Apply for gains in the medium to long term
Innoventive Industries Limited is tapping the capital markets with its IPO which has opened on Tuesday the 26th of April 2011 and closed for QIB bidders on Thursday the 28th of April. It would close on Friday the 29th of April for all other bidders. The QIB portion on the last day was subscribed 85% and the overall subscription to the issue is 87%.
| Price Band | Rs 117 – Rs 120 |
| Offer size in shares | 1,87,67,521 Equity Shares at lower band to 1,82,98,333 Equity shares at higher |
| Issue Size | Rs 219.58 crs |
| QIB’s | 93,83,761 Equity Shares at lower band to 91,49,167 Equity Shares at higher band |
| Non Institutional Investors | 28,15,128 Equity Shares at lower band to 27,44,750 Equity Shares at higher band |
| Retail Investors | 65,68,632 Equity Shares at lower band to 64,04,417 Equity Shares at higher band |
| Book Running Lead Manager | Axis Bank Limited |
| Avendus Capital Private Limited | |
| Syndicate Members | Avendus Securities Private Limited |
| Reliance Securities Limited | |
| Enam Securities Private Limited | |
| SBICAP Securities Limited | |
| Isssue Opening Date | Tuesday 26th April |
| Isssue closing date for QIB’s | Thursday 28th April |
| Isssue closing date for other than QIB’s | Friday 29th April |
| IPO Grade | ICRA grade 3/5 indicating average fundamentals |
| Paid -up Capital Pre IPO | 4,10,62,000 Equity Shares |
| Paid -up Capital Post IPO | 5,98,29,521 Equity Shares at lower band to 5,93,60,333 equity shares at higher band |
| Market Cap post listing | 700 crs at lower band to Rs 712.32 crs at higher band |
| Bid Lot | 50 shares |
| Bidding Amount for Retail | 1650 shares at Rs 120 or Rs 1,98,000 per application |
Business
Innoventive is a multiproduct engineering company engaged in the manufacturing and sale of precision steel tubes, tubular components, auto components, machined components and other steel products which find application in diverse industrial sectors such as transportation, oil and gas, power, farm equipment and general engineering. Innoventive has six manufacturing facilities located across Pune and Silvassa. Products are sold in the domestic and export markets.
Some of the products manufactured include ERW Precision Tubes, CEW Tubes, Auto components, Power Equipment components, Oil Country tubular goods and other steel products. Innoventive has developed the cap[bility of manufacturing membrane strips which are used in boilers and heat exchangers and hitherto these products were being imported. The company is a supplier to leading manufacturers like BHEL and Thermax amongst others who were otherwise importing these products.
Objects of the issue
The objects of the issue are as follows: –
| 1. | Capacity expansion of manufacturing facility | Rs 16306.35 lacs |
| 2. | Repayment of term loans | Rs 5000.00 lacs |
| 3. | General Corporate Purposes |
Financials
The company has reported consolidated sales of Rs 371.09 crs in year ending March 2009, which have improved to Rs 425.15 crs in March 2010 and to Rs 457.01 crs in the nine month period ended December 2010. If one were to annualise the nine months sale figures it would be Rs 609 crs. The net profit after tax for the corresponding period has been Rs 15.52 crs, Rs 35.11 crs and Rs 41.80 crs. The annualised number for profit would be Rs 55.73 crs.
| Rs in lakhs | |||
| 9 months | |||
| Mar-09 | Mar-10 | Dec-10 | |
| Sales and Services | 36196.31 | 42147.51 | 45316.89 |
| Other income | 913.57 | 367.54 | 384.89 |
| Total Income | 37109.88 | 42515.05 | 45701.78 |
| Ebitda | 7014.92 | 11513.23 | 12298.58 |
| Interest | 3529.63 | 5601.59 | 5328.48 |
| Depriciation & amortisation | 1160.77 | 1631.55 | 1649.14 |
| Profit before Tax | 2324.52 | 4280.09 | 5320.96 |
| Profit after Tax | 1552.49 | 3511.2 | 4180.06 |
The company is highly leveraged and pays a significant amount of interest on an annual basis. The company has paid Rs 35.3 crs, Rs 56 crs and in the nine months of the current year 53.28 crs. This is a concern and post the issue there would be some relief on this account as Rs 50 crs would be utilised for loan repayment.
Comparison
There is no multiproduct company with which the company can be compared. Innoventive has chosen to compare itself with different companies who are in the segments in which they operate. In the case of cycles and accessories which is the ERW tube business of the company the competitor is Tube Investments of India Limited. In the case of Auto ancillaries it is Lumax Auto Technologies and in the case of Steel, they have chosen to compare themselves with Gandhi Special Tubes.
I believe there is little or no comparison on a company level but if at best one wanted to divide Innoventive into various parts and then compare the various divisions or products and then do a sum of part valuation, probably some idea would emerge.
Valuations
The company on the pre-IPO equity of 410.62 lac shares has earned an EPS of Rs 8.55 for the year ended March 2010 and Rs 13.57 for the nine months annualised for December 2010. If the same were to be considered on a fully diluted basis the equity would increase to 598.29 lac shares at the lower end of the price band and 593.60 lac shares at the upper end of the price band. On a fully diluted, post IPO basis the EPS would be Rs 9.31 at the lower band and Rs 9.39 at the upper band. IF one were to calculate the PE ratio it would be between 12.56 at the lower band and 12.78 at the upper band. This PE is on the basis of post IPO and considering nine months ended December 2010 numbers on an annualised basis.
The issue looks marginally expensive as the year ending March is already over. The proceeds of the issue which at the gross level are Rs 220 crs would be utilised for capacity expansion. The existing capacity of 64,800 metric tons per annum of ERW would be increased due to the ongoing expansion to 85,000 tons. The CEW capacity which is at present 16,437 tons per annum would by ongoing expansion increase to 21,957 MT and with the proposed expansion as part of the IPO objects increase to 76,701 MT. This huge expansion would reflect in sales and therefore bottom line partly in the year 2011-12 as ongoing expansion capacity would be available in the first quarter of the current financial itself. The new capacity would also be available in the current year but the full benefit would be available in the financial year 2012-13.
Conclusion
The company is promoted by first generation entrepreneurs. The company is a multiproduct company and has been moving up the value chain consistently and more importantly innovating new products which always enjoy higher margins. There is substantial capacity addition happening which would see the company increasing its top line significantly in the coming quarters. The interest outgo on account of leverage is a concern but post the issue there would be some mitigation of risk on this count.
I recommend investors to apply for this issue but they should expect returns in the medium to long term only. Short term or listing gains would be considered as a bonus and should not be the reason for subscription.
SEBI Disclaimer: – I intend to subscribe to the above issue.
