Customer Concentration Risk and inconsistent cash flow from operations

• Vibhor Steel Tubes operates in the manufacturing of steel products, including ERW pipes, Galvanized pipes, and Hollow Section pipes. These products find applications in various sectors such as oil and gas transportation, water transportation, construction, etc. The company's primary customer is Jindal Pipes, for which it manufactures and sells products under the brand name 'Jindal Star'. Despite reporting growth in revenue and net profit, there are significant concerns that investors should consider.
• One major issue is the company's EBITDA per tonne, a key efficiency metric in the steel industry, which is lower compared to its competitors. This indicates that the company may have lower operational efficiency and profitability margins compared to its peers.
• Another significant concern is the company's consistent struggle to generate positive cash flow from operations. Even in H1FY24, the company reported negative cash flow from operations of Rs 8 crore. This ongoing negative cash flow reduces the company's ability to internally finance expansion and forces it to rely more heavily on debt to fund capital expenditures, which could increase financial risk in the long term.
• The most alarming issue is the heavy reliance on a single client, Jindal Pipes, which contributes 93% of the company's total revenue as of March 2023. This concentration of revenue from one client exposes Vibhor Steel Tubes to significant risk, as any adverse decision or change in business terms by Jindal Pipes could have a severe impact on the company's financial stability and operations.

Valuations

• The company is asking for a PE of 13.6x and a market cap to sales of 0.3x which in comparison to its listed peer is quite fair but considering the above issues related to the company, we recommend avoiding this IPO.​