Long standing track, unique market position, consistent financial performance, impressive margins justify IPO price though current slowdown in passenger vehicle market and issue timing pose some anxiety.
Pricing at a steep P/E of more than 28x may prove costly for IPO investors should Sensex and Nifty fall below 21000 and 7000 respectively.
|
OFFER AT A GLANCE |
|
|
Name |
Precision Camshafts ltd |
|
Public Offer |
Fresh Issue of 129 to 133 lakh shares and Offer for Sale of 91.5 lakh shares |
|
Offer % on Total Equity |
23.28% to 23.62% |
|
Post-IPO Promoter Stake |
63.63% to 63.92% |
|
Offer Price |
Between Rs 180 and Rs 186 (FV Rs 10) |
|
Offer Amount |
Rs 405 cr to Rs 410 cr |
|
Application Quantity |
80 & Multiples of 80 |
|
Bid/Offer Opens |
January 27, 2016 |
|
Bid/Offer Closes |
January 29, 2016 |
|
Listing |
BSE and NSE |
|
IPO Rating |
Nil |
|
Book Running Lead Managers |
SBI Capital, HDFC Bank, IIFL Holdings |
|
Registrars |
Link Intime |
The IPO
The present IPO is a combined issue consisting of an `offer for sale’ of 91.5 lakh equity shares Rs 10 each and fresh issue of Rs 240 cr at a price band of Rs 180-186 a piece aggregating to Rs 405-410 cr. Investors should apply for a minimum of 80 shares and multiples of 80 thereafter. The IPO would constitute 23.3% to 23.6% of the post-issue paid up capital of the company (Rs 94.74 cr to Rs 95.17 cr). The promoters and their associates, who control 81.51% of the present equity, would hold 63.63% to 63.92% post-offer. SBI Capital, HDFC Bank and IIFL Holdings are acting as book running lead managers to the offer.
IPO Object
Of the fresh issue proceeds of Rs 240 cr, the company proposes to spend Rs 200 cr on establishment of a machine shop for ductile iron camshafts at its EOU, which is estimated to cost Rs 230 cr, and the balance net of issue expenses is earmarked for general corporate purposes. The fund requirement and deployment for the establishment of a machine shop for ductile iron camshafts are however have not been appraised by any bank or financial institution or independent agency.
The company currently has two manufacturing facilities – an EOU unit and a domestic unit – both located at Solapur, Maharashtra. The EOU consists of four foundries and two machine shops and products manufactured at the EOU are primarily sold to overseas customers. The domestic unit consists of one foundry and one machine shop which cater to domestic customers. Total annual capacity at the end of fiscal 2015 was 12 million camshafts castings from four foundries at the EOU and 1.38 million camshaft castings from one foundry at the domestic unit; and 1.86 million machined camshafts at the EOU and 0.36 million machined camshafts at the domestic unit.
Leveraging its experience, expertise and longstanding relationship with existing customers, the company seeks to capitalize on the anticipated global demand for camshafts in the passenger vehicle segment particularly for the ductile iron camshafts. Accordingly, it proposes to set up a new machine shop at the EOU in Solapur for manufacturing ductile iron camshafts. This will be the first machine shop to be established by the company for ductile iron camshafts.
The company claims to have secured orders from Ford Motors and Toyota for supply of ductile iron camshafts. However, subject to the orders from customers in future for ductile iron camshafts and subject to the availability of the machines at the new machine shop, the company proposes to optimally utilize the new machine shop or certain machines for machining other camshaft castings including chilled cast iron camshaft castings and assembled camshaft castings. In order to be able to machine chilled cast iron camshaft castings or the assembled camshafts castings, the company may also need to undertake certain changes in the machines at the proposed new machine shop.
Pedigree
The 1992-registered Solapur-based Precision Camshafts Ltd (PCL) is promoted by first generation entrepreneurs Yatin Shah (54) and his spouse Suhasini Shah, who have established strong business relationships with marquee global OEMs over two decades. PCL today is one of the world’s leading manufacturers and suppliers of camshafts, a critical engine component, in the passenger vehicle segment. The company supplies over 150 varieties of camshafts for passenger vehicles, tractors, light commercial vehicles and locomotive engine applications. A majority of its revenue comes from export of camshafts to various OEMs directly and indirectly. PCL has long term relationships with several marquee global OEMs, such as General Motors, Ford Motors, Hyundai, Maruti Suzuki, Tata Motors and Mahindra and Mahindra.
In last 10 years, PCL has supplied over 58 million units of camshafts to various customers across different geographies including the United States of America, Brazil, the United Kingdom, Germany, Austria, Hungary, Russia, South Korea, Spain, Uzbekistan, China and India. Despite a relatively slower period of growth in the automobile industry in the last five years, the company has been able to consistently increase its global market share in passenger vehicle camshafts market from 5%-6% in 2010 to an estimated 8%-9% in 2014.
The company has two state-of-the-art manufacturing facilities at MIDC, Solapur (Maharashtra). Its total annual manufacturing capacity as on September 30, 2015 was 13.38 million camshaft castings and 2.22 million machined camshafts. The global passenger vehicle camshaft volume is estimated to be 100 million for 2014 and is expected to grow at 4% to 5% over medium to long term in line with the growth of the passenger vehicle production which is estimated to grow at a CAGR of 9% to 10% by fiscal 2020. Leveraging its experience, expertise and existing relationship with the customers, PCL seeks to capitalize on this anticipated global demand for camshafts in the passenger vehicle segment. The company also proposes to set up two new machine shops at Solapur specifically for ductile iron camshafts and assembled camshafts, respectively, by fiscal 2017 and fiscal 2018. Further, PCL intends to foray into manufacture and supply of sliding cams and cam modules in accordance with its expansion strategy.
In order to strengthen its operations in Asia, PCL has entered into two Chinese joint ventures Ningbo Shenglong PCL Camshafts Company Limited, for machining of camshafts, and PCL Shenglong (Huzhou) Specialised Casting Company Limited, for setting up a foundry. The machine shop at Ningbo commenced production in April 2013 and the foundry at Huzhou City is currently under construction.
PCL has been continuously investing in technologies, designing capabilities and R&D activities. It uses different technologies in engineering and manufacturing operations including shell sand molding process technology, special (AI203/ ceramic sand care) technology and GBQII process technology which reportedly provides the company cost advantage. The company also claims to have entered into an exclusive agreement with EMAG, a German machining and tooling company, for transfer of certain know-how and technology in order to strengthen its foray into assembled camshafts and expand its operations in the European market.
Financials
PCL has experienced sustained growth in recent years despite only a modest growth in passenger vehicle sales post 2010. The company has been able to increase its consolidated turnover and profit from fiscal 2011 to fiscal 2015 at a CAGR of 18% and 37%, respectively. The company attributes this achievement to regular capacity augmentation in both foundries and machine shops, acquisition of new customers, improvement in share of business with some of our key customers and optimizing direct and related costs of sourcing raw materials and consumables, power and fuel expenses, other fixed costs and cost of debt.
The company has reportedly undertaken a number of measures to improve its working results like procurement of power at a comparatively lesser rate, higher utilization of the plant and machinery during the nonpeak tariff hours and additional incentive to employees for lower defect rate, etc. Due to improvements in product and sales mix, the company has managed to improve sales realization per camshaft from Rs 375 in fiscal 2011 to Rs 489 in first half of fiscal 2016. Moreover, as a result of its diversified geographic presence, PCL has been able to achieve consistent growth, despite the global financial crisis in recent years.
PCL’s operating margin has been steadily increasing during last five years and it is quite impressive at more than 28% in the current fiscal. The company’s bottom line took a dip in fiscal 2014 main due to an unusual hefty stock option of Rs 45 cr. Also, the company pruned the dividend from 10% to 0.5% in fiscal 2015 as capital had increased 20 folds on account of a bumper 19:1 bonus. Perhaps a negative aspect of PCL is the large equity base. Against its top line of Rs 543 cr, the company’s capital is already as high as Rs 82 cr which is proposed to be increased to Rs 95 cr post-IPO.
|
PRECISION CAMSHAFTS CONSOLDATED FINANCIALS |
|||||
|
(Amount in lakh) |
Sep-15 |
Mar-15 |
Mar-14 |
Mar-13 |
Mar-12 |
|
Operating Revenue |
25337 |
53243 |
46736 |
35883 |
30261 |
|
Other Income |
1019 |
1032 |
1255 |
872 |
863 |
|
EBIDTA |
8258 |
15116 |
12042 |
6631 |
5048 |
|
Operating Margin % |
28.6 |
26.5 |
20.3 |
12.3 |
11.7 |
|
Interest |
553 |
1123 |
1263 |
1056 |
1051 |
|
Depreciation |
2164 |
4122 |
2778 |
1894 |
1205 |
|
Tax |
2131 |
3634 |
2143 |
1289 |
758 |
|
Net Profit |
3410 |
6236 |
1313 |
2392 |
2034 |
|
Net Oper. Cash Flow |
3844 |
11976 |
7804 |
3090 |
4803 |
|
Equity Cap |
8184 |
8184 |
409 |
309 |
309 |
|
Reserves |
18738 |
15187 |
16994 |
10738 |
8380 |
|
Dividend % |
|
0.5 |
10 |
10 |
10 |
|
Div Pay-out % |
|
0.7 |
2.4 |
1.3 |
1.5 |
|
Net Block |
25188 |
24740 |
23419 |
22321 |
15537 |
|
Borrowings |
17989 |
18620 |
18515 |
15567 |
15766 |
Valuation
The IPO price of PCL discounts the company’s last full year’s earnings about 28 times, net worth around 6.5 times and net block of assets around 6 times. Though there is no comparable peer for PCL in the listed domain in terms of its product line, PCL’s price compares reasonably well with other precision auto parts manufacturers. Whereas bearing manufacturers like FAG, SKF, Timken, etc., steering major Sona Koyo and Automotive Axles whose margins are much lower than PCL are currently commanding a P/E much higher than PCL.
While public is asked to shell out Rs 180-186, the average cost of selling shareholders is not even Rs 2 a share. As such once the lock-in lapses, one cannot rule out the existing public shareholder diluting his stake even at below the IPO price. As regards PCL’s past return to private equity investors, CDC which invested Rs 3.5 cr in 1997 is believed to have got a compounded annual return of over 23% and Tata Capital, which entered in 2008 is said to have netted a little over 13% in 2013. Should PCL maintain its current tempo of growth, the IPO investors can expect a better return than the private equities got. On the other hand, should the secondary market drift lower, Sensex and Nifty dropping below 21000 and 7000 respectively, PCL may find it difficult to hold the price at the IPO level.
|
HOW PRECISION CAMSHAFTS COMPARES WITH AUTO ANCILLARIES |
||||||||||||
|
CO_NAME |
M-CAP |
EQ |
Sales |
P/E |
P/BV |
P/NB |
OPM |
YLD |
FV |
PRICE |
||
|
|
(Rs Cr) |
(x) |
(%) |
(Rs) |
||||||||
|
Bharat Forge |
18,052 |
46.57 |
4,714 |
23.4 |
5.2 |
7.5 |
29.5 |
1.0 |
2 |
775 |
||
|
Mahindra Cie |
6,774 |
323.25 |
1,613 |
124.6 |
2.9 |
11.4 |
7.8 |
0.0 |
10 |
210 |
||
|
FAG Bearings |
6,307 |
16.62 |
1,724 |
34.8 |
5.7 |
16.2 |
16.0 |
0.2 |
10 |
3,795 |
||
|
SKF India |
6,129 |
52.73 |
2,447 |
32.5 |
4.3 |
17.4 |
10.0 |
0.9 |
10 |
1,162 |
||
|
Timken India |
3,034 |
67.99 |
1,016 |
38.8 |
6.9 |
19.6 |
13.6 |
0.7 |
10 |
446 |
||
|
Precision Cams |
1,762 |
94.74 |
532 |
28.3 |
6.5 |
6.2 |
26.5 |
– |
10 |
186 |
||
|
|
1,713 |
95.17 |
532 |
27.5 |
6.3 |
6.0 |
26.5 |
– |
10 |
180 |
||
|
Nrb Bearings |
1,228 |
19.38 |
651 |
24.5 |
4.5 |
5.2 |
16.7 |
1.2 |
2 |
127 |
||
|
Ramkrishna Forg |
1,152 |
27.47 |
944 |
13.3 |
2.8 |
1.3 |
19.0 |
0.5 |
10 |
419 |
||
|
Swaraj Engines |
1,126 |
12.42 |
516 |
23.6 |
5.3 |
11.0 |
13.6 |
1.7 |
10 |
907 |
||
|
ZF Steering Gear |
1,095 |
9.07 |
354 |
26.9 |
4.4 |
11.5 |
19.5 |
0.8 |
10 |
1,207 |
||
|
Sona Koyo Steer |
1,046 |
19.87 |
1,081 |
50.1 |
4.0 |
2.2 |
11.0 |
1.2 |
1 |
53 |
||
|
Automotive Axles |
944 |
15.11 |
981 |
36.0 |
3.1 |
5.0 |
8.2 |
0.3 |
10 |
625 |
||
|
Amtek Auto |
840 |
45.84 |
4,358 |
– |
0.2 |
0.1 |
21.9 |
0.0 |
2 |
37 |
||
|
Munjal Showa |
716 |
8.00 |
1,554 |
10.0 |
1.7 |
3.4 |
8.0 |
2.2 |
2 |
179 |
||
|
L.G.Balakrishnan |
711 |
15.70 |
1,068 |
13.2 |
2.0 |
2.2 |
11.4 |
1.6 |
10 |
453 |
||
|
MM Forgings |
560 |
12.07 |
507 |
11.0 |
2.4 |
2.1 |
21.8 |
1.3 |
10 |
464 |
||
|
Hi-Tech Gears |
506 |
18.77 |
449 |
22.9 |
2.8 |
2.9 |
12.6 |
0.9 |
10 |
270 |
||
|
Shivam Autotech |
482 |
20.00 |
436 |
20.9 |
2.7 |
1.6 |
17.7 |
2.5 |
2 |
48 |
||
|
Nelcast |
461 |
17.40 |
581 |
15.7 |
1.6 |
1.8 |
9.7 |
1.3 |
2 |
53 |
||
|
Alicon Castalloy |
338 |
6.13 |
603 |
16.2 |
2.5 |
2.1 |
11.0 |
1.1 |
5 |
276 |
||
|
Rane Engine |
336 |
6.72 |
422 |
8.7 |
2.9 |
1.9 |
5.9 |
0.5 |
10 |
500 |
||
|
Rane (Madras) |
315 |
10.51 |
841 |
26.9 |
2.2 |
1.1 |
9.0 |
1.5 |
10 |
300 |
||
|
Menon Bearings |
261 |
4.67 |
107 |
19.8 |
6.1 |
7.4 |
22.6 |
1.4 |
1 |
56 |
||
|
Hinduja Found |
232 |
72.65 |
587 |
– |
-0.6 |
0.5 |
– |
0.0 |
10 |
32 |
||
|
Metalyst Forging |
202 |
36.75 |
2,515 |
– |
0.2 |
0.1 |
16.5 |
1.8 |
10 |
55 |
||
Lead Manager’s Track
PCL’s IPO is handled by three investment bankers who have a mixed track record. Even though the last two IPOs handled by SBI Capital Markets are currently quoting at a premium, the overall performance of the IPOs managed by the investment banker since 2010 is far from convincing. Of the 21 public issues handled by SBI Cap during this period, as much as 15 are currently languishing below their offer prices. Whereas Repco Home Finance, offered in March 2013 has fetched a return of more than 260%, A2Z Infra Engineering, Tecpro Systems, Jaypee Infra, Goenka Diamond and Arss Infrastructure – all offered in 2010 have inflicted losses in excess of 90%!
|
PERFORMANCE OF SBI CAP ASSOCIATED IPOs SINCE 2010 |
||||
|
ISSUER NAME |
IPO |
IPO |
CURNT |
GAIN |
|
|
DATE |
PRICE |
PRICE |
% |
|
Prabhat Dairy |
28-Aug-15 |
115 |
118.10 |
2.7 |
|
Navkar Corp |
24-Aug-15 |
155 |
196.10 |
26.5 |
|
Monte Carlo Fashions |
3-Dec-14 |
645 |
451.50 |
-30.0 |
|
Repco Home Finance |
13-Mar-13 |
172 |
620.00 |
260.5 |
|
PTC India Financial |
16-Mar-11 |
28 |
34.00 |
21.4 |
|
Tata Steel |
19-Jan-11 |
610 |
247.10 |
-59.5 |
|
Punjab & Sind Bank |
13-Dec-10 |
120 |
35.25 |
-70.6 |
|
A2Z Infra Engineering |
8-Dec-10 |
400 |
23.05 |
-94.2 |
|
Shipping Corporation |
30-Nov-10 |
140 |
77.10 |
-44.9 |
|
Power Grid Corp |
9-Nov-10 |
90 |
133.20 |
48.0 |
|
Tecpro Systems |
23-Sep-10 |
355 |
4.30 |
-98.8 |
|
Electrosteel Steel |
21-Sep-10 |
11 |
3.46 |
-68.5 |
|
Microsec Financial |
17-Sep-10 |
118 |
86.50 |
-26.7 |
|
Engineers India |
27-Jul-10 |
290 |
212.45 |
-26.7 |
|
Jaypee Infra |
29-Apr-10 |
102 |
10.31 |
-89.9 |
|
SJVN |
29-Apr-10 |
26 |
28.65 |
10.2 |
|
Goenka Diamond |
23-Mar-10 |
135 |
1.88 |
-98.6 |
|
IL&FS Transportation |
11-Mar-10 |
258 |
72.05 |
-72.1 |
|
DQ Entertainment |
8-Mar-10 |
80 |
28.35 |
-64.6 |
|
United Bank Of India |
23-Feb-10 |
66 |
18.80 |
-71.5 |
|
Arss Infrastructure |
8-Feb-10 |
450 |
37.00 |
-91.8 |
In the case of HDFC Bank, Snowman Logistics, which went public in August 2014, has given a gain of 34% while Muthoot Finance, offered in April 2011, is currently quoting below the offer price.
|
HDFC BANK ASSOCIATED IPOs SINCE 2010 |
||||
|
ISSUER NAME |
IPO |
IPO |
CURNT |
GAIN |
|
|
DATE |
PRICE |
PRICE |
% |
|
Snowman Logistics |
26-Aug-14 |
47 |
63.15 |
34.4 |
|
Muthoot Finance |
18-Apr-11 |
175 |
174.95 |
0.0 |
As regards IIFL Holdings, whereas Power Mech Projects – the last IPO handled by the investment banker in August 2015 – has failed to click, the previous three IPOs have brought decent gains.
|
IIFL HOLDINGS ASSOCIATED IPOs SINCE 2010 |
||||
|
ISSUER NAME |
IPO |
IPO |
CURNT |
GAIN |
|
|
DATE |
PRICE |
PRICE |
% |
|
Power Mech Projects |
7-Aug-15 |
640 |
614.00 |
-4.1 |
|
Manpasand Beverages |
24-Jun-15 |
320 |
456.25 |
42.6 |
|
Talwalkars Better |
21-Apr-10 |
128 |
222.40 |
73.8 |
|
Infinite Computer |
11-Jan-10 |
165 |
216.50 |
31.2 |