Unstable financials, technocrat-promoter taking backseat, desperate ‘high-sea trading’, etc. make Chemtech Industrial Valves unsafe for investment! 

OFFER AT A GLANCE
Issuer Name	Chemtech Industrial Valves Ltd
Offer Amount	Rs 7.43 cr
Offer Quantity	49.52 lakh shares of Rs 10 each
Offer on Total Equity	43.2%
Post-issue Promo stake	56.8%
Post-IPO Capital	Rs 11.47 cr
Offer Price	Rs 15
Application Quantity	8,000 & Multiples of 8,000
Offer Opens	January 15, 2014
Offer Closes	January 17, 2014
Listing	SME Platform of BSE
Rating	Nil
Lead Manager	Choice Capital Advisors
Market Maker	Choice Equity Broking
Registrar	Bigshare Services

 

The IPO

The Mumbai-based Chemtech Industrial Valves Ltd (CIVL) proposes to offer public 49.52 lakh equity shares of Rs 10 each at a fixed price of Rs 15 a piece aggregating to Rs 7.43 cr. Of the public offer, 2.8 lakh shares are reserved for the market maker.

The shares are proposed to be listed on the SME Platform of Bombay Stock Exchange (BSE). Minimum subscription for the retail applicant is 8000 shares or Rs 1.2 lakh. The entire issue has been under-written by the lead manager, Choice Capital advisors, who are handling a public issue for the first time.

 

Issue Object

The IPO proceed is proposed to be utilized for acquiring second hand plant & machinery  for the factory at Wada (Rs 3.32 cr) , interior decoration of corporate office at Thane (Rs 1.09 cr) and incremental working capital (Rs 2.93 cr). Nevertheless, the funding plan has not been appraised by any external agency.

 

Issue Grading

The IPO being made under `Chapter XB of the SEBI (ICDR) Regulations’, there is no requirement of IPO grading.

 

Promoter

CIVL was founded in the year 1997 by Pradeep Badkur (54), a commerce graduate, and Ignatious Inasu (55), a diploma holder in mechanical engineering. The promoters claim to have a collective experience of over 40 years in the valve industry. Until recently, the technocrat promoter had a controlling stake of more than 38% as compared to Badkur family’s stake of 53%. Strangely, their equation has now been altered and the Badkurs control more than three-fourths of the promoter stake and the technocrat promoter has been relegated to ‘Promoter Group’ with less than one-fourth control.

As regards the track record of the promoters, the Badkurs seem to have more than a dozen companies in their fold, most of them sounding like real estate developers. However, none of them has a credible record to speak about.

 

Chemtech’s Track Record

CIVL fabricates carbon/stainless steel industrial valves of various sizes ranging from 15mm up to 4000mm. The company reportedly concentrates on ball, butterfly, globe, gate and check valves catering predominantly to the steel industry. CIVL boasts of competing even with multinationals like KSB. The company commenced operations at Asangaon in 1997 with two galas which were increased to five galas in 2007.The operations were moved to Wada (Thane Dist.) in 2012.

As regards financial performance, CIVL’s fortunes have been fluctuating over the years.  The company logged sales of Rs 5.36 cr in fiscal 2009 on which it netted a profit of less than Rs 3 lakh. Next year saw sales surging to Rs 8.81 cr and net profit flared to Rs 49 lakh. In fiscal 2011, sales were maintained around Rs 9 cr but bottom line turned red (Rs 14 lakh loss).

In fiscal 2012, sales shot up to Rs 15 cr and profit rose to Rs 72 lakh. Surprisingly, in the next fiscal, sale of manufactured goods dropped significantly to Rs 11 cr but, profit increased to Rs 87 lakh with the help of trading turnover. Of late, the valve manufacturer seems to be more interested in commodity trading! In the eight month-period ended November 2013, whereas manufactured-sales amounted to only Rs 8.16 cr, traded goods, mainly of steel wires, accounted for nearly Rs 16 cr. Despite an increased turnover (from Rs 21 cr to Rs 24 cr), the company’s bottom line plummeted to Rs 7 lakh.   

 

Prospects

CIVL currently has an equity base Rs 6.52 cr which is proposed to be increased to Rs 11.47 cr through the IPO. The company has never paid any dividend, nor has it adequately earned to service the enlarged equity. The proposed expansion being in a nascent stage, one cannot expect significant rise in profit from the manufacturing activity in the immediate future. Perhaps realizing its limited prospects from manufacturing, the company has resorted to commodity trading that too on the high seas! According to the promoter-director, the company procures commodities like steel wires from far-east countries and sells in the middle-east. If overseas trading is more attractive than manufacturing, why should the company raise public money for expanding its valves manufacturing? The company’s past and the promoters’ track do not exude much optimism for the future of CIVL.

 

Valuation

Perhaps, for a 17 year-old company, a premium of Rs 5 may look cheap. Nevertheless, the company’s past pricing advises caution. In 2006, CIVL issued shares at a price of Rs 40 and in 2011 shares were issued at an exorbitant price of Rs 200!   In fact, CIVL has just followed many of its predecessors on the BSE-SME in collecting hefty premiums and making bumper bonuses before going public. Quite contrary to their credentials, most of the BSE-SME IPOs are currently quoting at a premium while more credible counterparts on the NSE platform are going at a discount.

Even while the performances of BSE-SMEs exude optimism, one cannot completely overlook the facts that CIVL’s promoters are new to investors, the company’s profitability is far from impressive, it has unconvincingly diversified into trading, most of the group companies are making losses and the company has a pathetic record in corporate governance, especially with regard to Accounting Standard, Statutory Compliance, etc.