Prakash Steelage is entering the capital market on 5h August 2010 with a fresh issue of 62.5 lakh equity shares of Rs.10 each, in a price band of Rs.100 to Rs.110 per equity share. The company will raise about Rs. 63-69 crore via the issue, which constitutes 35.71% of post-issue paid-up capital and issue closes on 9th August for QIB bidders and on 10th August for HNIs and retail investors.
The company manufactures seamless and welded stainless steel pipes, tubes and U-tubes at 2 manufacturing facilities located in Silvassa and at Umbergaon in Gujarat, with total installed capacity of 15,600 MTPA. It is undertaking capacity expansion at its Gujarat unit with an investment of Rs.49 crore. The other objects of the issue include meeting working capital requirements and general corporate purpose.
The company has already arranged for Rs. 43 crore via debt and Rs. 5 crore through equity issue (preferential allotment to promoters) for meeting the objects of the issue. Of the total issue, Rs. 15 crore will be used towards capacity expansion, about Rs. 40 crore towards working capital needs and balance for general corporate purposes.
During FY10, the company earned revenue of Rs. 437 crore, of which, Rs. 219 crore was from sale of traded products. It earned net profit of Rs. 18 crore, earning net margin of 4.1% and EPS of Rs. 15.84. As of 31st March 2010, the company’s networth stood at Rs. 51 crore while it had total outstanding debt of Rs. 141 crore, largely working capital loans.
The company’s profitability has been fluctuating due to foreign exchange gains and losses. During FY10, it earned Rs. 2 crore in forex gains, while in FY09, it suffered a loss of Rs. 6.6 crore due to currency fluctuations.
On the lower and upper end of the price band, the company is issuing shares at PE multiples of 6.3 and 6.9 times, respectively. Its larger listed competitor, Ratnamani Metals, having annual sales of Rs. 850 crore, net margins of 9.6% and debt-free status, is presently ruling at a PE multiple of 7.3 times.
Though not much disappointment on the growth and size of the company, but, Prakash Steelage is half the size of Ratnamani Metals in terms of turnover, earns net margins which are less than half of what Ratnamani presently makes, and has largely built its present manufacturing capacity only over the last 2-3 years. These factors must be discounted by atleast 15%, while valuing the company. Also, being a primary market issue, about 10% must be left on the table for prospective investors. Hence, a PE multiple of around 5.5 would have been justified for the issue, as against 6.3 – 6.9 presently. This translates into a fair value of share at Rs. 86. So, even at the lower band of Rs. 100, it is looking expensive.
Hence, investors can give this issue a miss, on the backdrop of expensive valuations.
Thursday, August 5, 2010
Prakash Steelage: Not a STEAL
Monday, August 2, 2010
Grey Market Premium Dt. 2-8-2010
Grey Market Premium Dt. 2-8-2010
| Company Name | Offer Price (Rs.) | Premium (Rs.) | Kostak (Rs. 1 Lac Application) |
| Midfield Industries Ltd. | 133 | 18 to 20 | -- |
| Engineers | 270 to 290 | 9 to 10 | 1800 to 2000 |
| SKS Micro Finance | 850 to 985 | 63 to 65 | 2200 to 2300 |
| Bajaj Corp. Ltd. | 630 to 660 | 85 to 90 | 1800 to 1900 |
| Prakash Steelage | 100 to 110 | 3 to 4 | 1100 to 1200 |
Bajaj Corp: Long Term
Bajaj Corp is entering the capital market on 2nd August 2010 with a fresh issue of 45 lakh equity shares of Rs.5 each, in a price band of Rs.630 to Rs.660 per share. The company will raise Rs. 284 to 297 crore, depending on the price discovered via the public issue, which closes on 4th August for QIB bidders and on 5th August for retail and HNI category. Through the issue, the company is looking to dilute 15.3% equity.
A Shishir Bajaj group company, Bajaj Corp is India’s third largest producer of hair oils. The company’s brand portfolio comprises of Bajaj Almond Drops, Brahmi Amla, Amla Shikakai and Jasmine Hair Oil in the hair oil segment and Bajaj Kala Dant Manjan in the oral care (tooth powder) segment. Bajaj Almond Drops, a premium brand, is the largest selling light hair oil in India, accounting for 50.3% market share by value and about 47% share by volume. However, the company is heavily dependent on this single product, which generates about 92% of annual sales.
The company has an aggregate annual manufacturing capacity of 8.3 crore litres of oil, at 3 company-operated premises (2 in Himachal Pradesh and 1 at Dehradun) and 2 third-party facilities (in Himachal Pradesh and Rajasthan). It has a national distribution reach of 15.6 lakh retail outlets through its 4,600 distributors and 8,900 wholesalers.
The company’s manufacturing facilities are located in tax-free zones, due to which it is exempt from excise duty for a period of 10 years beginning FY09. It also enjoys benefits under section 80I-C of the Income Tax Act, due to which it is exempt from income tax for 5 years beginning FY09 and thereafter will be taxed at concessional rates for next 5 years.
The objects of the issue are:
| Objects of issue | Rs. crore |
| Promote 4 new products during FY11-14 | 220 |
| Acquisitions and other strategic initiatives | 50 |
| General Corporate purposes | Balance |
With a limited product portfolio and heavy dependence on a single brand, the company’s prospects are vulnerable to the success of its 4 products to be launched in the near future. Moreover, the company is yet to identify the products or companies to be acquired, for which Rs. 50 crore has been earmarked from the issue proceeds.
Pg 26 of the RHP states that funds deployed towards general corporate purposes may constitute over 30% of the issue size. However, this contradicts the objects of issue. The company is expected to raise about Rs. 297 crore, at the upper end of the price band at 660. In that case, funds available for general corporate purposes would be Rs. 27 crore, amounting to only 10% of the issue size. Then how can the funds for general corporate purposes be close to Rs. 85-90 crore, in any case? Are the other objects of the issue, specially acquisitions, a mere gimmick for fund raising?
The company does not have much operating history as it was carved out from its parent Bajaj Consumer Care Limited only in 2008. For FY10, it clocked revenue of Rs. 330 crore and earned net profit of Rs. 84 crore, thereby earning an EPS of Rs. 33.6 on equity of Rs. 12.5 crore (2.5 crore shares of Rs. 5 each).
As on 31st March 2010, it had a networth of Rs. 26 crore, down from Rs. 51.2 crore as on 31st March 2009. The book value per share, as on 31st March 2010, was Rs. 10.24. The low book value was due to the 110% interim dividend pay-out in FY10, mainly to benefit the promoters, before the company went public. The company declared interim dividend twice, at 700% and 176% in Dec 2009 and Mar 2010, respectively, entailing a total payout of Rs. 107.6 crore (inclusive of dividend tax). As on date, the company enjoys debt-free status.
Compared to peers, the company enjoys healthy net profit margin due to limited scale and depth of operations. Going forward, as new product launches are undertaken, margins are likely to come under pressure.
At the lower and upper end of the price band, the company is issuing shares at PE multiples of 18.8 and 19.7 times, respectively. This works out to valuation of Rs. 1,850 to Rs. 1,950 crore, mainly for 1 hair oil brand – Bajaj Almond Drops. The issue price factors in the growth of future products to be launched by the company. Listed peers, both Indian and MNCs, much larger in size, are presently ruling at PE multiples of 25 and above on the bourses.
On a relative basis, the valuation seems to be fair. However, taking a fundamental call leads to a neutral view on the issue. The company being an FMCG player, considered a defensive sector, may give safe returns to investors in the longer term, as it continues to grow through new product launches and strategic acquisitions to taps its distribution reach further.