Capacity utilization holds key!
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OFFER AT A GLANCE |
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Name |
Veto Switchgears and Cables Ltd |
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Offer Amount |
Rs 25 cr |
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Offer Quantity |
50 lakh to 52.08 lakh shares |
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IPO/Free Float on Equity % |
Between 30% and 30.9% |
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Offer Price |
Between Rs 48 and 50 |
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Application Quantity |
3000 & Multiples of 3000 |
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Offer Opens |
December 3, 2012 |
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Bid/Offer Closes |
December 5, 2012 |
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Listing at |
SME Platform of NSE |
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Rated By |
CRISIL |
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Grade Awarded |
4 out of 5 |
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Book Running Lead Manager |
Keynote Corporate |
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Registrars |
Bigshare Services |
The IPO
Fresh issue of equity shares of face value of Rs 10 aggregating to Rs 25 cr at a price band of Rs 48 to 50 per share. As the IPO is made through the SME Platform of NSE, minimum application quantity has been kept at 3000 shares. In other words, retail investors have to shell out about Rs 1.5 lakh per application.
The book-running lead manager (BRLM) Keynote Corporate and its associate Keynote Capital, who acts as a market maker, have underwritten to the tune of Rs 7.5 cr each, while co-BRLM Indian Overseas Bank has committed Rs 5 cr. Ladderup Corporate Advisory and Prabhudas Lilladher have assured Rs 3 cr and Rs 2 cr respectively.
Issue Objective
The objects of the IPO are as follows: Modernization of existing facility at Haridwar (Rs 4.7 cr); Financing of incremental long-term working capital (Rs 15.8 cr); Enhancement of company’s brand through advertising and other brand-building activities (Rs 2 cr); and the remaining for general corporate purposes.
Rating & Rationale
CRISIL has assigned a grade of ‘SME 4/5’ (pronounced “SME four on five”) to the IPO indicating that the fundamentals of the company were superior, compared to other SMEs in India. The relatively high grading is largely influenced by the following points:
- Demand for the company’s products viz. electrical accessories, wires and cables is steadily increasing on account of rise in disposable per capita income, consumers’ preference for branded products and conducive government policies towards improvement of electric supply and services;
- Company’s products sold under the brand names `Veto’ and `Vimal Power’ are well known in north-western India;
- Company has an extensive distribution network of about 2375 dealers in fiscal 2012;
- Firmly entrenched in Rajasthan the company is now expanding its market into Gujarat, Delhi, Madhya Pradesh, West Bengal, Assam, etc. besides planning to export electrical accessories;
- Company is pro-active in augmenting its product portfolio – recently launched CF Lamps and fans, has introduced products at various price points;
- Manufacturing facility in Uttarakhand enjoying tax concessions till 2018;
- Huge unutilized capacity; etc.
On the negative side, the rating has also factored in the intense competition from numerous players in the field, longer working capital cycles and volatility of the price of main raw material viz. copper.
Lineage
Incorporated as a private limited company in 2007 by conversion of a partnership firm, Veto Switchgears and Cables Ltd (VSCL) is part of the Jaipur-based Gurnani group which has interests in wires & cables, electrical accessories, real estate and hotels. VSCL is promoted by Veto Electropowers (India), which is a subsidiary of Gurnani Holding, which in turn is owned by Gurnani brothers Vishnu Kumar, Mohan Das and Narayan Das.
The promoters claim to have a long standing presence in PVC wires and cables which enabled them to expand into the electrical accessories business. The company’s state-of-art facility at Hardwar is reportedly having capacities for 14.08 lakh bundles of wires & cables and 380 lakh electrical accessories.
Business Profile
VSCL is an ISO 9001:2008 certified company. Its product portfolio ranges from industrial cables, stand cables to telephone & co-axial wires, from general switches to modular switches, from ceiling fans to rechargeable fans, compact fluorescent lamps and other electrical accessories. It sells electrical accessories under the `Veto’ brand and cables under the `Vimal Power’ brand. Wires and cables contributed 54% to the company’s sales in fiscal 2012.
Financial Track
The company’s top line grew at a CAGR of 28.7% over FY08-12 to ` 68.60 cr led by the management’s focus on augmenting distribution network, new product launches and brand building. Same period, net profit after tax increased to `7.22 cr from `2.13 cr at a CAGR of 35.7%. The company’s operating margin which was around 10% in FY 08 has steadily improved to 16.1 in FY12. Return on capital employed has increased from less than13% to 23% in this period. What’s more appealing is, the company could post such impressive financials even when its capacity utilization was less than 30%.
Prospects
The company expects entry into new regions and introduction of new products to drive high volume. Nevertheless, expected increase in employee cost, advertising and marketing expenses could put pressure on the margin. Moreover, copper being nearly a half of the company’s material cost, any adverse price movement could pose threat to the company’s profitability. On the fillip side, the issue proceeds should ease the long term working capital pressure and the company would be able to enhance its capacity utilization as it expands its market into new territories.
Valuation
Industry heavy weights like Havell’s and V-Guard command a P/E of more than 20x and P/BV of more than 4x. Compared to these, Veto’s P/E of about 8x on the pre-IPO EPS looks reasonably attractive. On the enlarged equity, the P/E may climb to around 12x which is should ease significantly when the capacity utilization is stepped up after the infusion of additional working capital.
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How Veto compares with peers |
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SCRIP |
M-CAP |
PE |
P/BV |
P/FV |
P/R |
OPM |
P/NB |
YIELD |
PRICE |
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(Rs Cr) |
(x) |
(%) |
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(%) |
(Rs) |
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Havell’s India |
7,201 |
21.3 |
4.1 |
115.4 |
1.8 |
12.7 |
8.0 |
1.1 |
577.10 |
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V-Guard |
1,547 |
22.0 |
6.2 |
51.8 |
1.3 |
10.2 |
12.3 |
0.7 |
518.30 |
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Finolex Cables |
808 |
4.7 |
0.9 |
26.4 |
0.4 |
9.9 |
1.8 |
1.5 |
52.80 |
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KEI Industries |
119 |
3.9 |
0.5 |
8.9 |
0.1 |
9.7 |
0.4 |
1.1 |
17.75 |
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Ram Ratna Wire |
60 |
9.4 |
1.2 |
5.5 |
0.1 |
4.0 |
1.3 |
2.8 |
27.30 |
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Eon Electric |
57 |
– |
0.2 |
3.6 |
0.5 |
– |
1.0 |
0 |
35.80 |
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Veto Switch |
83 |
8.1 |
1.6 |
5.0 |
1.2 |
16.1 |
10.8 |
0 |
50.00 |
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81 |
7.7 |
1.6 |
4.8 |
1.2 |
16.1 |
10.5 |
0 |
48.00 |
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Concerns
- Premium issue sans dividend record
- Promoters new to investing public
- Proposed funding plans not appraised by external agency
- Orders for plant & machinery yet to be placed
- Promoter-group companies share similar business objectives thereby creating conflict of interests for the public company
- Promoter-company shares the same brand names that are used by the public company
- Limited product offerings compared to big players in the industry
- Promoters’ average cost of acquisition of the share is only `5 which just one-tenth of the IPO price.