Financials lend credence to pricing though appreciation could be a distant dream!
In last two years the SME platform has seen five IPOs from the electric wire/cable segment and none them has joined the dividend list yet. Will the sixth one fare better?
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OFFER AT A GLANCE |
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Issuer Name |
Ultracab (India) Ltd |
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Offer Amount |
Rs 7.97 cr |
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Offer Quantity |
22.14 lakh shares of Rs 10 each |
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Offer on Total Equity |
27.6% |
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Post-issue Promo stake |
63.2% |
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Post-IPO Capital |
Rs 8.01 cr |
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Offer Price |
Rs 36 |
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Application Quantity |
3,000 & Multiples of 3,000 |
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Offer Opens |
September 15, 2014 |
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Offer Closes |
September 23, 2014 |
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Listing |
SME Platform of BSE |
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Rating |
Nil |
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Lead Manager |
Pantomath Capital Advisors |
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Market Maker |
Choice Equity Broking |
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Registrar |
Bigshare Services |
The Issue
The Rajkot-based Ultracab (India) Ltd is making a fresh Issue of 22.14 lakh equity shares of Rs.10 each at a fixed price of Rs 36 a piece aggregating to Rs 7.97 cr. Of the IPO quantity, 1.14 lakh shares are reserved for the market maker, Choice Equity Broking. The entire issue has been underwritten by the lead manager of the offer, Pantomath Capital Advisors. Whereas the quantum of IPO amounts to 28% of the post-issue equity (Rs 8.01 cr), the promoters (20.08%) and promoter group (43.15%) would collectively hold 63.23% of the company’s equity.
Issue Objective
More than 82% (Rs 6.57 cr) of Ultracab’s IPO proceed is earmarked for working capital and around 13% (Rs 1 cr) is kept for `general corporate purpose’. However, the funding plan has not been appraised by any external agency.
Background
Ultracab was registered in 2007 by a first generation promoter, Nitesh Vaghasiya (40), who is a qualified electrical engineer. Having started with a capital of Rs 25 lakh in December 2007, Ultracab gradually increased its capital base to Rs 2.9 cr by July 2014 through premium issues. In August 2014, more than 98% of the premium collected was converted in to bonus shares which took the capital to Rs 5.8 cr. In this pre-IPO equity Nitesh, his spouse and his HUF, classified as promoters, collectively hold 17.83% which works out to 12.91% on the post-issue equity.
Ultracab is engaged in the manufacture of electric wires/cables. The company reportedly has a capacity of 4.8 lakh House Wire Coils, 3000 Km Flat Cables, 2000 Km Industrial Flexible Cables, 2000 Km Power and Control Cables, 3000 Km Instrumentation Cables, 2000 Km Special/Auto/Solar/ Battery Cables, 3600 MT Copper/Aluminium Conductor and 3000 Km Communication Cables. The company boasts of selling its products to countries like UK, UAE, Africa, Singapore and Uganda besides catering to the domestic market.
The company’s manufacturing facility is located at Varaval, near Rajkot. At the end of March 2014, the company’s gross block was valued at Rs 5.58 cr which seems to be very low as compared to its capacities.
Financial Track
In last five years Ultracab has reported consistent growth in its top line. From Rs 10.64 cr in FY 2010, the company’s revenue steadily grew to Rs 31.68 cr in FY 2014. Nevertheless, the company’s profitability was volatile. From an operating margin of 11.1% in FY 2010, the profitability fell to 7.3% in FY 2013 which dramatically improved to 12.6% in FY 2014. The company’s net profit, which moved at a snail’s pace – from Rs 14.66 lakh in 2010 to Rs 21.68 lakh in 2013, leapt to Rs 82.78 lakh in 2014 that is on the eve of the IPO. Also, between 2010 and 2013, the company’s net cash flow from operation was negative. It turned marginally positive in 2014.
Even though the company’s revenue has consistently grown, its capacity utilization has been very low. In House Wire, Instrumentation Cables, Communication Cables and Copper Conductor, the company’s capacity utilization was in single digits. Flat Cables, Industrial Cables, Power & Control Cables had a capacity utilization of less than 50%.
Prospects
According to the company’s management, the capacity utilization was very low due to working capital constraints. With the public issue proceeds, the company hopes to scale up its marketing and geographical reach and boost production. In fiscal 2014, the company posted a pre-tax profit of Rs 1.2 cr after providing Rs 2.5 cr towards finance cost. As such, post-IPO fund deployment, any saving in interest cost should strengthen the company’s bottom line.
Valuation & Perception
Ultracab has priced its share at Rs 36 which discounts the pre-IPO EPS about 25 times. On the enhanced capital, the diluted EPS would push the P/E multiple over 34 times. The company compares itself with power cable heavyweights like Finolex, KEI Industries, Torrent Cables, V-Guard Industries and Cords Cable. Nevertheless, the best comparison would be its peers in the SME segment.
The SME segment has five electric wire players. Though all of them came out with a premium, none of them has joined the dividend list. The best performer in terms of capital appreciation in this segment is the NSE-listed Veto Switchgears (37.5%) followed by BSE-listed B.C. Power (15.6%). As compared to the fabulous returns that some of the BSE-SMEs have offered, the returns from the electric wire players are indeed very poor.
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ULTRACAB SME-PEERS MARKET PERFORMANCE |
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CO NAME |
IPO |
Current |
Gain |
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Date |
Price |
Price |
% |
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B.C. Power |
24-Feb-14 |
18.00 |
20.80 |
15.6 |
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RCI Industries |
30-Dec-13 |
40.00 |
40.00 |
0.0 |
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Sanco Industries |
24-Feb-14 |
18.00 |
18.45 |
2.5 |
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Tentiwal Wire |
11-Dec-13 |
13.00 |
11.50 |
-11.5 |
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Veto Switchgears |
3-Dec-12 |
45.45 |
62.50 |
37.5 |
(Price adjusted to bonus)
Ultracab is aiming a market cap of Rs 29 cr which discounts the company’s revenue less than one time. However, the valuation discounts the company’s current profit nearly 35 times which is on the higher side as compared to more sound scrip like Veto Switchgears. Moreover, the average cost of holding for the promoters works out to only between Rs 7.40 and Rs 11.27. Further, the promoter group, who hold more than 43% at a cost less than a half of the public, may dump the shares once the lock-in expires after one year.
The factors that weigh against Ultracab’s valuation are: First generation promoter is yet to be tested by the investing public; Non-dividend paying company is asking for steep premium; Working capital intensive nature of business; Conflict of interest from group-company having similar business; and extremely poor corporate governance practiced by the company.
It is disturbing that the company has in the past delayed in complying with reporting requirements such as registration of special resolutions, filing of forms for appointment/resignation of directors, filing of annual returns etc., with the ROC. The company has also received money from outside India against issuance of shares for which it did not file the return on FLA (Foreign Liability & Assets) with RBI.
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HOW ULTRACAB PRICING COMPARES WITH SME PEERS |
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ELECTRIC WIRE/ |
M-CAP |
EQUITY |
Promo |
SALES |
OPM |
P/E |
PRICE |
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CABLES |
(Rs Cr) |
Stk% |
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(%) |
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(Rs) |
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B.C. Power |
24.46 |
11.76 |
51.0 |
152.83 |
1.4 |
47.0 |
20.80 |
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RCI Industries |
43.60 |
10.90 |
73.5 |
427.79 |
1.4 |
24.4 |
40.00 |
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Sanco Industries |
15.81 |
8.57 |
54.8 |
66.23 |
9.6 |
11.3 |
18.45 |
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Tentiwal Wire |
6.23 |
5.42 |
60.0 |
44.39 |
8.7 |
7.9 |
11.50 |
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Veto Switchgears |
113.65 |
18.33 |
70.0 |
94.48 |
11.4 |
18.7 |
62.00 |
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Ultracab (India) |
28.84 |
8.01 |
63.2 |
31.68 |
12.6 |
34.7 |
36.00 |
Lead Manager’s Track
The IPO of Ultracab is managed by the Mumbai-based Pantomath who has already been associated with two SME IPOs. Both these IPOs are currently quoting at a premium though their post-IPO actual EPS fell short of the pre-issue level.
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MARKET PERFORMANCE OF PANTOMATH CAPITAL-MANAGED IPOs |
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COMPANY |
IPO |
IPO |
MARKET |
GAIN |
Pre-IPO |
Post-IPO |
P/E |
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DATE |
PRICE |
PRICE |
% |
EPS |
EPS |
(x) |
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SI.VI .SHIPPING |
18-Feb-14 |
25 |
35.70 |
42.8 |
5.43 |
0.13 |
264.6 |
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WOMEN’S NEXT |
28-Mar-14 |
65 |
69.00 |
6.2 |
4.50 |
4.39 |
15.7 |