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Talbros - FPO

Talbros Automotive Components

Diversifying into forgings

After establishing itself in the field of gaskets, the company is venturing into manufacture of forgings to meet group company's requirement

Talbros Automotive Components (Talbros) is a market leader in the manufacture of gaskets in India, with a market share of around 50%, and supplies to almost all leading vehicle and engine manufacturers. In the year ended March 2005, about 70% of the sales revenue came from the original equipment manufacturer (OEM) segment and about 16% from the replacement market. The remaining, about 14%, came from exports.

Long-term technical assistance agreements executed with Federal Mogul Sealing Systems (Slough) Ltd., U.K; Nippon Leakless Corporation, Japan; and Ishikawa Gaskets Company Ltd, Japan; have provided the company with contemporary technologies to cater to the demand of all kinds of gaskets to almost all OEMs in the country.

Talbros's issue is to raise funds for setting up a Rs 31.82-crore forging unit to cater to the existing demand within the group, make investment of Rs 4.80 crore in the joint venture with Nippon Leakless Corporation, Japan, for catering mainly to the Honda group of companies in India, and expansion of the current gasket manufacturing facility at the Faridabad and Pune plants at a cost of Rs 9.46 crore.

Strengths

Talbros is well positioned to benefit from the growth in the automobile industry in India. Though the growth rate of the auto industry may come down from the heady days of the last few years, it still will be decent, specially in view of the good monsoon, the continued expansion of road network and the low interest-rate regime.

Weaknesses

Talbros has increased its operating profit margin (OPM) significantly over the past year, which is unlikely to be sustained given the dynamics of the auto ancillary industry. There is a risk of lower OPM in future due to pricing pressures from OEMs, depressing the profit going forward.

Presently, Talbros derives 27% (Rs. 22.35 crore) of its revenue from sales to Honda and its associates in the domestic market. It has recently entered into a joint venture with Nippon Leakless Corporation, Japan (NLK) for catering to the Honda group's requirement, with a 40% share and NLK 60% . As per the terms of the joint venture agreement, the sales to Honda and its associates in India would be phased out of the company into the joint venture over three years. Consequently, there will be a loss of revenue to the extent of the sales transferred to the joint venture company.

Talbros is a new entrant in the forging industry and is yet to establish on quality and price parameters. Inability to meet the required quality standards and supply at competitive price will significantly affect the contribution from the project.

The forging project is being set up primarily cater to the requirement of an unlisted group company, which is engaged in the production of steerings and steering components. This gives rise to quesitons of transparency.

Valuation

The Talbros scrip currently trades around Rs 138, discounting the trailing 12-month earnings on pre-IPO equity by around 14 times, which is reasonable. However, after the current IPO, equity will almost double. The rise in OPM has been a major driver of its earnings growth, but the risk of a fall in OPM in future cannot be wished away due to the normal industry practice of OEM-led pricing pressure. The present offer is being made at a price of Rs 90 to Rs 102, which discounts the fully diluted FY 2005 EPS by 22 to 23 times. Benefits of the new projects are likely to be available mainly from FY 2007. Till then, the earnings growth will not be enough to sustain P/E of more than 20 times.

Talbros Automotive Components :Issue Highlights
Sector	Auto Ancillary
Sector P/E Ratio	18.4
Price	90—102
Issue Size	Rs 50 crore
Pre issue promoter holding	Rs 2.57 crore
Post issue promoter holding	Rs 2.82 crore to Rs 2.85 crore
Pre issue paid up capital	Rs 5.75 crore
Post issue paid up capital	Rs 10.65 crore to Rs 11.30 crore
Listing	BSE & DSE
Rating: 43/100