Minimum holding period to be 4 years for returns on listing at main exchange

Thejo Engineering Limited is tapping the capital markets with its IPO which opens on Tuesday the 4th September and closes on Thursday the 6th of September. This is an IPO which would list on the SME platform of NSE. This also happens to be the maiden offering on the NSE SME platform known as ‘EMERGE’. The price band is Rs 402-430 and would be for a total value of Rs 1900 lacs.

The issue to list on SME has a slightly different system of allocation than conventional issues. The merchant banker and company have made a pre-IPO allotment of 59,236 shares at a price of Rs 337.63 on the 27th of August 2012. This price is at a discount of 16% at the lower end of the price band of Rs 402 and 21.5% at the higher end of the price band of Rs 430. Why such a steep discount has been given one week before the issue opens is a mystery and would remain unanswered. These shares would come with a lock in of one year. All investors in a SME issue are effectively coming as PE (Private Equity) investors as there would be trading only for an hour on this platform and that also would be through a call auction system as happens on listing day of IPO’s. The option of trading on a regular basis is also available if the company so opts for it.
There is a firm allotment to the market maker of Rs 50 lacs worth of shares which would reduce the net offering to the public to roughly Rs 18.5 crs.

Objects of the issue
The objects of the issue are as follows:-

Business
Thejo is an engineering solutions provider for bulk material handling, mineral processing and corrosion protection to the core sector industries like mining, power, steel, cement, ports, fertilisers etc. Services include belt conveyor maintenance and operations while the product portfolio covers design, manufacture and supply of engineered products for bulk material handling, mineral processing and corrosion protection.

The company is professionally managed and has a pan-India presence. It has service engineers at all the power stations, mining towns and large metal and cement companies. The technical teams at various sites enable the company to offer 24/7 back up and maintenance services to customers on site.

Financials
The revenues of the company have grown from Rs 65.96 crs in year ended March 2010 to Rs 96.20 crs in March 2011 and to Rs 117.86 crs in March 2012. The profit before tax and exceptional items in the same period has increased from Rs 3.51 crs in March 2010 to Rs 5.77 crs in March 2011 and to Rs 10.01 crs in March 2012. There is an exceptional item of sale of land which has fetched the company Rs 2.84 crs at the gross level in the year ended March 2012 which has helped boost profits further. If one were to set off the same the net profit for the three years would be Rs 2.27 crs in FY10, Rs 3.83 crs in FY11 and Rs 6.70 crs in FY12.

The EPS based on March 2012 net profit and equity is Rs 56.57. If one were to dilute the same on post issue basis the EPS would be Rs 39.03 at the lower end of the price band of Rs 402 and Rs 39.74 at the upper end of the price band of Rs 430.

Track Record of Merchant Bankers
The merchant banker has in the last three years handled 6 IPO’s of which 3 were PSU companies. Of the list of companies given the summary states that half were trading at a premium 30 days after the issue listed and half are trading at a discount. If one were to look at this list based on the closing prices as of Friday the 31st of August the status changes with two of the four companies trading at a premium and four companies trading at a discount. All three PSU companies are trading at a discount. The complete list of companies includesAanjaneyaLifecare and Gujarat Pipavav Port which are trading at a premium. The companies trading at a discount include NBCC, SRS, MOIL and SJVN.

Comparisons
No comparisons have been made in the RHP and it appears that companies on the SME need not do so. There are quite a few companies trading at lower multiples than that offered by Thejo. One such company is Innoventive Industries Limited which reported total sales of Rs 786.55 crs for the year ended March 2012, and a net profit of Rs 80.29 crs. The EPS of the company was Rs 13.88 and based on the closing price of Rs 116.80 on the BSE as of 31st August 2012, the PE ratio is a mere 8.41 times. The company was listed in May 2011. Its net margins are a healthy 10.94% and compare very favourably with Thejo’s margin at 5.68%, excluding extraordinary income.

Valuations
The fully diluted EPS at the lower end of the price band is Rs 39.03 and at the upper end of the price band is Rs 39.74. The PE ratio at the lower price band of Rs 402 works out to 10.30 and 10.82 respectively. This is an expensive valuation compared to the size of the company.

Concerns
The EMERGE platform for SME is being launched on the NSE and this is the first company. We have all seen the kind of performance of IPO’s on the broad exchange and find that the one single complaint against promoters and merchant bankers has been the price band fixed being too high. This issue is no exception and is following the same trend. What is even more disturbing is that the concept of SME exchange makes all retail investors VC’s (Venture Capital) or PE (Private Equity) investors.Considering this fact that there is a substantially higher risk involved one expected the company and merchant banker to value their share in the company at a lower amount and price the issue more attractively.

Secondly one third of the issue proceeds would be invested in the Australian Subsidiary. This investment is a long term investment and will not bear fruit in the short term.

The exit route for investors in this issue would be when the company shifts to the main board. It is hoped as per the vision of the merchant bankers and the promoters that they would be able to do so in the next 2-3 years. This looks almost impossible because the new guidelines state that to list on the main board a company needs net profits of Rs 15 crs in three of the preceding five years. The condition also states that if this condition is not fulfilled the QIB portion would be increased to 75%. These conditions would make a listing that much more difficult in the time frame envisaged. The company has earned a net profit of Rs 9.02 crs in the year ended March 2012 and if one excludes the one time exceptional income the same is Rs 6.70 crs. To expect the net profit to improve to Rs 15 crs, a rise of 223% in the current year ending March 2013 when the issue proceeds would be available only after half the current year is over is certainly a tall order. Secondly the expansion which is to be done with the money raised would be available for commercial purposes partly in the beginning of the fourth quarter and partly in the first quarter of 2013-14. This means that if the rule of 3 years profit of Rs 15 crs is needed, Thejo would have to wait for another 4 years minimum before this can happen.

Conclusion
The company has grown well over the years and has created a launching pad for itself. The infusion of large capital through the IPO will certainly help in achieving better growth in time to come. The business opportunities exist as mining activity and core industries like mining, steel, cement, power generation, ports and fertilisers would continue to grow in time to come. There is competition and the company needs to grow considering competition and the fact that this is a service driven business. The asking price and the effective waiting period for the investors in realising gains being anything from 4 years upward would unnerve many investors.
There are two options for investors here if you have the risk appetite to wait for a minimum period of 4 years which could extend to another year or two apply, otherwise look at the share post listing because there would be many investors who would lose patience in the long period of 48 months plus.

SEBI Disclaimer: – I do not intend to subscribe to the above issue