ICRA has assigned an IPO Grade 1 indicating poor fundamentals, to the proposed initial public offering of Ankit Metal & Power Limited (AMPL).

The assigned grading reflects the promoter’s lack of prior experience in steel manufacturing, relatively small size of the proposed project and lack of any obvious competitive advantage when compared to other established players in the industry.

ICRA notes that the lack of any backward linkage exposes the company to volatility inherent in prices of critical raw material like Iron Ore and Coal and the quality of steel and consequently the rolled bars that the company will manufacture may preclude it from commanding any price premium compared to other players in the segment.

Coal in a sponge iron plant serves both as a reducing agent and a fuel inside the kiln. Given India’s relatively inferior grade of coal deposits with high ash content,priority position of the power sector as a coal consuming industry and lack of adequate infrastructure for import of coal, availability of good quality coal could become a major operational risk factor for sponge iron players, especially the smaller ones.

The promoters, however, have experience in Ferro-Alloys industry and the positive outlook on the construction industry- the key user for TMT bars- could offset some of the disadvantages that the project is exposed to.
The promoters are also simultaneously carrying outexpansions in some of the other group companies, and have also stated their intention to start work on another project for expanding the capacity of TMT bars in AMPL, which would entail investments of over Rs 150 Crores, once this project is completed. .

This also increases the overall risk profile of the project, given the modest cash accruals in the existing businesses, and the limited ability of the promoters to bring in additional capital, should the need arises. The inherently cyclical nature of the steel industry and the on going capacity addition by major steel producers could also impact the realizations and profitability.