Pedigree justifies price though timing wouldn’t have been worse.
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OFFER AT A GLANCE |
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Name |
Thejo Engineering Ltd |
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Offer Amount |
Rs 19 cr |
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Offer Quantity |
4.419 lakh to 4.726 lakh shares |
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IPO on Total Equity % |
Between 27.5% and 26.2% |
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Post-issue Free Float % |
Between 41.9% and 42.9% |
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Offer Price |
Between Rs 402 and Rs 430 |
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Application Quantity |
300 & Multiples of 300 |
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Offer Opens |
September 4, 2012 |
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Bid/Offer Closes |
September 6, 2012 |
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Rated By |
CRISIL |
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Grade |
5 out of 5 |
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Lead Managers |
IDBI Capital |
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Registrars |
Cameo Corporate |
The IPO
Even while the `coalgate’ logjam has brought core sectors like coal, power, steel and cement under cloud, the Chennai-based Thejo Engineering Ltd whose future depends on these industries is making a bold entry into Indian capital market with an ultra high price band of Rs 402-430 for a 10 paid-up share. Investors will have to shell out minimum Rs1,20,600 for participating in the Rs 19 cr IPO. Incidentally, Thejo’s is the first IPO to be listed on the SME Platform of NSE.
Objective
The main objects of Thejo IPO are to finance the expansion plans and achieve the benefits of listing on the stock exchange. Thejo’s management believes that listing will enhance the company image and brand name. The company proposes to spend the issue proceeds on the following: Setting up a poly-urethane unit (Rs 68.28 lakh); Expansion of existing facility (Rs 686.61 lakh); Setting up R&D Unit (Rs 283.05 lakh); Setting up a lining plant (Rs 169.02 lakh); Investment in subsidiary, Thejo Australia Pty Ltd (Rs 642 lakh) and General corporate purposes.
Rating & Rationale
CRISIL has assigned the maximum grade of ‘SME 5/5’ (pronounced “SME five on five”) to the IPO of Thejo. According to the rating agency, the fundamentals of the company are excellent compared to other SMEs in India. Notwithstanding the uncertainties faced by the user industries, CRISIL believes the company’s planned expansion in international markets and cross-selling through its operations and maintenance (O&M) contracts will help it sell the incremental produce.
Thejo is said to have limited competition in the services business, where it claims a 60% market share. Currently, most of the conveyor operations in the industry are handled by the plant owners and hence competition in outsourced O&M services is reportedly limited. Thejo has indigenously designed and developed various products and patented a few of them and now intends to set up a new R&D facility for product development. CRISIL believes a strong focus on product development and innovation will help the company brace up for competition from large established players. A diversified client base, product mix and marquee clients such as JSW Steel, Jindal Steel and Power, SAIL, Singareni Collieries should help Thejo minimise the risk of slowdown in any particular market/industry.
Pedigree
Promoted in 1986 by K.J. Joseph and Thomas John who have vast experience in the industry, Thejo initially provided only maintenance services for conveyor belts. It then started manufacturing rubber products and other items required for conveyor belts and material handling systems. Currently, Thejo designs, manufactures and supplies products for bulk material handling, mineral processing and corrosion protection to mining, power, steel, cement, ports and fertiliser industries. It also provides operation and maintenance services. It has floated a subsidiary in Australia, Thejo Australia Pty Ltd, which intends to offer conveyor belt-related services and rubber lining activities, and sell bulk material handling and corrosion protection products in Western Australia. In Saudi Arabia, it has formed a JV with Hatcon Industrial Services W.L.L., (a Bahrain-based firm supplying products and providing services for oil and gas, petrochemicals, mining and marine sectors).
Financials
Thejo’s gross income has grown at 26% CAGR over FY08-12 to Rs 115 cr driven by increase in realisations in the product business and strong growth in the services segment. The company has been able to maintain its EBITDA margins at above 10% despite sharp increase in raw material prices as it could pass on the increase to its customers. The product business grew at 17% CAGR over FY08-12 (primarily driven by increase in input prices) and the services business grew at 39% CAGR over the same period. The export business grew faster at 42% CAGR over FY08-12 as compared to 25% CAGR in the domestic business primarily due to increased focus on key overseas markets. Thejo has kept a tight control on its debtors and inventory, and has effectively managed its working capital over the past few years.
The net-debt to equity as on FY12 was 0.8x with an interest coverage of 3.7x. Over the past three years, Thejo has reduced its debt and improved coverage ratio. The company’s net worth was Rs 25.75 cr as on FY12. Thejo has been paying dividend for the past six years, last dividend being 40% (Rs 4 per share) in FY12.
Prospects
The company is expected to benefit from end-market trends such as increased preference for outsourcing material handling operations, growth in end-user industries, and increased preference for conveyors to transfer material besides replacement demand. Thejo’s entry into overseas markets like Australia and Ghana has opened up new opportunities. The de-bottlenecking of its existing manufacturing facility – through installation of new equipment – is expected to boost the capacity utilisation.
Valuation
In August 2012, by way of Pre-IPO placement, shares were allotted to SIDBI Venture Capital at a price of Rs 337.63. Considering the market conditions, the IPO price band (402-430) indeed looks very steep. Nevertheless, the company’s financials seem to fully justify the valuation. Being a SME listing, investors may not see a significant capital appreciation in the short run. However, when the company moves from SME to the main board sooner or later, the scrip may fetch sizeable capital appreciation.
Post-IPO, the company’s equity capital would be only about Rs 1.7 cr against which it has a bottom line of Rs 9 cr. Even after excluding the extraordinary items, the EPS works out to more than Rs 41 on the post-issue capital. Thejo has gradually hiked its dividend from 25% to 40% in last four years. Fiscal 2012 dividend (Rs 4 per share) offers a yield of around 1% on the IPO price.
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How Thejo compares with other Conveyor Belting peers |
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SCRIP |
M-CAP |
P/E |
P/BV |
P/FV |
P/R |
P/NB |
OPM |
YLD |
PRICE |
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(Rs Cr) |
(x) |
(%) |
(Rs) |
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Int’l Conveyors |
104 |
9.8 |
1.5 |
15.4 |
1.0 |
6.7 |
16.6 |
1.6 |
15.40 |
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Somi Conveyor |
13 |
5.7 |
0.3 |
1.1 |
0.3 |
0.5 |
22.4 |
0.0 |
10.71 |
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INDUSTRY COMP |
117 |
9.1 |
1.1 |
6.3 |
0.8 |
2.0 |
18.4 |
1.4 |
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Thejo Engg |
72 |
5.9 |
1.9 |
43.0 |
0.6 |
6.4 |
11.1 |
0.9 |
430.00 |
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69 |
5.5 |
1.8 |
40.2 |
0.6 |
6.1 |
11.1 |
1.0 |
402.00 |
Lead Manager Track
Thejo issue is managed by IDBI Capital Market whose concern for investors is far from convincing. In last six years, the investment banker brought out 17 public issues of which just two are currently trading at a premium. In fact, as many as 10 are quoting at more than 50% discount! Why should Tejo choose such an issue manager? Has it been influenced by the independent director who is an ex-director of IDBI? Perhaps the same independent director, who is also on certain committees of NSE, might have influenced for NSE-SME listing too.
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IDBI CAPITAL-ASSOCIATED IPOS |
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Issuer |
IPO |
FV |
IPO |
Listing Day |
Current |
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Date |
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Price |
Price |
Gain% |
Price |
Gain% |
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Nitin Spinners |
6-Jan-06 |
10 |
21 |
26.20 |
24.8 |
7.19 |
-65.8 |
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Uttam Sugar |
16-Mar-06 |
10 |
340 |
417.35 |
22.8 |
24.65 |
-92.8 |
|
Transwarranty |
23-Jan-07 |
10 |
52 |
47.25 |
-9.1 |
8.14 |
-84.3 |
|
VTX Industries |
8-Feb-07 |
10 |
100 |
68.95 |
-31.1 |
9.65 |
-90.4 |
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Decolight Cera |
24-May-07 |
10 |
54 |
44.50 |
-17.6 |
8.80 |
-83.7 |
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Central Bank |
24-Jul-07 |
10 |
102 |
115.40 |
13.1 |
65.95 |
-35.3 |
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Coral Hub |
21-Jul-08 |
1 |
10 |
8.63 |
-13.7 |
2.11 |
-78.9 |
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Rishabhdev Tech |
4-Jun-09 |
10 |
33 |
27.20 |
-17.6 |
2.86 |
-91.3 |
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Astec Life |
29-Oct-09 |
10 |
82 |
83.90 |
2.3 |
29.80 |
-63.7 |
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JSW Energy |
7-Dec-09 |
10 |
100 |
100.75 |
0.8 |
46.15 |
-53.9 |
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Arss Infra |
8-Feb-10 |
10 |
450 |
736.30 |
63.6 |
36.05 |
-92.0 |
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SJVN |
29-Apr-10 |
10 |
26 |
25.05 |
-3.7 |
19.15 |
-26.3 |
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Gujarat Pipavav |
23-Aug-10 |
10 |
46 |
54.05 |
17.5 |
49.95 |
8.6 |
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MOIL |
26-Nov-10 |
10 |
375 |
466.50 |
24.4 |
241.35 |
-35.6 |
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Aanjaneya Life |
9-May-11 |
10 |
234 |
311.25 |
33.0 |
601.80 |
157.2 |
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SRS |
23-Aug-11 |
10 |
58 |
33.65 |
-42.0 |
40.15 |
-30.8 |
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National Build |
22-Mar-12 |
10 |
106 |
97.05 |
-8.4 |
92.45 |
-12.8 |
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( Stock prices adjusted to split & bonus) |
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Concerns
- Promoters new to the investing public
- Conveyor belt stocks have poor discounting in the market
- Though more than Rs 12 cr is proposed to be spent on expansion of facilities, no external agency has appraised the projects
- Company’s short term debts amount to nearly 80% of its net worth
- Land for the expansion has been taken on lease from private individuals for a limited period which could pose problems at the time of renewal
- Less than 10 days before the IPO, shares have been allotted to an associate company of IDBI offering a discount of Rs 64 over the IPO price
- Cost of holding of main promoters K J Joseph and Thomas John works out to only Rs 9.28 and Rs 24.83 respectively
- Contingent liabilities on tax matters amount to Rs 3.3 cr which, if provided will bring down the book value by more than Rs 19 per share
- The company operates in a cyclical industry – its production declined 21.5% in FY10 due to economic slowdown
- Prospects largely depend on steel, power, cement, mining and mineral processing industries which are under cloud post ‘coalgate’
- Fiscal 2012 net operating cash flow was the lowest in four years
- Thejo’s Australian dealer has been acquired by a competitor thereby increasing the risk of loss of business in Australia.