Engineering India Ltd: Well Engineered

Engineers India Limited (EIL) is making a further public offer (FPO), through an offer for sale, for 3.37 crore equity shares of Rs.5 each, in the price band of Rs. 270 to Rs. 290 per share. The issue, offering a 5% discount to investors applying under the retail category, represents 10% of the paid-up equity share capital of the company. The issue opens on 27th July 2010 and closes on 29th July for QIBs and on 30th July for the retail and HNI category.

Through the FPO, Government of India (GoI), which presently holds 90.4% in the company, plans to raise between Rs. 894 to 960 crore, depending on the price discovered. Post the offer, public shareholding in the company will increase to 19.6% from the present 9.6%.

EIL, a leading engineering consultancy company, is primarily focussed on oil and gas and petrochemicals industries and serves clients both in India and globally. For FY10, the company reported consolidated revenues of Rs. 2,014 crore and net profit of Rs. 444 crore, resulting in an EPS of Rs. 13.19 on the present equity of Rs. 168 crore (33.69 crore equity shares of Rs. 5 each). On standalone basis, these numbers were marginally lower; revenues being Rs. 1,993 crore, net profit Rs. 436 crore and EPS at Rs. 12.93.

As on 31st March 2010, the networth of the company was Rs. 1,152 crore and it had no debts on its books. Cash and bank balance, as on that date, was Rs. 1,795 crore, which amounts to cash of Rs. 53 per share. Its order book as on 31st March 2010, was Rs. 6,237 crore, which represents over 3 times of FY10 sales.

For the quarter ended 30th June 2010, on a standalone basis, it reported revenues of Rs. 606 crore and net profit of Rs. 115 crore, with quarterly EPS of Rs. 3.40. It is expected to report FY11 EPS of close to Rs.15.

At the upper end of the price band of Rs. 290, the issue is priced at a PE multiple of 19.33 times, based on FY11 estimated earnings of Rs. 15 per share. After applying the 5% discount for retail investors, the FPO price at the upper end of 290 is discounted by 18.37 times, its forward earnings.

If the cash and bank balance on the company’s books is deducted from the share price, the effective price per share for the company’s business, clocking annual topline of Rs. 2,000 crore, is Rs. 223, which implies a discount of less than 15 times forward earnings. The same is explained as under:

		(in INR)
Price Band	270	290
Less: 5% Retail Discount	13.5	14.5
Net Price (for retail)	256.5	275.5
Less: Cash in co's books (as on 31-03-10)	53	53
Effective Price	203.5	222.5
FY11 expected EPS	15	15
Effective PE multiple	13.57	14.83

On comparing the FPO price vis-à-vis the share’s current market price of Rs. 318 (Monday’s closing price), the pricing looks attractive, inspite of the fact that secondary market price in case of FPO of PSUs are not relevant. Still, on pure fundamentals, share deserves a price of Rs. 300 per share on listing.

After having witnessed poor show for the recent public offerings of PSUs, and keeping an eye on the targeted Rs. 40,000 primary market pipeline for this fiscal, the Government finally seems to have done a fair job with respect to EIL’s pricing. The issue is recommended even at the upper end of the price band, as effective cost will be at around 276 per share, thus leaving room for listing gains on table for the prospective investors and good potential of appreciation over the next 6 to 12 months period.

SKS Microfinance: Macro gains

SKS Microfinance is entering the capital market through a public issue of 1.68 crore equity shares of Rs.10 each, comprising of an offer for sale of 93.46 lakh shares by 4 promoter entities and balance 74.45 lakh shares, through a fresh issue. The issue, priced between Rs. 850 to Rs. 985 per share, offers Rs. 50 discount to investors applying under the retail category. The issue represents 21.6% of the fully diluted post issue paid-up capital of the company, opens on 28th July 2010 and closes on 30th July for QIBs and on 2nd August for the retail and HNI category.

SKS Microfinance, an NBFC by legal constitution, is the India’s largest micro finance institution, in terms of value of loans outstanding, borrowers and number of branches. It provides collateral-free loans, having an average ticket size of about Rs. 10,000, to poor women in rural India, for conducting any income generating activities. The loans are repayable in 50 equal weekly instalments and carry interest rates between 26.7% to 31.4%. As of 31st March 2010, the company had a wide-spread network of 2,029 branches in 19 Indian states, catering to 67.8 lakh women borrowers.

The company has reported robust growth between FY07-FY10. Its total income grew at 176% CAGR to Rs. 959 crore in FY10, from Rs. 46 crore in FY07. Likewise, its net profit increased at 330% CAGR, during this period, to Rs. 175 crore in FY10 from Rs. 2 crore in FY07. During FY10, it disbursed Rs. 14,387 crore in loan amount and earned net profit margin of 18.2% and EPS of Rs. 32.98.

The company has a very good asset quality, as reflected by low NPAs. As on 31st March 2010, gross NPAs were Rs. 9.6 crore (0.33% of gross loans outstanding) and net NPAs stood at Rs. 4.8 crore (0.16% of net loans outstanding). For FY10, it earned a return on assets (RoA), a key parameter for NBFCs, of 4.9%. Its networth, as of 31st March 2010, was Rs. 950 crore and book value per share amounted to Rs. 147. Total debt amounted to Rs. 2,695 crore, of which 55.8% can be recalled by the company’s lenders anytime, leading to a debt-equity ratio of 2.8:1.

In the past, the company has faced instances of cash embezzlements and misrepresentation by employees. Also, with a headcount of over 21,000 employees, its employee attrition stood high at 25.7% for FY10.

The primary object of the issue is to fund the company’s future growth plans. At the upper end of the price band of Rs. 985, the company is expected to see fund infusion of about Rs. 733 crore while the offer for sale will amount to Rs. 920 crore. Recent trend in IPO pricing has been to keep a very close price band, generally in the range of 6-8%, representing confidence on the part of promoters. But in this case, the 16% range between the lower and upper end of the price band is quite large, considering the high issue price, in absolute terms.

At the lower and upper end of the price band, the company is issuing shares at PE multiple of 25.8 and 29.9 times respectively. On a PBV basis, it is issuing shares at 5.8 and 6.7 times respectively, calculated on pre-issue equity. On a post dilution basis, PBV works out to 3.9 and 4.2 times at the lower and upper ends, respectively.

There are no exact comparable companies listed in India. However, it can be benchmarked with asset financing NBFCs such as Shriram Transport Finance and M&M Financial Services. Shriram Transport, clocking annual revenues of Rs. 4,500 crore had net profit margin of 19.7% in FY10. It is presently ruling at PE multiple of 17.2 times and PBV of 3.9 times. On the other hand, M&M Financial Services, having earned PAT margin of 22.8% in FY10 on revenues of over Rs. 1,500 crore, is ruling at PE and PBV of 14.7 and 3.0 times respectively. These companies, bigger in size, with higher net profit margins, established presence and earning comparable RoAs are available at much attractive valuations in the secondary market. Obviously, an investor cannot afford to overlook these comparable peers and will not get carried away by the innovative concept of micro financing.

We have seen that a lot of hype has been created for this issue, firstly due to Narayana Murthy and George Soros backed Quantum fund being PE investors in the company and secondly due to the nature of business of discharging social obligations or rendering services to the poor. But both are coming at a heavy price, leading to good profit for the promoters. It would have been much better, if lending would have been made at around 15% to 18%, as there is not much NPAs. Infact, lending rate of around 28% looks quite exorbitant and seen as fleecing poor and illiterate borrowers. Also, it is felt that borrowers have seen adopting the teeming and lading approach, as fresh loan is availed to repay old ones.

On pure economics of business and fundamentals, issue is looking expensive, but still may evoke good response, which may result in listing gains. It would have been better to see book getting discovered at Rs. 850 per share (which looks unlikely looking to the response having received from anchor investors) thus having an effective cost to retail investors at Rs. 800 per share. But element of premium looks to have built in its pricing due to first mover advantage and good hype.

Those who are looking to go for it are advised to do so at the upper band, as otherwise they may get left out.

Midfield Industries: No Middle Path

Midfield Industries is entering the capital market on 19th July 2010 with a fresh issue of 45 lakh equity shares of Rs.10 each, in a price band of Rs. 126 to Rs. 133 per share. The company plans to raise between Rs. 57 to 60 crore, depending on the price discovered, via the 100% book-built public issue, which closes on 21st July 2010.

The company, an organised player in the industrial packaging segment, manufactures steel strapping, seals, angle boards, collated nails and also offers end-to-end packing solutions, to companies in the steel, aluminium, glass, jute and paper industry. It has an installed capacity of 12,000 MW per annum of steel strapping, which accounts for about 65% of its total sales.

The company has a customer base of over 500 clients, however it is highly dependent on a few of them, as top 10 clients accounted for 48% of its sales in FY10, 43% in FY09 and 49% in FY08.

The company plans to expand its existing manufacturing facilities at Hyderabad, Roorkee and Mumbai, as well as, establish new facilities at Hyderabad and Sharjah, UAE, with an aggregate investment of Rs. 38 crore, to be funded mainly through the IPO proceeds. The UAE facility will primarily cater to the export markets. However, the company’s exports have been declining over the years; having dropped from Rs. 8 crore or 12% of sales in FY08, to just Rs. 3 crore or only 3.3% of sales in FY10.

Other object of the issue include meeting working capital needs (Rs. 5.4 crore) and general corporate purposes. The benefits due to capacity augmentation will be reflected in the company’s financials only from FY12 onwards.

The company has entered into a 49:51 joint venture with Spanish company Centaur Equipos de Flejado, for establishing steel strapping manufacturing facility in India (same line of business as its existing one) to supply to Centaur in Europe. More than 3 years have elapsed, but this JV has not yet commenced any operations. Also, as per the JV agreement, the company will be selling Centaur’s products in India. One fails to understand the rationale for this JV, since the company could have independently catered to the European markets.

The company’s business has been growing at the steady pace. For FY10, it reported sales of Rs. 90 crores and PAT of Rs. 8 crores, earning EPS of Rs. 9.8. For FY09, it had reported sales of Rs. 83 crore with net profit of Rs. 6 crore and EPS of Rs. 7.1. However, it has defaulted in payment of 6 monthly instalments aggregating to Rs. 1.1 crore, since December 2009.

As on 31st March 2010, its networth was Rs. 33.7 crore and it had debt of Rs. 42.3 crore, resulting in a debt-equity ratio of 1.3:1. Working Capital (or net current assets), as on that date, was Rs. 62 crores, while fixed assets was only Rs. 13.2 crore. This shows that the business is very working capital intensive.

The company has failed to manage its working capital effectively - it is compelled to offer longer credit period to its customers, but does not enjoy as favourable credit terms from its suppliers. Nearly 8 months of its FY10 sales were locked in outstanding debtors of Rs. 58.4 crore, as on 31st March 2010, while in FY08, the outstanding debtors were less than 5 months sales. Going forward, for FY11, it estimates to offer 6.5 months credit period to debtors, whereas, it is expected to get only 3.5 months credit from its creditors.

At the lower end of the price band, the company is issuing shares at a PE multiple of 12.9 times, based on FY10 earnings, and at 13.6 times on the upper end of the price band. There is no justification for such a high PE multiple when the industry PE is less than 10 times and most of the smaller players, like Midfield, are ruling in the single digit PE multiples.

The company faces severe competition both from multi-nationals like ITW Signode, operating on a large scale in India and globally, as well as the fragmented unorganised players in India. It also enjoys very low pricing power. Also, the price-conscious industrial packaging industry has been witnessing increasing client preference for plastic strapping over metal.

We give a thumbs down to the issue, as a company clocking annual turnover of Rs. 90 crores in steel strapping and related packaging materials, does not deserve an enterprise value (market cap + debt – cash) of over Rs. 200 crores, arrived at the lower end of the price band of 126.

Grey Market Premium Dt. 20-7-2010

Grey Market Premium Dt. 20-7-2010

Company Name	Offer Price (Rs.)	Premium (Rs.)	Kostak (Rs. 1 Lac Application)
Aster Silicates Ltd.	118	6.5 to 7	--
Hindustan Media Ventures	166	3.50 to 4	--
Midfield Industries Ltd.	126 to 133	15.50 to 16	1400
SKS Micro Finance	--	47 to 48	1250

Note: Dont subscribe for issue by just seeing premium Price as it may change anytime before listing. Subscribe only considering Fundamental of the companies

Grey Market Premium Dt. 7-7-2010

Latest Grey Market Premium Dt. 7-7-2010

Company Name	Offer Price (Rs.)	Premium (Rs.)	Kostak (Rs. 1 Lac Application)
Aster Silicates Ltd.	118	7 to 7.50	--
Technofab Engineering	240	28 to 29	--
Hindustan Media Ventures	162 to 175	Discount	--

Note: Dont subscribe for issue by just seeing premium Price as it may change anytime before listing. Subscribe only considering Fundamental of the companies

Hindustan Media Ventures: Good News at lower end

Hindustan Media Ventures is entering the capital market on 5th July 2010 to raise Rs. 270 crore, with a fresh issue of equity shares of Rs.10 each, in a price band of Rs. 162 to Rs. 175 per share. The company will issue 154 to 167 lakh fresh equity shares, depending on the price discovered, via the 100% book-built public issue, which closes on 7th July 2010.

Another issue from the Bhartiya stable, after Jubilant Foodworks, Hindustan Media Ventures publishes the 70 year old Hindi daily Hindustan, India’s 3rd largest newspaper in terms of readership (99 lakh readers). It also publishes Hindi magazines Nandan (children’s magazine) and Kadambini (general interest magazine).

‘Hindustan’, with 16% readership growth during Jul06 to Dec09, is currently the No. 1 newspaper in Bihar (45 lakh readers) and Jharkhand (14 lakh readers), No. 2 Hindi newspaper in Delhi NCR and No.3 newspaper in Uttar Pradesh (26 lakh readers), India’s largest market for Hindi newspaper. Going forward, company plans to improve its readership base and circulation in Uttar Pradesh and Uttarakhand.

A 98.85% subsidiary of HT Media, it has 17 printing facilities and an editorial team of over 800 journalists. A new printing facility at Gorakhpur, UP, will become operational by next month, which will give the company a pan-UP presence and help it offer a complete UP pack to advertisers, thus augmenting its position in that key growth market.

The objects of the IPO include:

1. Establishing 8 new publishing units worth Rs 66 crore, to be fully operational by FY12-end
2. Upgrading exiting plant and machinery for Rs 55 crore, during FY11
3. Immediate pre-payment of unsecured loans, borrowed for discharging purchase consideration for Hindi business acquired from HT Media in December 2009, worth Rs 135 crore. The company will, thus become debt-free post-issue.

Coming onto the financial performance, FY10 operations have to be viewed for 8 months period from Apr-Nov09, when the business was under HT Media, together with 4 months period from Dec09-Mar10, post transfer of Hindi business to the company. For FY10, it reported sales of Rs. 439 crores, of which advertising revenue accounted for Rs. 297 crore (or 68% of sales). It earned net profit of Rs. 45 crores, amounting to 10.3% net margins. Advertising revenue, the lifeline of media companies, grew at a compounded annual growth rate (CAGR) of 33% between FY07-10.

At the lower and upper end of the price band, issue is discounting an EPS of close to Rs. 8 for FY 10, by about 20 and 22 times respectively. With focus on UP market going forward, a pre-dominantly higher advertisement revenue generating market, the company is likely to increase its advertising revenue to paper sales ratio of 68:32 presently, to 80:20 in next couple of years. This will result in improvement in the bottomline. The company also enjoys operational and management synergies with parent HT Media.

Peers such as Jagran Prakashan and D B Corp, two Hindi print media companies, though larger in size, but with debts on their books, are presently ruling at PE multiples of 22-24 times, based on historic earnings.

The company, with estimated market capitalisation of Rs. 1,270 crore on the upper end of price band (debt free status due to loan pre-payment), looks good in terms of strong foothold in its key markets, future growth prospects and group pedigree. The issue looks good at the lower band of Rs. 162, considering its listed peers, while at the upper price band of Rs. 175, it restricts near term and listing gains.