HNI subscription on day 2 indicates listing day drama likely
Vaswani Industries Limited is tapping the capital markets with its IPO which has opened on Friday the 29th of April and closes on Tuesday the 3rd of May. The company is issuing 1 cr shares in a price band of Rs 45-49. At the end of day 2 the issue is subscribed 1.26 times with absolutely no bids from QIB’s and 43% from retail investors. It is the HNI category which has managed huge response and was subscribed 7.41 times.
| Price Band | Rs 45 – Rs 49 |
| Offer size in shares | 1,00,00,000 Equity Shares |
| Issue Size | Rs 45 crs at Rs 45 to Rs 49 crs at Rs 49 |
| QIB’s | 50,00,000 Equity Shares |
| Non Institutional Investors | 15,00,000 Equity Shares |
| Retail Investors | 35,00,000 Equity Shares |
| Book Running Lead Manager | Ashika Capital Limited |
| Isssue Opening Date | Friday 29th April |
| Isssue closing date for QIB’s | Tuesday 3rd May |
| Isssue closing date for other than QIB’s | Thursday 21st April |
| IPO Grade | ICRA grade 2/5 indicating below average fundamentals |
| Paid -up Capital Pre IPO | 1,34,90,700 Equity Shares |
| Paid -up Capital Post IPO | 2,34,90,700 Equity Shares |
| Market Cap post listing | Rs 105.71 crs at lower band to Rs 115.10 crs at higher band |
| Bid Lot | 120 shares |
| Bidding Amount for Retail | 4080 shares at Rs 49 or Rs 1,99,920 per application |
Business
Vaswani Industries Limited is in the integrated business of manufacturing sponge iron, Steel Billets and Ingots and power generation. Vaswani Industries is part of the Vaswani group which has interest in iron and steel since the past two decades. The company currently has a sponge iron capacity of 3 x 100 tons per day, 3 induction furnaces with a capacity of 36,000 metric tons for manufacturing of steel billets and ingots utilising the in-house production of sponge iron. The company also generates a total of 11.5 MW of power, with 9 MW from waste heat recovery boiler and 2.5 MW from coal. The company sells surplus power as merchant power.
Objects of the Issue
The objects of the issue are as follows: –
| Pre-payment of term loan | Rs 2518.50 lacs |
| Long term working capital requirements | Rs 1914.00 lacs |
| General Corporate Purpose | XX |
| Issue Expenses | XX |
Financials
The total income of the company has fallen from Rs 133.80 crs in the year ending March 2009 to Rs 91.96 crs in March 10. The revenue in the seven months ended October 2010 have improved to Rs 69.11 crs. The net profit has similarly fallen from 4.09 crs to 3.68 crs and then improved to 2.69 crs in the seven months of the current year. Net margins have been fluctuating between 3.06% and 4%. For an integrated player from sponge iron to billets and also having power, they appear on the lower side.
| Rupees in Lacs | |||
| year 2009 | year 2010 | 7 months | |
| Oct-10 | |||
| Net Sales | 13380.83 | 9196.44 | 6911.47 |
| Other Income | 69.18 | 34.51 | 31.54 |
| Total Income | 13237.34 | 9085.13 | 6877.55 |
| Total Expenses | 11719.94 | 7634.85 | 5687.95 |
| Interest Expenses | 567.13 | 512.05 | 324.69 |
| Profit Before Tax | 624.04 | 600.06 | 404.1 |
| Net Profit After Tax | 408.94 | 368.19 | 269.38 |
| NET MARGINS | 3.06 | 4.00 | 3.90 |
Comparisons
The company has chosen to compare itself with players like MSP Steel and Godawari Power and Ispat Limited which are quoting at substantially lower valuations than those asked for by Vaswani. The company produces billets when the realisation is better, otherwise it prefers to keep the plant closed and sells power. Any capacity which is kept idle does not augur well for the company and means underutilisation of capacity. The company is operating at very low margins and even though it is located in the mineral rich state of Chhattisgarh it has no linkages of coal or iron ore. This makes the raw materials expensive and the margins of this company would always be under pressure.
Vaswani has earned an EPS of Rs 3.03 in March 09 and Rs 2.72 in March 10 on the pre-IPO capital. On the basis of expanded capital of 234.907 lakh shares the EPS for March 10 would be Rs 1.567 and for the seven month period ended October 2010 would be Rs 1.146. If one were to annualise the same the EPS would increase to Rs 1.96. Based on this earnings the shares are being offered at a price earnings multiple of 22.96 times at the lower end and a 25 times at the upper end.
Conclusion
The objects of the issue are to be utilised towards pre-payment of term loans and for purposes of working capital requirements. This implies that there would be no increase in capacity which would affect top line and bottom line. The only change would be that one would expect the bottom line to improve on account of the saving in interest costs. In terms of capacity utilisation the same is at a low 53% for sponge iron and an abysmal 12% for billets and ingots.
There is likely to be some drama on listing day, but the fundamentals do not warrant or merit investment. I would advise investor’s to stay away from this company and look for better issues from forthcoming IPO’s.
SEBI Disclaimer: – I do not intend to subscribe to the above issue.
