Unconvincing track record and floating public issue for retiring bank loans make the IPO passable!
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OFFER AT A GLANCE |
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Name |
Vaswani Industries Ltd. |
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Offer Quantity |
1 cr Shares of Rs 10 each |
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% on Total Equity |
42.6% |
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Offer Amount |
Rs 45 cr to Rs 49 cr |
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Offer Price |
Rs 45 to Rs 49 |
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Bid Quantity |
120 & Multiples of 120 |
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Bid/Offer Opens |
April 29, 2011 |
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Bid/Offer Closes |
May 3, 2011 |
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Rated By |
ICRA |
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Rating |
2/5 |
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Lead Managers |
Ashika Capital |
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Registrars |
Link Intime India |
Issue Objective
The main objects of the issue are repayment of term loan (Rs 25.19 cr) and enhancing long term working capital to the tune of Rs 19.14 cr. The surplus IPO amount is ear-marked for `general corporate purposes’.
Parentage
The 2003-registered Raipur-based Vaswani Industries Ltd (VIL) belongs to Vaswani group of companies which reportedly has interest in iron and steel for the past two decades. The main promoter, Ravi Vaswani claims to have extensive knowledge in trading and marketing of sponge iron and steel billets. Though the group has nine companies including VIL, only three have a credible track record to mention about. In fact, three of the group companies were incorporated only in 2010.
Business
VIL is presently engaged in the integrated business of manufacturing sponge iron, steel billets/ingots and power generation. The company’s manufacturing facility near Raipur started with 1 kiln of 100 TPD of sponge iron in FY-05 which has been hiked to 3 kilns of 100 TPD each, aggregating to 90,000 tonnes annually by FY-10.
In FY-08 the company installed three induction furnaces to manufacture 36,000 tonnes of steel billets and ingots utilizing the in-house production of sponge iron. The company also set-up a power generation project in FY-08 for producing 5 MW from waste heat recovery boiler and 2.5 MW from coal for captive consumption. The waste heat recovery power capacity has been enhanced to 9 MW in FY-11.
Operating Performance
Though VIL has completed all its projects, the company has witnessed wild fluctuations in its operational performance. In FY-08, against a capacity of 60,000 tonnes, the company produced 42,400 tonnes of sponge iron. But, next year, production dropped down to 37,800 tonnes. In FY-10 sponge iron capacity rose to 90,000 tonnes but production was only 47,378 tonnes.
In the case of steel billets too, the company’s production that went up from 14,260 tonnes in FY-08 to 36,000 tonnes in FY-09, plunged to 4,350 tonnes in FY-10. In line with its operating performance, the company’s bottom line too fluctuated in recent times.
Prospects
Since VIL proposes to retire high cost term loans worth more than Rs 25 cr with the issue proceeds, the company’s bottom line should get a boost in the coming years. The company is now graduating itself from a sponge iron producer to steel billets/ingots manufacturer. Nevertheless, what’s worrying is its pathetic capacity utilization in steel billets/ingots which was just 12% in FY-10.
In the first seven months of FY-11, the company has posted net profit of Rs 2.69 cr which yields an annualized EPS of less than Rs 2 on the post-issue capital of Rs 23.49 cr. With such performance, obviously, one cannot expect any dividend in the immediate future even though the shares are being offered at a premium of Rs 35 or more.
Valuation
There are about 15 listed sponge iron manufacturers whose composite P/E currently works out to around 15 times. But, mild steel producers have slightly lower composite P/E. VIL has priced its share about 14 times its current earnings and 1.6 times its net worth. Though the valuation does not look very steep as compared to the industry average, it does not leave much room for capital appreciation too. More over, when a reputed name like Tata Sponge with a dividend yield of 2.3% is currently available at less than 6 P/E, which prudent investor would go for VIL?
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How Vaswani compares with peer group |
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SCRIP |
COS |
M-CAP |
P/E |
P/BV |
P/FV |
P/R |
OPM |
YIELD |
PRICE |
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|
(Rs Cr) |
(X) |
% |
(Rs) |
|||||
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Monnet Ispat |
|
3,238 |
11.5 |
2.1 |
52.1 |
2.1 |
29.7 |
1.0 |
520.80 |
|
|
Jai Balaji Ind |
|
1,274 |
22.3 |
1.4 |
20.0 |
0.6 |
14.1 |
0.2 |
199.85 |
|
|
Adhunik Metaliks |
|
1,096 |
18.8 |
1.8 |
8.9 |
0.8 |
20.0 |
1.4 |
88.75 |
|
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Orissa Sponge |
|
834 |
– |
4.2 |
30.9 |
5.3 |
-9.0 |
0 |
308.75 |
|
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Jayaswal Neco |
|
687 |
7.9 |
1.1 |
2.7 |
0.4 |
21.1 |
0 |
27.40 |
|
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Visa Steel |
|
593 |
13.2 |
1.9 |
5.4 |
0.5 |
15.3 |
1.9 |
53.90 |
|
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Tata Sponge |
|
542 |
5.9 |
1.3 |
35.2 |
0.8 |
22.2 |
2.3 |
351.75 |
|
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Lloyds Metals |
|
522 |
16.7 |
5.2 |
23.3 |
0.8 |
6.2 |
0 |
46.50 |
|
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Kirloskar Ferrous |
|
352 |
9.2 |
1.1 |
5.1 |
0.3 |
8.2 |
3.9 |
25.65 |
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Tata Metaliks |
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308 |
13.4 |
3.4 |
12.2 |
0.2 |
5.1 |
0 |
121.65 |
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Nova Iron |
|
168 |
– |
1.1 |
1.1 |
4.2 |
-19.1 |
0 |
11.16 |
|
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Sathavahana Ispat |
|
166 |
3.4 |
0.9 |
5.0 |
0.3 |
15.1 |
3.0 |
49.75 |
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Sponge Iron |
15 |
9,960 |
14.5 |
1.8 |
8.8 |
0.7 |
15.7 |
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Iron & Steel |
44 |
239,646 |
13.8 |
2.3 |
22.5 |
1.7 |
23.4 |
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Market Composite |
2,955 |
6,988,271 |
18.5 |
3.0 |
35.0 |
1.9 |
23.1 |
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Vaswani Industries |
Hi-Band |
115 |
14.3 |
1.6 |
4.9 |
0.6 |
14.4 |
0 |
49 |
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Lo-Band |
106 |
13.2 |
1.4 |
4.5 |
0.5 |
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|
45 |
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Concerns
- Maiden public venture of the promoters whose group companies are yet to show consistent performance.
- Over crowded industry facing stiff competition, resulting in low margins
- Poor Capacity Utilization
- Below average performance in the current year.
- Present bottom line too small to offer dividend return
- Potential conflict of interest as couple of group companies could be the major customers.
About 20% (more than 40 lakhs shares) of the company’s post-issue equity is held by a number of small investors, who acquired the shares few years ago through private placements, could rush in for selling when their lock-in ends after a year.