Midfield Industries Limited is tapping the capital markets with an IPO which opens on Monday the 19th of July and closes on Wednesday the 21st of July. The issue is for 45 lakh shares in a price range of Rs 126-133 and would garner between Rs 56.7 crs and Rs 59.85 crs.

Business
Midfield Industries Limited is in the organised segment of packaging industry catering to the growing demand for industrial packaging consumables in India. The company provides packaging consumables like high tensile steel strapping in various dimensions and strengths. It makes different seals for different applications and also collated nails and corner boards being used in general and the end of line packaging of goods by varied industries.

The company provides end to end packaging solutions to its customers at their locations which enable them to focus on their core products and competencies. It provides men, material, equipments and resources at the customer’s location and assists them in providing complete packaging solutions. Midfield has been in business for the last sixteen years and has catered to customers domestically and internationally. The service of contract packaging has been started recently and though not very old has the potential to become a large part of the business going forward. The end users include the steel, aluminium, glass, copper, paper, automobiles, and refractory are some of the industries that they cater to.

Its key customers include companies like Essar Steel, Bhilai Steel Plant, Vizag Steel Plant, Tata Steel Plant, Hindalco Industries, Saint Gobain Glass and National Aluminium.  

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

Financials
Midfield Industries has seen sales grow from Rs 70.16 crs in March2008 to Rs 84.39 crs in March 2009 and Rs 90.03 crs in March 2010. Its profit after tax in the same period has grown from Rs 4.16 crs to Rs 5.91 crs and Rs 8.14 crs in March 2010. Its sales have grown by over 34.6% in 2008 over 2007, 20.2% in 2009 over 2008 and 6.7% in 2010 over 2009. The net profit margins have been continuously improving from 5.92% in 2008 to 7% in 2009 and a healthy 9.04% in 2010.
The margin improvement in 2010 has been helped by the fact that the outsourcing activity where the company uses its men, machines and resources at the customer’s end has increased and is on the up move. With this business increasing its momentum this would be a strong growth driver going forward.

Valuations
Based on the pre-IPO equity of 83.21 lakh shares the EPS for March 2008 was Rs 4.99, Rs 7.10 for March 2009 and Rs 9.78 for March 2010. Accordingly the price earnings multiple at the lower and upper band of the issue price of Rs 126-133 is 25.25 to 26.65 times in 2008, 17.75 to 18.73 times in 2009 and 12.88 to 13.60 times in 2010.

Risks
Midfield is spreading itself and is gearing up for the export and domestic market. The global packaging industry is growing at a mere 3.5% and it may not offer enough opportunities for growth. The outsourcing business has huge prospects but it is capital intensive in the sense that one needs to invest in machinery and men for this business. Secondly this leads to higher book debts and requires larger working capital. Though the Indian packaging industry is growing at about 15-16% annually Midfield needs to invest large sums to capture the growth ahead.

The company has in the past had a mismatch of its financial needs and defaulted in its repayment schedule to S.E.Investments. The industry is highly fragmented and has its own risks in terms of being small, fragmented and highly competitive. The largest player in this segment is the MNC player ITW Signode which was a listed player many years ago. Incidentally the promoter of Midfield Industries is an ex-employee of ITW Signode, where he worked for about 13 years before branching of on his own setting up Midfield Industries.

Steel which forms the major raw material is highly volatile in terms of prices and could cause concern as the company has no long term contracts for supply of its raw materials. On the flip side it has no long term contracts with its customers on prices but only on quantities. Prices are based on the ruling prices of steel and are more or less on spot basis.

Comparison
The company has on page 51 of its RHP compared itself with people like AMD Industries, Bajaj Steel, Glory Polyfilms, Hitech Plastics and others but is not comparable to any of them simply because they are into other parts of the packaging business not steel strapping which is the main segment of Midfield’s business.
In looking at the price earnings multiple of Midfield one can certainly say that that the same is not cheap but does offer scope for growth as the industry is growing and there is plenty of opportunities going forward. If one were to look at the fully diluted post earnings multiple based on equity capital of 128.21 lakh shares the EPS for March 2009 would be Rs 4.61 and Rs 6.35 for March 2010 respectively. Based on this EPS the PE multiple would be between 27.22 and 28.85 times for March 2009 and between 19.84 and 20.94 times based on March 2010 earnings.

Conclusion
The industry offers huge scope for appreciation and there is a future for companies in this highly fragmented and competitive industry. Midfield is well poised to take advantage of the opportunity that is offered in India to this requirement. There seems to be a lot of primary interest in this IPO and there could be short term gains to be made on listing.

The issue has its risks but if one has the appetite for risk this share is likely to offer short term appreciation. Apply if you have the risk taking ability and can exit post listing. Expect 10-15% appreciation.

SEBI disclaimer: – I do not intend to subscribe to the issue as I am averse to short term trading.