Past merits premium, future looks uncertain.
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OFFER AT A GLANCE |
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Name |
MITCON Consultancy & Engineering |
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Offer Amount |
Rs 25 cr |
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Offer Quantity |
41 lakh equity shares of 10 each |
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IPO on Total Equity % |
33.9% |
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Post-issue Public Holding % |
100% |
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Offer Price |
Rs 61 |
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Application Quantity |
2000 & Multiples of 2000 |
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Offer Opens |
October 15, 2013 |
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Offer Closes |
October 18, 2013 |
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Listing at |
SME Platform of NSE |
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Rated By |
CRISIL |
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Grade |
4 out of 5 |
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Lead Managers |
IDBI Capital / Keynote Corporate |
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Market Maker |
Keynote Capitals |
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Registrars |
Link Intime India |
The IPO
The Pune-based more than three decade-old dividend-paying project consultancy company MITCON Consultancy & Engineering Services Ltd is making a fresh issue of 41 lakh shares of Rs 10 each at a price of Rs 61 a piece aggregating to Rs 25.01 cr. Of this, 2.06 lakh shares are reserved for the market maker, Keynote Capitals. Whereas the issue managers viz. IDBI Capital and Keynote Corporate have underwritten Rs 10 cr (40%) and Rs 8.53 cr (34%) respectively, Prabhudas Lilladher, Ladderup Corporate Advisory and Indian Overseas Bank have committed Rs 2.50 cr (10%), Rs 1.99 cr (8%) and Rs 1.99 cr (8%) respectively. Since there is no identifiable promoter, the entire post-issue capital of Rs 12.10 cr is considered as public float. Though MITCON is the fourth IPO to be listed on the SME Platform of NSE, it is the first `fixed price’ SME on NSE.
Objective
MITCON plans to spend the issue proceeds on the following: Acquisition of property for setting up new offices in Ahmedabad, Bengaluru, Chennai, Hyderabad and New Delhi Rs 16.14 cr; Interior decoration and purchase of furniture for the new offices Rs 2.91 cr; Environment testing laboratory equipment Rs 1.02 cr; Equipment for the new offices Rs 58 lakh; and General corporate purpose Rs 80 lakh. Rs 3.56 cr is earmarked for issue-related expenses.
Rating & Rationale
CRISIL has assigned the grade of ‘SME 4/5’ (pronounced ‘SME four on five’) to the IPO. The rating indicates that the fundamentals of the company are superior compared to other SMEs in India. CRISIL’s rating rationale is based on the following factors:
MITCON is an established player in the technical consultancy market, particularly in Maharashtra. Over the past three decades, the company has developed expertise in certain industries, particularly power generation, which has helped it gain a strong foothold in those industries. Currently, it provides a wide range of services to small power generation projects – project feasibility studies, assistance for getting approvals, detailed appraisal reports, financial syndication, pre-contract engineering services, and post-contract project management services.
MITCON’s clientele includes established names from the government and private sectors. Over the past three decades, the company has successfully reduced its client concentration, with no single client contributing more than 12% to revenues as of FY13 compared to 17.9% in FY11. As of June 30, 2013 the company had 352 clients.
Demand for MITCON’s consulting service is expected to be driven by the company’s diversified exposure to both matured (power generation, energy and BFSI) as well as emerging (bio-technology, food processing and environmental management) industries and its presence across major business hubs of the country (Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad and Mumbai).
Demand for the company’s power-related consulting service (which is the largest sub-segment of the consulting business) is expected to remain stable owing to steady growth in power demand. As per CRISIL Research’s estimate, demand for power is forecast to log 6.2% CAGR over FY12-17 compared to 6.1% CAGR over FY08-12. MITCON, along with other technical consultancy providers, is expected to benefit from increased infrastructure spending by the government over FY13-17. Average infrastructure spending by the government over FY13-17 is aimed at 9-10% of GDP, which is significantly higher than 7.5% achieved during the previous five-year period.
However, a weak economic scenario and muted investment spending activity may impede growth of some of these industries, which will in turn affect the demand for MITCON’s consulting services. Also, the company is much smaller in size compared to some of the other technical consultancies such as Engineers India, Feedback Ventures and Mott MacDonald India. This limits the ability of the company to acquire large ticket clients/projects.
Pedigree
Promoted by leading financial institutions such as ICICI, IDBI and IFCI and state development corporations such as State Industrial & Investment Corporation of Maharashtra (SICOM), Maharashtra Industrial Development Corporation (MIDC), and Maharashtra Small Scale Industries Development Corporation (MSSIDC), MITCON was incorporated in 1982. From offering soft consultancy services such as draft report preparation initially, the company has gradually expanded its service offerings to become a technical consultancy and training services provider.
MITCON is a IS/ISO 9001:2008 certified company headquartered in Pune and has sales offices in Ahmedabad, Aurangabad, Chennai, Delhi, Mumbai and Nagpur. With a small presence outside Maharashtra, the company intends to expand to other Indian cities. The four largest shareholding institutions – ICICI, IFCI, SICOM and SIDBI – have one nominee director each on the board.
Financials
MITCON’s revenue grew at a CAGR of about 18% over FY08-13 to Rs 46.67 cr. The company has been able to maintain EBITDA between FY08 and FY13 despite challenging business conditions. While the margin declined to 27.6% in FY12 from 29.9% in FY08 it improved to 29% in FY13 following the downsizing of the vocational training business – a low-margin segment compared to consultancy. The company recorded an average PAT margin of 18.4% over FY08-13. PAT margin increased to 19.7% in FY13 from 17% in FY08 driven by improvement in EBITDA margin and increase in non-operating income.
Even though the growth over the five-year period looks quite decent, the company’s recent performance looks none too impressive. From Rs 54 cr in FY12, the top line has receded to less than Rs 47 cr in FY13 which is lower than even FY11. The company’s latest net profit (Rs 9.97 cr) too is less than the FY11 level (Rs 10.90 cr).
Moreover, due to difficult business environment, some of MITCON’s clients had to shelve their projects in FY13 and were unable to pay their dues to the company on time. As a result, its debtor-days increased significantly to 130 in FY13 from 89 in FY12. This, coupled with a decrease in creditor-days to 68 from 82 in FY12, stretched MITCON’s working capital days to 113 in FY13 from 54 in FY12.
Prospects
The current performance of listed infra consultancy players like Indiabulls Infra and Basil Infra does not exude much optimism. MITCON’s consulting business too has been under pressure for the past two years. If fresh investment activity fails to pick up in the country, demand for its consulting services particularly power generation, energy and infrastructure related may remain subdued in the near future. Also, MITCON’s decision to downsize its vocational training business will impact its revenue stream in the near term as this segment accounted for 32% of the total revenue in FY13. Nevertheless, this being a low-margin business as compared to consulting, the company is likely to improve its margin in the long run by scaling down the training business.
Against its net worth of Rs 54 cr, the company’s contingent liabilities amounted to over Rs 10 cr which includes disputed service tax Rs 1.46 cr. Further, the company management operates a trust, MITCON Foundation, in Pune on behalf of which the company has issued corporate-guarantee and has incurred expenses. Although the company hopes to recover its dues from the trust within the next three years, any such related party transaction in future may be detrimental to public shareholders.
Valuation
Currently, whereas many of the BSE-SMEs are quoting at a fabulous discounting, the market makers of NSE-SMEs have failed to provide decent returns. For MITCON’s pedigree – three decades old with consistent dividend record – its IPO price (Rs 61) looks reasonable. The company’s current bottom line (Rs 9.97 cr) gives an EPS of Rs 12.47 on the pre-IPO capital which discounts the offer price less than 5 times. On the expanded capital EPS works out to Rs 8.24 which discounts the offer 7.4 times. The company has paid a dividend of 50% in last three years on a smaller capital of Rs 50 lakh which will increase to over Rs 12 cr in the current fiscal. With the current profitability, the company can easily pay a dividend of 30% on the enlarged equity which could give a yield of close to 5%. Nonetheless, give the current market scenario, capital appreciation prospects are bleak.
Lead Manager Track
MITCON’s IPO is managed by IDBI Capital and Keynote Corporate Services. While the quality of SME IPOs brought out by these merchant bankers looks far better than most of the BSE-SME issues, the market performance of the IPOs handled by these investment bankers is frightening. Save National Buildings Construction Corporation and Gujarat Pipavav none of the issues handled by IDBI in last seven years is quoting above the offer price. In fact, as many as seven (out of 21) have inflicted a loss of more than 90%!
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PERFORMANCE OF IDBI-MANAGED IPOs |
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ISSUER |
IPO DATE |
IPO PRICE |
CUR. PRICE |
GAIN % |
|
Opal Luxury |
25-Mar-13 |
130 |
111.00 |
-14.6 |
|
PC Jeweller |
27-Dec-12 |
135 |
94.20 |
-30.2 |
|
CARE |
7-Dec-12 |
750 |
583.00 |
-22.3 |
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Thejo |
4-Sep-12 |
201 |
199.00 |
-1.0 |
|
National Buildings |
22-Mar-12 |
106 |
111.75 |
5.4 |
|
SRS |
23-Aug-11 |
58 |
35.30 |
-39.1 |
|
Dr. Datsons Labs |
9-May-11 |
234 |
73.25 |
-68.7 |
|
MOIL |
26-Nov-10 |
375 |
208.65 |
-44.4 |
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Gujarat Pipavav |
23-Aug-10 |
46 |
46.30 |
0.7 |
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SJVN |
29-Apr-10 |
26 |
19.00 |
-26.9 |
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Arss Infrastructure |
8-Feb-10 |
450 |
21.25 |
-95.3 |
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JSW Energy |
7-Dec-09 |
100 |
44.70 |
-55.3 |
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Astec Lifesciences |
29-Oct-09 |
82 |
22.50 |
-72.6 |
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Rishabhdev Tech |
4-Jun-09 |
33 |
1.09 |
-96.7 |
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Coral Hub |
21-Jul-08 |
100 |
0.71 |
-99.3 |
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Central Bank |
24-Jul-07 |
102 |
52.40 |
-48.6 |
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Decolite Ceramics |
24-May-07 |
54 |
4.19 |
-92.2 |
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VTX Industries |
8-Feb-07 |
100 |
6.05 |
-94.0 |
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Transwarranty |
23-Jan-07 |
52 |
5.21 |
-90.0 |
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Uttam Sugar |
16-Mar-06 |
340 |
12.60 |
-96.3 |
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Nitin Spinners |
6-Jan-06 |
21 |
10.26 |
-51.1 |
(Stock prices adjusted to split & bonus)
In the case of Keynote, except Thangamayil Jewellery and Veto Switchgears all other IPOs handled by them in last seven years are currently trading at a discount, five of them inflicting more than 90% loss. The only solace is that the last NSE-SME IPO handled by Keynote (Veto Switch) has fetched modest gain.
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PERFORMANCE OF KEYNOTE-MANAGED IPOs |
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ISSUER |
IPO DATE |
IPO PRICE |
CUR PRICE |
GAIN % |
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Veto Switchgears |
3-Dec-12 |
50 |
57.00 |
14.0 |
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Servalakshmi Paper |
27-Apr-11 |
29 |
2.70 |
-90.7 |
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Gravita India |
1-Nov-10 |
125 |
26.95 |
-78.4 |
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Bedmutha Industries |
28-Sep-10 |
102 |
7.85 |
-92.3 |
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Prakash Steelage |
5-Aug-10 |
110 |
88.95 |
-19.1 |
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Emmbi Industries |
1-Feb-10 |
45 |
9.79 |
-78.2 |
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Thangamayil Jewell |
27-Jan-10 |
75 |
180.55 |
140.7 |
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Globus Spirits |
31-Aug-09 |
100 |
86.05 |
-14.0 |
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Edserv Softsystems |
5-Feb-09 |
60 |
3.55 |
-94.1 |
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20 Microns |
8-Sep-08 |
55 |
30.40 |
-44.7 |
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Lotus Eye Care |
12-Jun-08 |
38 |
5.76 |
-84.8 |
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Sita Shree Food |
11-Mar-08 |
30 |
3.85 |
-87.2 |
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Porwal Auto Comp |
17-Dec-07 |
75 |
3.68 |
-95.1 |
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Nissan Copper |
4-Dec-06 |
4 |
1.70 |
-56.4 |
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Gangotri Textiles |
18-May-06 |
41 |
2.10 |
-94.9 |
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Gitanjali Gems |
16-Feb-06 |
195 |
52.50 |
-73.1 |