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Retail Research

Sector: Steel 22 September 2010

Gallantt Ispat Ltd.
IPO Note
GIL is one of the growing companies in Uttar Pradesh engaged in the manufacturing and marketing of Sponge Iron, Mild steel billets, Re-Rolled products (TMT bars and Mild Steel Structural) and wheat flour products. The company was incorporated in February 2005 at Kolkata and is promoted by Mr. Chandra Prakash Agrawal, Mr. Prem Prakash Agarwal, Mr. Nitin M Kandoi, M/s Chandra Prakash Agarwal & Sons HUF and M/s Gallantt Metal Ltd. The company has already commenced commercial productions for Mild steel billets, Re-Rolled products (TMT bars) in May 2009 and wheat flour products in March 2009 and proposes to expand its business into Sponge iron production and has commenced the trial production in September, 2010. They have appointed M/s Industrial Technical Consultant, Raipur (ITCR) as its technical consultant for the proposed Sponge Iron Plant, M/s Akal Sahae Engineers for the Rolling Mill Division and M/s. Avant Garde Engineers and Consultants Pvt. Ltd., Chennai (AGECPL) will be appointed for the Captive Power Plant. In case of Mild steel billets, M/s Gallantt Metal Limited, their promoting company, has already developed a technical team at its existing Gorakhpur plant and Bhuj, Gujarat plant. The same team has been utilized for setting up the Mild steel billets plant. The in house consumption of entire Sponge Iron to manufacture billets which is further rolled into TMT bars along with installation of captive power plant to utilize the waste heat would improve the profitability of the project thereby making it economically more viable. Setting up the integrated steel plant and flour mill in Gorakhpur, Uttar Pradesh also provides GIL with benefits like interest free loan equivalent to sales tax amount for a period of 15 years, transport subsidy for 15 years, 20% subsidy of fixed capital investment, 5% additional subsidy of fixed capital investment being first unit under this scheme and exemption of mandi tax 2% on wheat purchase, among other benefits.
ISSUE DETAILS: Date of Opening Date of Closing Issue Size No. of Shares Offered Face Value BRLM Registrar Bid Lot Post Issue Share Capital 22nd September 2010 24th September 2010 Rs. 40.50 cr. 81,00,000 (81 lac.) Rs. 10 Anand Rathi Advisors Ltd. Niche Technologies Pvt. Ltd. 125 Rs. 26.77 Cr.

Offer Price (Rs.): 50

OBJECTS OF ISSUE To part finance the integrated steel plant To part finance the flour mill Listing of securities on stock exchanges Total

(Rs. Cr.) [•] [•] [•] [•]

SHAREHOLDING PATTERN PRE ISSUE Promoter & Promoter Group Non Promoter Public Total POST ISSUE Promoter & Promoter Group Non Promoter Public Total No. of Shares 17,318,131 1,348,166 18,666,297 No. of Shares 18,718,131 1,348,166 6,700,000 26,766,297 % 92.78 7.22 0.00 100.00 % 69.93 5.04 25.03 100.00

Source: RHP, SSL Research For complete information and a complete list of the risk factors, please refer the Red Herring Prospectus.

SBICAP Securities Limited, Corporate Office: 191, Maker Towers 'F', Cuffe Parade, Mumbai 400 005 Tel.: (Board) +91 22 30273300/01 • Fax: (022) 30273420. For a list of our branches refer to our website: www.sbicapsec.com

Gallantt Ispat Ltd.

Steel

Key Strengths
Strong brand recognition
GIL forms a part of the Gallantt Group. The Gallantt Group is already engaged in the manufacturing of steel products in Gorakhpur, Uttar Pradesh, selling its product under the brand name Gallantt and has successfully marketed their products in Northern India. The company proposes to sell its products in Uttar Pradesh and the surrounding areas wherein it has already established considerable brand recognition.
~ Strong brand recognition

Management Expertise
Other than GIL, their group comprises of two other companies namely, Gallant Udyog Limited (GUL) and Gallantt Metal Limited (GML). GML, incorporated in 2005, is based in Gujarat, and has integrated steel manufacturing operations. Their promoters, over the years, have gained experience in setting up and operating integrated steel plants as well as flour mills. The established position of the Group Companies in the local markets has also resulted in an established customer base and a supplier network in Uttar Pradesh, Chattisgarh, Bihar and Madhya Pradesh. In addition to their Promoters, they have a professionally managed team with technical experts in respective fields.

Quality Certification
GIL has met standards of Bureau of Indian Standards and has received the IS 1786:2008 certification for high strength deformed steel bars for concrete reinforcements (TMT). Since the company is dedicated towards quality of products, processes and inputs, they get repetitive orders from their customers, as they are capable of meeting their quality standards thereby enabling them to maintain their brand image in the market.
~ Quality Certification

Captive Power plant
Considering the power requirements of existing manufacturing facilities, GIL also proposes to setup a 16 MW captive power plant to meet its present requirement of power. Captive power plant will give them the stable and uninterrupted power supply which is very crucial in manufacturing of products. Uninterrupted power supply helps to avoid any delays in manufacturing process thereby ensuring complete utilization of their capacities. GIL currently requires 12.98 MW for the purpose of running the Sponge Iron Unit, Steel Melt Shop Unit, Rolling Mill Unit and the Flour Mill. Further additional 1.30 MW are required to operate their common auxiliary services. Once the Captive Power Plant is operational, the 16 MW produced by it will be utilized by company thereby eliminating the existing dependence for power from their current providers, being the Uttar Pradesh Power Corporation Limited.
~ Captive Power plant

For complete information and a complete list of the risk factors, please refer the Red Herring Prospectus. • Source: RHP

SBICAP Securities Limited

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Gallantt Ispat Ltd.

Steel

Business Strategies
Sales and marketing
The sales and marketing strategy is based on building upon strengths and results already achieved. Accordingly, their strategy is to consolidate their position in Uttar Pradesh and penetrate in other northern, western and eastern parts of the country. In parallel, they would also strive to build credible partnerships as an entry strategy and build on the same for a full-scale penetration in future.
~ Sales and marketing

Focus on expansion of capacity so as to attain economies of scale
To maintain the position in the Iron & Steel Industry, GIL is aiming to enhance and optimize their manufacturing capacities of their product to cater to the northern regions of India. This is in line with the belief that maximum values can be created by way of making products at the locations where customers/ markets currently exists or will grow in future..

Mix of organic and inorganic models of growth
GIL strategy so far had been organic growth. At this stage of the business, they believe that a combination of organic and inorganic models will help them continue to grow. Strategic acquisitions would help them in leveraging complementary skills to capture market opportunities as well as reduce timeto-market and accelerate growth.
~ Mix of organic and inorganic models of growth

Continued focus on consistently meeting quality standards so as to ensure product acceptance by customers
GIL has created a reputation with their suppliers who can consistently supply quantity without compromising on the quality and delivery schedules. They intend to continue to focus on this. As they are using one of the best technologies in products manufactured by them, they intend to continue this for the new projects of the company as well.
~ Continued focus on consistently meeting quality standards so as to ensure product acceptance by customers

For complete information and a complete list of the risk factors, please refer the Red Herring Prospectus. • Source: RHP

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Gallantt Ispat Ltd.

Steel

Risk Factors
Land on Lease from the Gorakhpur Industrial Development Authority (GIDA)
GIL has taken land on lease, from Gorakhpur Industrial Development Authority (GIDA) vide a lease deed dated May 25, 2007, for a period of 90 years, for establishing an integrated steel plant, captive power plant, spinning mill and modern roller flour mill. In the event of any breach by the company, GIDA has a right to terminate the lease, by giving a notice thereof and to resume possession of the entire plot leased or part thereof.
~ Land on Lease from the Gorakhpur Industrial Development Authority (GIDA)

Completely dependent on the Uttar Pradesh markets for the sale of products
The company is solely dependant on the markets in Uttar Pradesh for the sale of all of its products that is sponge iron, mild steel billets, re-rolled products (TMT bars) and wheat flour products. GIL business, results of operations and financial conditions may be adversely affected if one or more of the following factors occur:
n

~ Completely dependent on the Uttar Pradesh markets for the sale of products

negative demand for their products due to increased competition, or the company's inability to compete with new players competitors further penetration enactment of any legislation which may not be favourable to the industry in Uttar Pradesh

n n

Promoter and Group Company are engaged in the same line of business
The main objects of GML, their Promoter, and GUL, their Promoter Group Company, allow them to have same/similar business as carried out by GIL. Further, as on the date of this prospectus, GML and GUL are engaged in the same or allied businesses as that of their company. As a result, they are / could be in direct competition with their company. They do not enjoy contractual protection by way of a non - compete agreement or any other arrangement with GML or GUL.

Company has availed incentives offered under the Heavy Industrial Investment Promotion Policy of the Government of Uttar Pradesh
The incentives available under the scheme are capital subsidy, infrastructure subsidy, transport subsidy and interest free loan in lieu of trade tax. There are several terms and conditions which GIL is required to comply with in order to continue to enjoy the benefits and incentives. GIL is eligible to receive an aggregate capital and infrastructure subsidy of Rs. 103.56 crores. There may be a delay with regards to the funds deployment/ disbursement by the government of Uttar Pradesh. In the event of such a delay / non receipt of the balance funds, their business and results of operations would be materially affected.
For complete information and a complete list of the risk factors, please refer the Red Herring Prospectus. • Source: RHP

~ Company has availed incentives offered under the Heavy Industrial Investment Promotion Policy of the government of Uttar Pradesh

SBICAP Securities Limited

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Gallantt Ispat Ltd.

Steel

Financials & Valuations Snap Shot:
Gallant Ispat Ltd. (Rs. cr.)
Pre Issue FY10 Post Issue FY10 Offer Price (Rs.) Particulars Net Sales Total Income EBIDTA PAT Equity Share Capital No of Equity Shares Face Value EPS CMP Cash and Bank Debt Market Cap Enterprise Value Mcap/Sales (x) EV/Sales (x) EV/EBIDTA (x) EBIDTA/Sales (%) 130.02 130.04 5.16 (4.50) 18.67 1.87 10.00 (2.41) 50.00 0.67 85.18 93.33 177.84 0.72 1.37 34.47 3.97 50.00 130.02 130.04 5.16 (4.50) 26.77 2.68 10.00 (1.68) 50.00 0.67 85.18 133.83 218.35 1.03 1.68 42.32 3.97 Source: RHP, SSL Research

Relative Valuations
Particulars. CMP (Rs) TTM Sales (Rs Cr) M.cap (Rs Cr) EV / Sales (x) EV / EBIDTA (x) M.cap / Sales (x) OPM (%) Adhunik Metaliks Ltd 118.10 1,317.30 1,458.54 1.96 9.56 1.11 20.46 Monnet Ispat & Energy Ltd 511.75 1,544.94 2,674.41 2.43 8.19 1.73 29.69 Rathi Bars Ltd 14.04 190.76 22.93 0.24 6.41 0.12 3.73 Gallant Ispat Ltd. 50.00 130.02 133.83 1.68 42.32 1.03 3.97 Source: RHP, Capitaline, SSL Research

For complete information and a complete list of the risk factors, please refer the Red Herring Prospectus.

SBICAP Securities Limited

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Gallantt Ispat Ltd.

Steel

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