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Commercial Engineers & Body Builders Company Limited (CEBBCO) is tapping the capital markets with an IPO which has opened on Thursday the 30th of September and closes on Tuesday the 5th of October. The issue comprises of a fresh issue of Rs 153 crs and an offer for sale of 15.28 lakh shares. The issue price band is Rs 125-127 and would garner Rs 172.41 crs at the top end of the price band. The company has allotted 24.43 lakh shares at the top end of the price band to anchor Investors.

Business
Cebbco produces vehicle and locomotive bodies for diverse applications for road and railways transportation. They are one of the leading designers and manufacturers in India of vehicle bodies for the commercial vehicles industry with an extensive portfolio of product offerings. They also conduct refurbishment of railway wagons as well as manufacturing of components for railway wagons, coaches and locomotives. The company has two divisions namely Commercial Vehicles division and Railways division. 

CEBBCO is engaged in the business of manufacturing vehicle bodies for the commercial vehicles industry for Original Equipment Manufacturers (“OEMs”) engaged in the production of Fully Built Vehicles (“FBVs”).The company believes that they have forged long-standing relationships with OEMs such as Tata Motors Limited and the Ministry of Defence as well as with corporate groups deploying significant private fleets of vehicles such as Reliance Petroleum Limited, Reliance Industries Limited and Som Datt Builders Private Limited. Our supplies to Tata Motors Limited are both for their Indian and export markets. We have also received orders for manufacturing different vehicle bodies for the commercial vehicles industry from OEMs such as VE Commercial Vehicles Limited (a joint venture between the Volvo group of companies and Eicher Motors Limited), Ashok Leyland Limited, Asia Motor Works Limited, Man Force Trucks Private Limited and Hino Motors Sales India Private Limited (belonging to the Toyota group of companies), all of which also manufacture FBVs.

Railways Division
In late 2008, CEBBCO expanded its business into the railways division. In the railways division, the principal customer is the Indian Railways (acting for the Government of India) which conducts procurement at various levels within its organization, including production units, zonal authorities and workshops. Recently, it has added to its list of customers, Bharat Heavy Electricals Limited (a public-sector undertaking that supplies locomotive shells to the Indian Railways), Sanrok Enterprises (a partnership firm that makes supplies to the Indian Railways) and Bouvier Resources Limited, a foreign company with which they have entered into an agreement for supplies for railway wagons. Orders placed on us for supplies to the Indian Railways are from various of its production units, zonal authorities and workshops, including Diesel Locomotive Works (“DLW”), Integral Coach Factory (“ICF”), Western Railway, Eastern Railway, Wagon Repair Shop, Kota (a workshop of the West Central Railway), the Northern Railway Carriage & Wagon Workshop at Jagadhari, Haryana, West Central Railway (Jabalpur) and North Western Railway (Jaipur). Work under the orders placed on us by these production units, zonal authorities and workshops of the Indian Railways includes the refurbishment of wagons, supplies and fitting of Side-Walls, End-Walls, floor plates, flap doors, door plates, door cut-outs, partition frames and crib angles for wagons, dust bins for coaches and stainless steel fittings for wagons, and the manufacture of long hood structures for locomotives. Apart from orders from the Indian Railways, recently we have received an order from Bharat Heavy Electricals Limited, a public-sector undertaking that supplies locomotive shells to the Indian Railways, to deliver 5 sets of locomotive shells at Jhansi. We have also received an order from Sanrok Enterprises, (a partnership firm that makes supplies to the Indian Railways, for components for BOXNR Wagons. We have also entered into an agreement for supply of panels and components for railway wagons with Bouvier Resources Limited, a company with its representative office in Russia. Placing of orders under this agreement is subject to approval of prototype, as per drawings of Bouvier Resources Limited. 

Objects of the Issue 

1. Capital expenditure for the railway project    Rs 80.30 crs
2. Prepayment of identified loan facilities     Rs 59.05 crs
3. General corporate purposes           XX
4. Total

Financials 
CEBBCO reported net sales of Rs 112.05 crs for the year ended March 2009 and Rs 182.86 crs for the year ended March 2010. The total income was Rs 126.15 crs for March 2009 and Rs 196.87 crs for March 2010. The profit after tax was Rs 1.41 crs for March 2009 and Rs 20.30 crs for March 2010.  

The order book of the company as of 15th July is Rs 623.8 crs which comprises of Commercial vehicles of Rs 525.6 crs and railway refurbishment of Rs 98.2 crs. The orders are to be completed by the end of the financial year ending in March 2011.  

Based on the year ending March 2010 numbers and a pre-IPO equity capital of Rs 42.9 crs or 4.29 cr shares, the EPS is Rs 4.73. The PE multiple based on these numbers is 26.4 times to 26.84 times.

Comparison 
There are no comparable listed players on the bourses. New railway business of wagon building will be comparable with two major wagon builders in Texmaco and Titagarh. The current refurbishment business is not comparable. Auto Corporation of Goa in the commercial vehicles body segment is probably the only comparison in this segment. Texmaco quotes at 22.8 times its March 2010 numbers while Titagarh is at roughly 14 times March 2010 numbers. As regards Auto Corporation it quotes at roughly 19 times first quarter 2010-11 annualised numbers. In the financial year ended March 2010, the company had made a loss; hence there is a negative EPS.  

I believe one has to look at the opportunity and consider the fact that the capacity of CEBBCO at its 5 factories is roughly 45,000 commercial bodies and considering the demand and growth in the infrastructure space in the country, the opportunity that the company has. The current year 2010-11 would be the launching pad for the company and things are likely to be different post this year-end 

Conclusion  
The company is poised to show rapid growth in the current year and thereafter. Tata Capital Growth Fund has acquired 14% of CEBBCO’s equity at Rs 116.56 in July 2010. CEBBCO’s promoters enjoy a 70 year old association with Tata Motors. Railway wagons are refurbished at railway’s workshops and don’t require any facilities in terms of space. On a valuation matrix the shares are being offered in a price band of Rs 125-127 which when compared to the March 2010 numbers on a fully diluted post IPO equity of between Rs 56.66 crs and Rs 56.47 crs would translate into an EPS of Rs 3.58 to Rs 3.59. The PE multiple would be in the region of 34.9 times to 35.3 times at these earnings. One must however consider that the railway business has now taken shape after having entered into in 2009. The commercial bodies business is now flush with orders with the Indore and Jamshedpur facilities being recent additions.  

The issue looks expensive apparently and there is a risk of execution attached to it. If the company is able to complete even 80% of its order book one is talking of a top line growth far in excess of 2.8 times its FY 2010 revenue. I recommend investing for the medium to long term for handsome returns.

SEBI Disclaimer: – I intend to subscribe to the above issue