Vascon Engineers: Whats on?

Vascon Engineers is entering the capital market from 27 Jan 2010 to 29 Jan 2010, with a public issue of 108 lakh equity shares of Rs. 10 each, in the price band of Rs. 165 to Rs. 185 per share.

The business model of the company is quite mixed and confusing, with major chunk of its topline coming from contracting or EPC business, but the company is relying more on its land bank, for its valuations.

The performance of the company is on a declining trend and FY09 and H1 of FY10 has disturbing and declining trend of profitability. For FY09, the total income of the company was at Rs. 530 crores with PAT at Rs. 21.05 crores, resulting in an EPS of Rs. 2.80. For H1 of FY10, the total income of the company was at Rs. 319 crores with PAT at Rs. 18.53 crores, which results in an annualized EPS of Rs. 4.70. Even in this, the major contribution, to the extent of about Rs. 260 crores, has come from EPC while realty has contributed just Rs. 50 crores.

Even present paid up equity of the company is quite high at Rs. 79.20 crores, which will rise to Rs. 90.35 crores, post IPO. This would result in a market capitalization of Rs. 1,670 crores at the upper band of Rs. 185 per share, with enterprise value of Rs. 1,800 crores.

The company can neither be treated as a contracting or EPC company nor realty company. Also, it falls in mid category segment of both the sectors, where PE multiple of such stocks are anywhere between 8 to 10 times. The Company is issuing shares at a PE of over 30 times, based on FY 10 earnings, which is very expensive, even at the lower band of Rs. 165. Even the present net worth of the company at Rs. 450 crores does not justify such valuations.

There are many players available in this space, in the secondary market, which are ruling at 50% valuations, of the primary market valuations asked by the company. So, no point in considering this IPO,even at the lower band of Rs. 165.

Clear advice is to avoid the issue.

Thangamayil Jewellery: Fine Jewellery

Thangamayil Jewellery is entering the capital market 27th Jan 10 to 29th Jan 10, with a public issue of Rs. 28.75 crores, with the price band of Rs. 70 to Rs. 75 per share.

The company is a regional player with presence in Madurai and engaged in jewellery retailing. To broad base its presence, the company is planning to open retail outlets in Tuticorin, Dindigul, Theni,Nagarcoil, Thirunelveli, Kovilpatti and Sivakasi and want to spread to the whole state, instead to a city. For this, fund requirement is estimated at Rs. 48 crores, which has been partly mobilized from pre-IPO placement of Rs. 6.25 crores, at Rs. 75 per share, while Rs. 12.84 crores is coming from internal accruals. Balance of Rs. 28.75 crores is to come via IPO. As the company has a net worth of Rs. 37 crores, as at 30-9-09, it may not be difficult to source a part fund from internal accruals. The company had a total loan of Rs. 51.25 crores as at 30-9-09, which is largely to finance the working capital requirement of the company, as it has been holding net current assets of close to Rs. 80 crores, of which, Rs. 78 crores is as inventory.

The company has also been improving on its financial performance year after year. For FY 09, the total income of the company was at Rs. 247 crores, with PAT at Rs. 7.50 crores, giving an EPS of Rs. 8.30. For 6 months ending 30-9-09, the total income improved to Rs. 209 crores, with PAT at Rs. 7.97 crores, resulting in an annualized EPS of Rs. 17.50.

The company is a tiny player and would continue to remain a small cap company, with an expected market cap of close to Rs. 100 crores. Its present paid up equity of Rs. 9.89 crores is likely to move to Rs. 13.75 crores, post IPO.

We all know that, it is the time to move to branded jewellery with quality assurance provided to the customers. Also, retail jewellery segment has better margin as compared to exports or trading in bullion and diamonds. The company is trying to expand in Tamil Nadu state with minimal capex, which will help the company to post a growth of about 40% every year, over next 3-4 years.

Expecting an EPS of Rs. 15 for FY 10 on conservative basis, share at the upper band of Rs. 75 is being issued at a PE of 5 times, which looks reasonable, while comparing with the other listed peers. Also, expected growth in the coming years can make the stock looks attractive, due to fall in its PE multiples. However, due to small cap status and being a regional player with presence in about 2 states, it may be a limiting factor for the stock.

Still, on an overall basis, stock at upper band of Rs. 75, looks reasonably priced, which is likely to give listing gain as well as gain over next 6-12 months.