Kamdhenu Ispat

Friday, April 07, 2006

Background :

Kamdhenu Ispat Limited (KIL), incorporated in September 1994, is the flagship company of Kamdhenu Group. It is a manufacturer of cold twisted deformed (CTD) bars, thermo mechanically treated (TMT) bars with the plant capacity of 48,000 metric tonnes (MT) per annum and ingot manufacturing capacity of 22,500 MT per annum.
The company has franchisee arrangement with 22 entities to manufacture high strength deformed bars (HSD)/TMT bars, cement, stainless steel pipes under the brand name "Kamdhenu". The total combined capacity of all these units is 840,000 MT.
KIL's products are used in the construction of multistoried buildings, dams, bridges, flyovers, and power plants as a basic reinforcement material.
The Company derives its operating income from three different activities: by selling products manufactured by the KIL, by trading of products manufactured by Franchisees and through royalties received from Franchisees for using brand name of the company "Kamadhenu".
The Company has entered into an agreement with Centre De Rechercher Metallurgiques (CRM), Belgium for use of TEMPCORE trademark used for identification of high quality steel bars.

Objects of Issue :

To meet the long term working capital requirements of Rs.2,888.15 lakhs to establish ten stockyards across the country.
To meet the cost of setting up of corporate office with an investment of Rs.250 lakhs.
To meet the expenditure on lease deposits and miscellaneous fixed assets for setting up stock yards of Rs.59 lakhs.
To meet the issue expenses of Rs.180 lakhs.

Strengths :

KIL's key strength is its brand name. It sells all its products under brand name "Kamdhenu", at a premium ranging between Rs.300 to Rs.700 per metric ton.
The company has a network of more than 1750 distributors and dealers spread across the northern, central and eastern India.
KIL is operating through franchising due to which company is having the benefit of larger volumes turnaround across the country with minimum investment in fixed capital and reduced gestation period.
The Company and all its franchisee are using the "Tempcore Process". It produces steel bars at faster speed than normal plants.
KIL's capacity utilization has been constantly been increasing since FY01. It has increased to 107.3% in FY05 from 91.33% FY01 for steel bars.

Weakness :

KIL's FY05 operating profit margin and net profit margin are as low as 3.3% & 1.6% respectively.
Company has undertaken a project to erect sponge iron manufacturing facility but the project has halted, as company could not get mining rights in respect of Mines of Iron/ Manganese Ore.
KIL's biggest cost is raw material. It formed 52.4% of total expenses of the company. Increase in raw material prices and other inputs can affect the business operations adversely.
KIL is not a fully integrated company, thus will face margin pressure (company is already operating on thin margins), unlike Gallantt Metals & Godawari Power & Ispat ltd. These companies are operating in same industry, have come up with IPO to fully integrate their manufacturing operations.

Peer Group Comparison :

Financial Year 2005

Valuation :

KIL's sales & PAT have grown at a CAGR of 34.8% and 61.2% respectively since FY01. Sales have grown from Rs.3,574.31 lakhs in FY01 to Rs.11,784.65 lakhs in FY05. Net Profit grew from Rs.25.61 lakhs to Rs.171.19 lakhs.
Operating profit margin of the company has nearly doubled from 2.6% in FY01 to 4.4% for 9 month ending December2005.
The company's net worth as on 31st March 2005 was Rs.772.06 lakhs which has increased to Rs.1,133.41 lakhs as on 31st December 2005.
Book Value per share as on 31st December 2005 is Rs.18.25
Post issue annualized EPS based on 31st December 2005 earnings is Rs.1.33 per share. The shares are being offered at a price of Rs.25, at P/E of 18.8