Credentials match ‘NSE grade’ though appreciation could be a distant dream.
Since the advent of SME IPOs in 2012, BSE has entertained as many as 52 issuers while NSE could rope in just 5 SMEs in two long years. This perhaps speaks volume about the difference in quality of SMEs admitted by BSE vis-à-vis NSE. Ironically, while some of the SMEs listed on BSE are commanding fabulous premium despite having poor fundamentals, the more credible SMEs listed on NSE are currently languishing below their offer prices.
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OFFER AT A GLANCE |
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Issuer Name |
Sanco Industries Ltd |
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Offer Amount |
Rs 4.32 cr |
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Offer Quantity |
24 lakh shares of Rs 10 each |
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Offer on Total Equity |
28.0% |
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Post-issue Promo stake |
54.8% |
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Post-IPO Capital |
Rs 8.57 cr |
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Offer Price |
Rs 18 |
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Application Quantity |
8,000 & Multiples of 8,000 |
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Offer Opens |
February 24, 2014 |
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Offer Closes |
February 26, 2014 |
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Listing |
SME Platform of NSE |
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Rating |
Nil |
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Lead Manager |
Keynote Corporate |
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Market Maker |
Keynote Capitals |
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Registrar |
Beetal Financial |
The Issue
The latest entrant to NSE-SME platform is the Delhi-based Sanco Industries Ltd (SIL). SIL is making a fresh Issue of 24 lakh equity shares of Rs.10 each at a fixed price of Rs 18 a piece aggregating to Rs 4.32 cr. Whereas the lead manager, Keynote Corporate Services has underwritten 15% (Rs 64.80 lakh) of the issue amount, a little known Delhi-based broking firm, CPR Capital Services, has committed 85% (Rs 367.20 lakh). The quantum of IPO amounts to 28% of the post-issue equity (Rs 8.57 cr) of the company.
Issue Objective
The main object of SIL’s IPO is to finance the company’s Rs 3.77 cr expansion-cum-modernization of its existing PVC Pipes & Wires manufacturing facility in Himachal Pradesh. However, the funding plan has not been appraised by any external agency. The company has not sought any borrowings for the expansion and the entire capex is to be funded through equity.
Background
The Delhi-registered SIL was incorporated in 1989 in order to take over the business of a partnership firm named “Sanco Plastic Industries” in which Sanjay Gupta and Jai Pal Singh Shishodia were partners. The partnership firm was manufacturing PVC compounds since 1986.
Having started with PVC Compound manufacturing, SIL diversified in 1991 into PVC Conduit Pipes & Profiles with a capacity of about 3000 MT. In 1995, the company ventured into the manufacture of PVC Insulated Wires & Cables with an annual capacity of 6000 KM which was later increased to18000 KM in the year 2007. Subsequently, the company diversified into electrical and sanitary products introducing PVC/PPR Plumbing Pipes with a capacity of 3240 MT per annum.
The pipes manufactured by the company find applications in electrical installation, railways, agriculture, potable water supply schemes, sewage and drainage systems, construction, telecom, bore well for underground water suction, etc.
Currently, Sanjay Gupta’s family is considered as the sole promoter company with 76% stake and the balance is held by his relatives and friends. Post-IPO, the core promoters propose to hold about 55% of the enlarged equity.
Financial Track
In last five years SIL has reported consistent growth in its bottom line though the company’s top line has been fluctuating. Whereas net profit has steadily increased from Rs 1.5 cr in fiscal 2009 to Rs 3 cr in fiscal 2013, the company’s manufacturing sales dropped from Rs 39.90 cr in 2009 to Rs 23.39 cr in 2011. In fiscal 2013 manufacturing sales stood at Rs 38.34 cr and the company boosted its top line to over Rs 58 cr with a record trading turnover of Rs 20.20 cr. In fact, during the first half of current fiscal, trading turnover was more (Rs 12.51 cr) than manufactured products sales (Rs 10.15 cr).
For a manufacturing company of SIL’s size, its gross block is too low. At the end of September 2013, SIL’s gross block amounted to only Rs 3.53 cr as compared to its net worth of Rs 17.41 cr. In recent years, barring 2012, the company has had positive cash flows from operations.
Prospects
Utilizing the IPO proceeds, SIL proposes to expand its PVC insulated wires and cables capacity from 18000 KMPA to 36000 KMPA and PVC conduit pipes/profiles from 4000 MTPA to 6000 MTPA. The expanded capacity is scheduled to start commercial production in July 2014 though the project is at a very preliminary stage today.
The company’s existing bottom line (Rs 3 cr) yields an EPS of about Rs 3.50 even on the enlarged equity of Rs 8.57 cr which discounts the offer price about 5 times. The current earnings do support a modest dividend pay-out but, will the management consider the maiden dividend after the IPO remains to be seen.
Valuation
Currently, PVC wires contribute more to SIL’s turnover as compared to PVC pipes. On the trading floor both PVC cables & pipes have poor discounting. Well known power cable scrips like Finolex and Torrent are traded only about 7 times their earnings despite attractive dividend yield. In the PVC pipe segment too many are quoted in single digits. In fact most of the players in PVC wires & pipes are valued in the secondary market much below their net worth today. As compared to the current market valuation of PVC cable and pipe companies, SIL’s pricing looks reasonable.
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HOW SANCO COMPARES WITH PEERS |
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PVC CABLES |
M-CAP |
P/E |
P/BV |
P/R |
OPM |
YIELD |
PRICE |
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(Rs Cr) |
(x) |
(%) |
(Rs) |
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Delton Cables |
11 |
– |
0.5 |
0.1 |
2.0 |
3.9 |
38.95 |
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Finolex Cables |
1,178 |
6.7 |
1.3 |
0.5 |
9.9 |
1.6 |
77.00 |
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Torrent Cables |
48 |
7.9 |
0.3 |
0.2 |
4.9 |
6.3 |
56.00 |
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Universal Cables |
58 |
– |
0.3 |
0.1 |
-1.9 |
0.0 |
25.00 |
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SANCO INDUSTRIES |
15 |
3.7 |
0.6 |
0.3 |
12.0 |
0.0 |
18.00 |
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PVC PIPES |
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Astral Poly Technik |
2,188 |
21.7 |
9.1 |
2.2 |
14.7 |
0.1 |
389.45 |
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Finolex Industries |
2,270 |
8.4 |
3.1 |
1.0 |
18.1 |
3.0 |
182.90 |
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Kisan Mouldings |
35 |
11.9 |
0.3 |
0.1 |
9.8 |
2.9 |
17.00 |
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Texmo Pipes |
15 |
7.4 |
0.1 |
0.1 |
9.1 |
0.0 |
6.50 |
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Dutron Polymers |
14 |
6.8 |
1.0 |
0.2 |
4.6 |
6.1 |
23.15 |
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Sturdy Industries |
11 |
2.7 |
0.2 |
0.0 |
2.5 |
0.0 |
1.70 |
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Tijaria Polypipes |
8 |
2.6 |
0.1 |
0.1 |
13.7 |
0.0 |
3.59 |
Promoters’ Cost
Of the existing equity (61.71 lakh shares), the core promoters hold 46.99 lakh shares (76%) whose average cost of acquisition is less than Rs.6 per share. The balance 14.71 lakh shares are held by relatives and associates whose cost per share amounts to less than Rs.15. Hence, once the lock-in lapses (after a year) the market may witness some selling pressure from the existing shareholders.
Investment Bankers’ Track
SIL is the second NSE-SME IPO managed by the Mumbai-based Keynote Corporate. Keynote’s first NSE-SME IPO, Veto Switchgears & Cables which entered the market in December 2012 at a price of Rs 50, is currently traded around Rs 64. After adjusting to a 1:10 bonus, Veto has fetched nearly 40% return to IPO investor.
Concerns
- Promoters new to investing public
- Poor returns offered by SMEs listed on the NSE platform
- Premium issue sans dividend track
- Orders for Plant and Machinery required for expansion cum diversification project not yet placed
- Group company having sizable net worth has been engaged in similar line of business
- Average cost of promoters’ holding is less than Rs 6 as against the IPO price of Rs 18
- Inconsistent top line depending on trading of late
While vying for public funds for expansion, has parked significant amount in illiquid equity investments