Zenith Birla (India), part of the Yash Birla Group, manufactures ERW welded steel pipes (black and galvanised) and high speed steel (HSS) cutting tools including drills, reamers, cutters, taps, and tool bits. The company had undertaken a major restructuring exercise, hiving off or selling loss-making units. After divesting from the steel, paper, chemical and textile businesses, the company is now focusing on steel pipes and tubes.

The steel pipe division is located at Khopoli in Maharashtra and has an installed capacity of 1,20,000 tonnes of steel pipes. The HSS cutting tools, marketed under the brand,ITM, are manufactured in two units located at Nashik and Aurangabad.

Zenith Birla (India) has lined up a follow-on public issue to raise Rs 131 crore. The capital raised after meeting the issue expenses will be deployed to set up additional facilities for manufacturing mechanical tubes (primarily used in the automobile sector) at Khopoli, contribute to the working capital requirement of the existing business, be used as margin money for the mechanical tube business, and meet the preliminary and pre-operative expense and contingency requirement. The cost for setting up the mechanical tube project - mechanical tubings (cold drawn welded- CDW) at Khopoli will be Rs 88.22 crore. It will have an installed capacity of 60,000 tonnes per annum. Commercial production is scheduled from December 2007.

Strengths

• US is the largest importer of steel pipes worldwide and has been at the top of the list of countries where Zenith Birla (60% of sales come from exports) is regularly exporting steel pipes. Zenith Birla has a competitive advantage since it has 0% anti-dumping duty as against 7.08% for majority of domestic manufacturers. However, if fresh anti-dumping duty proceedings are initiated by the US pipe industry against imports of pipe from India, then it may affect the financial position of the company.
• Growth prospects for pipe demand in India are also encouraging.

• Apart from Zenith Birla (India), there are other players within the sector such as Tata Tubes and Bhushan Steel that are likely to add CDW capacity, leading to oversupply.

• After the issue, promoters holding will be reduced significantly from 32.85% earlier to 24.67%.

• There are other companies within the group that manufacture standard pipes and cutting tools, leading to conflict of interest and diversion of attention.

• Zenith Birla (India) has consistently incurred losses since 1989-90 to 1994-95 and then from 1999-00 to 2002-03. The company has been referred to the Board for Industrial and Financial Restructuring. Consequently there has been reduction in capital.

• It has been changing the financial year-ends consistently since the past few accounting periods, making comparison difficult.

Valuation

The 52-week high/low of Zenith Birla (India) has been Rs 83 (12 May 2006) and Rs 30.0 (15 June 2006). The current market price of the stock is Rs 64.9.

At an issue price of Rs 55, Zenith Birla’s (India) PE works out to 38.1 times FY 2006 earning and 18.3 times three months ended FY 2007 annualised earning on post-diluted equity. While the sector TTM PE is 8.7, companies such as Jindal Saw, Welspun Gujarat, PSL and Surya Roshni, which like Zenith Birla have a presence in the ERW segment, is trading at a TTM PE of 11.6, 14.3, 12.4 and 8.2, respectively. Bhushan Steel, with a presence in the mechanical tube segment where Zenith Birla is planning to venture, is trading at a TTM PE of 7.4.