Innoventive may not be an `inventive offer’ from the precision tube industry! 

Poor industry discounting, absence of project appraisal and fund monitoring by external agency, potential cost and time overruns, etc., make Innoventive a less attractive buy.

OFFER AT A GLANCE
Name	Innoventive Industries Ltd
Offer Quantity	1.83 cr to 1.88 cr Shares of Rs 10 each
% on Total Equity	30.8% to 31.4%
Offer Amount	Rs 219.58 cr
Offer Price	Rs 117 to Rs 120
Bid Quantity	50 & Multiples of 50
Bid/Offer Opens	April 26, 2011
Bid/Offer Closes	April 28, 2011-QIB portion
	April 29, 2011-Retail & Others
Rated By	ICRA
Rating	3/5
Lead Managers	Axis Bank, Avendus Capital
Registrars	Karvy Computershare

 

Issue Objective 

The company proposes to spend Rs 163 cr on expansion of capacity and repay high-cost term loans worth Rs 50 cr.  The balance (Rs 6.58 cr) is meant for general corporate purpose.

 

Parentage

The company, originally known as Arihant Domestic Appliances Pvt. Ltd, was incorporated in 1991 by a different set of promoters for the manufacture and assembly of mixers, grinders and emergency lights. The present promoter-chairman, Chandu Chavan, joined the board in March 2002. The company’s name was changed into the present one only in March 2010.

The Managing Director, Ravindra Katre, and the whole-time director Sanjay Waghulade joined the board in November 2002. Prior to the acquisition of the company, Chandu Chavan was part of Phoenix Enterprises, engaged in trading of precision tubes which was acquired by Innoventive in 2006. Before joining Innoventive as promoter, Sanjay Waghulade was associated as an executive with Kalyani Seamless Metal Tubes and Jindal Saw Pipes for two years each.   

 

Business

Innoventive is presented as a multi-product engineering company engaged in the manufacture of precision steel tubes, tubular components, auto components and other machined components which find application in diverse fields like transportation, oil & gas, power, farm equipments and general engineering. The company reportedly has six manufacturing facilities located around Pune and Silvassa.

Innoventive claims to export to 10 countries across the globe catering to over 475 customers worldwide. Its domestic clientele includes Bajaj Auto, BHEL, Thermax, John Deere, Sundaram Industries, Gabriel India, Alstom Projects, etc.

 

Financial Performance

In last five years, Innoventive has registered consistent growth in sales, from Rs 102 cr in FY06 to Rs 378 cr in FY10. In the first nine months of Fiscal 2011, the company logged Rs 379 cr. However, its bottom line has shown an uneven growth during this period. From Rs 10.18 cr in FY06, net profit slumped to Rs 5.51 cr in FY07 and further down to Rs 3.3 cr in FY08. Since FY09 the bottom line has seen a phenomenal growth.   From Rs 11.63 crores in FY09, profit leapt to Rs 34.54 cr in FY10 and Rs 31.77 cr in first nine months of FY11.   

 

Prospects 

The company currently has capacities for 64800 tpa of Electric Resistance Welded (ERW) tubes and 23265 tpa of Cold Drawn Electric Welded (CEW) tubes which have been proposed to be increased to 85000 tpa and 76701 tpa respectively after the expansion. By FY 2013, Innoventive expects to achieve a capacity utilization of 89% of ERW and 78% of CEW.  As compared to the capacity hike, the increase in equity from Rs 41 cr to Rs 59 cr is reasonable.  

 

Valuation

The offer at the higher band of Rs 120 discounts the December 2010 EPS of Rs 8.62 about 14 times and the book value of the share around 3.2 times. Though these discounting look steep when compared the steel tube industry average of 9.9 times P/E and 1.5 times P/BV, the company’s impressive operating margin (over 25%) may perhaps justify a higher discounting than the industry average. 

 

Peer Group Comparison

Within the peer group, reputed names like Jindal Saw and Maharashtra Seamless are currently valued at a P/E of 10x or less and P/BV of 1.6x. Against these, Innoventive’s offer certainly looks costly. 

How Innoventive compares with peer group
SCRIP	COS	M-CAP	P/E	P/BV	P/FV	P/R	OPM	PRICE
		(Rs Cr)	(X)				%	(Rs)
Jindal Saw		5,694	10.2	1.6	103.0	1.4	23.2	206.10
Tube Investments		2,651	20.2	3.2	71.4	0.9	11.3	142.85
Maharashtra Seamless		2,554	7.7	1.6	72.4	1.6	25.4	362.05
ISMT		817	11.3	1.4	11.2	0.6	17.4	55.80
Ratnamani Metals		608	7.7	1.7	65.5	0.7	17.8	131.00
Prakash Steelage		271	11.9	2.3	15.5	0.6	10.5	154.70
Suraj Stainless		118	18.7	1.6	6.1	0.5	12.6	61.25
Steel Tubes Composite	26	19,631	9.9	1.5	21.4	0.7	14.2
Market Composite	2,997	6,995,332	18.6	3.1	35.0	1.9	23.1
Innoventive Industries	High	712	13.9	3.2	12.0	0.9	25.6	120.00
	Low	700	13.6	3.1	11.7	0.9		117.00

 

Concerns

• Funding requirement and deployment of issue proceeds has not been appraised by any external agency
• Current capacity utilization of CEW tubes is low, at less than 45%
• Additional land for the expansion at Pune facility is yet to be procured
• Orders for the expansion machinery are yet to be placed
• 20-year-old company is yet to have a corporate office of its own
• Poor discounting for the industry on the trading floor

 

Conclusion

Though the company’s current financials may seem to justify the offer price even at the higher band, its long term prospects largely depend on the timely completion of the expansion. For those who want to bet on steel pipes/tubes industry, Jindal Saw and Maharashtra Seamless could be more attractive than Innoventive!