Current business is extremely expensive – AVOID
Sanghvi Forging and Engineering Limited is tapping the capital markets with its IPO to raise Rs 36.9 crs in a price band of Rs 80-85. The issue has opened on Wednesday the 4th of May and is closing on Friday the 6th May for QIB’s and for bidders other than QIB’s on Monday the 9th of May.
| Price Band | Rs 80 – Rs 85 |
| Offer size in shares | 46,12,525 Equity Shares at lower band to 43,41,200 Equity shares at higher |
| Issue Size | Rs 3690.02 lacs |
| QIB’s | 23,06,263 Equity Shares at lower band to 21,76,200 Equity Shares at higher band |
| Non Institutional Investors | 6,91,879 Equity Shares at lower band to 6,51,180 Equity Shares at higher band |
| Retail Investors | 16,14,384 Equity Shares at lower band to 15,19,420 Equity Shares at higher band |
| Book Running Lead Manager | Arihant Capital Marketys Limited |
| Syndicate Member | Prabhudas Liladhar Private Limited |
| Khandwala Securities Limited | |
| Issue Opening Date | Wednesday 4th May |
| Issue closing date for QIB’s | Friday 6th May |
| Isssue closing date for other than QIB’s | Monday 9th May |
| IPO Grade | CARE grade 3/5 indicating average fundamentals |
| Paid -up Capital Pre IPO | 83,51,072 Equity Shares |
| Paid -up Capital Post IPO | 1,29,63,597 Equity Shares at lower band to 1,26,92,272equity shares at higher band |
| Market Cap post listing | 103.71 crs at lower band to Rs 107.88 crs at higher band |
| Bid Lot | 70Equity Shares |
| Bidding Amount for Retail | 2,310 shares at Rs 85 or Rs 1,96,350 per application |
Business
The company is in the business of manufacturing and exporting of forging products for the non-automotive sector. Sanghvi Forging has an installed capacity of 3,600 metric tons per annum for manufacturing of forged flanges and precision machined components (with single piece forging upto 4 MT) in the area of open and closed die forgings. Sanghvi manufactures these products from carbon steel, alloy steel and stainless steel conforming to international standards. The existing plant is located at GIDC Industrial Estate Waghodia at Vadodra in Gujarat.
The company began production of forgings with a capacity of 300 mtpa in 1992 and has increased the same 12 times to 3,600 as on date. The new project would see a fresh capacity of 15,000 mtpa open die forging unit (with single piece forging upto 40 MT) being added. This capability would llow the company to manufacture products like stepped shafts, bars and hollows, blocks, flanged shafts, gear blanks, shells disks etc which are generally imported. The users of these products would be the wind energy, oil and gas, steel plants, power plants, pressure vessels, petrochemical and sugar industry and of course nuclear plants.
Sanghvi Forging has obtained approvals and certification from from a number of international agencies, domestic and international clients. A large number of clients would be common from the existing lot and for the new project.
Objects of the Issue
The objects of the issue are as follows: –
| Setting up of new project | Rs 10514 lacs |
| Margin money requirement for working capital | Rs 825 lacs |
| Pre-operative expenses including Issue expenses | Rs 700 lacs |
| Total project cost | Rs 12039 lacs |
| Portion to be financed from, gross proceeds of the issue | Rs 4250 lacs |
Financials
The total income in the year ended March 2009 and March 2010 have been more or less constant at Rs 29.53 crs and Rs 29.11 crs respectively. In the current year in the first nine months ended December 2010, the sales have improved to Rs 29.51 crs and if one were to annualise the same we would be talking of about Rs 39 crs and a profit of Rs 4.12 crs.
| Rupees in Lacs | year 2009 | year 2010 | 9 months |
| Dec-10 | |||
| Sales of manufactured products | 2583.30 | 2549.93 | 2275.84 |
| Other Income | 96.88 | 103.12 | 94.74 |
| Total Income | 2952.83 | 2910.55 | 2951.46 |
| Total Expenses | 2412.35 | 2305.47 | 2326.04 |
| Interest Expenses | 134.49 | 124.01 | 114.30 |
| Profit Before Tax | 350.75 | 416.06 | 462.77 |
| Net Profit After Tax | 232.38 | 274.09 | 309.05 |
| NET MARGINS | 7.87 | 9.42 | 10.47 |
The net margins have improved from 7.87% to 9.42% and further to 10.47%. This substantial improvement in margin seems sustainable and should improve further once the new project takes shape as the competition in that segment locally is hardly there.
Comparison
The company has chosen to compare itself with Bharat Forge, M M Forgings and Ramkrishna Forging. What is important to note about Sanghvi Forging is the fact that based on current business size, turnover and profitability the price and valuation being asked for is unwarranted. The new project with a capacity of four times the existing one is being financed by bank loans from State Bank of India and Bank of Baroda to the extent of Rs 72 crs. This project is huge considering the present setup of the company and is ambitious. This project is expected to begin commercial production in May 2012 and benefits of the same would be available only in the next financial year 2012-2013. This means that the investor has to take risk of project execution and if everything goes well there would be returns for the investor when financial results for the year 2012-13 are available.
Valuations
Based on March 2010 numbers, the EPS on a pre-IPO capital of 83.51 lakh shares is Rs 3.28 while on a nine month annualised number the EPS for the current year would be Rs 4.93. If the same is to be considered on a fully diluted basis the EPS would be Rs 3.18. The price earnings multiple based on this EPS would be 25.16 at the lower end and 26.73 at the upper end of the price band.
Conclusion
Based on the present business and financials the company’s expansion plans are huge and if everything goes to plan they would have achieved something which is great. There is a good 12 month waiting period assuming everything is as per plan and schedule. The project is ambitious and the asking price offers no scope for gains unless the project is successfully executed 12 months later. I believe investors can skip this issue as it offers no scope for appreciation in the short to medium term.
SEBI Disclaimer: – I do not intend to subscribe to the above issue.
