufacturing facilities are concentrated in a single region i.e. Raipur and Bilaspur, Chhattisgarh. Further Expansion Project is also being implemented at Bilaspur, Chhattisgarh and hence we face geographical concentration related risks.
• 100% of revenue is from sale of our steel products such as TMT Bars, MS Billets, Sponge Iron & others related items. Volatility in the demand and pricing in the iron and steel industry is common and is cyclical in nature. A decrease in steel prices may have a material adverse effect on business, results of operations, prospects and financial condition.
• Company have had experienced negative cash flows from operating, investing and financing in the recent past, and we may have negative cash flows in the future. Our net cash flow for the period / years are set forth in the table below
• Company do not have long-term agreements with our customers and we derive a significant portion of our revenues from our top 10 (ten) customers. The loss of, or a significant reduction in the revenues we receive from, one or more of these customers which would have a material adverse effect on our business, results of operations and financial condition.
• Promoters Gopal Sponge and Power Private Limited, Kirti Ispat Private Limited and Utkal Ispat Private Limited and our Group Company Vraj Metaliks Private Limited are engaged in activities which is similar to our business. This may be a potential source of conflict of interest for us and which may have an adverse effect on our business, financial condition and results of operations
• Promoters will continue to retain a majority shareholding in us after the Issue, which will allow them to exercise significant influence over us
• Company face substantial competition from domestic steel producers, which may affect our prospects. Developments in the competitive environment in the steel industry, such as consolidation among our competitors, could have a material adverse effect on our competitive position and hence our business, financial condition, results of operations or prospects.

• Inadequate or interrupted supply and price fluctuation of our raw materials could adversely affect our business, results of operations, cash flows, profitability and financial condition.

• Company is predominantly dependent on the sale of our steel products. An inability to anticipate and adapt to evolving customer preferences and demand for particular product, or ensure product quality or reduction in the demand of our steel products may adversely impact demand for our products, brand loyalty and consequently our business prospects and financial performance.

Financials

Key Financial Ratios

Balance Sheet

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Profit & Loss

(₹ in million except per share data or unless otherwise stated)

Cash Flow

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Capital structure

SWOT

• Strengths
  • Operating Revenues: Vraj Iron And Steel Limited’s operating revenues exceeded INR 500 crore for the financial year ending on March 31, 20231.
  • EBITDA Growth: Their EBITDA increased by 59.58% compared to the previous year.
  • Book Net worth: The company’s book net worth also saw a significant increase of 61.67%.
• Weaknesses
  • Funding Challenge: Vraj Iron And Steel Limited faces the challenge of raising substantial additional funds to construct more manufacturing facilities. The uncertainty lies in whether these funds can be obtained on reasonable terms or at all2.
• Opportunities
  • Market Expansion: Exploring new markets or expanding their existing market presence could be an opportunity.
  • Technological Advancements: Leveraging technology for efficiency gains and cost reduction.
• Threats
  • Competition: Intense competition within the steel industry.
  • Raw Material Prices: Fluctuations in raw material prices can impact profitability.

IPO Details

Vraj Iron and Steel Limited IPO Details

Ipo funds utilisation for

Litigation involved

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