Small scale of operations and substantial jump in equity base may prove to be a handicap for the company over the medium term.
An investment in the initial public offer (IPO) of Nissan Copper may be avoided, as the scope for capital appreciation appears limited over the medium term.
The small scale of operations, the greater vulnerability to price swings, the substantial jump in equity compared to its existing base and the rich valuations are factors that underpin our view on the IPO.
Nissan Copper manufactures copper pipes and tubes for supply to users in construction, air-conditioning, engineering and gas application industries.
The company proposes to increase its capacity from 10,800 tonnes per annum (TPA) to 18,600 TPA. The demand for copper products appears strong driven by rising requirements from user segments.
And so, the capacity expansion plan appears justified. That the clientele of the company includes Siemens, Voltas and Electrotherm India is a positive.
Risks
However, the risks for the company are likely to outweigh the opportunities, and this may have an adverse impact on profitability.
While it sources copper scrap from the domestic market, for copper cathode (both raw materials for making copper pipes/tubes) it relies substantially on imports.
It is not clear what proportion of imports are long-term contracts. Hence the risk of the company being exposed to cost pressures is fairly high.
The size and scale of operations also places it at a disadvantage. Being a secondary player, its bargaining power is likely to be limited compared to primary players where the degree of concentration is far higher. The effect of this is likely to be severe, especially in the event of a cyclical downturn.
The higher outgo in the form of interest and depreciation may affect its profitability over the next few years.
Post-expansion, equity base will expand by more than four times.
The growth in earnings is likely to lag the expansion in equity, at least till such time when additional capacities start contributing fully. The payback period may get extended if the metals cycle takes an unfavourable turn in 2007-08.
The price band for the offer has been fixed at Rs 33-39.
At the lower end, it values the stock at about 14 times its likely 2006-07 per share earnings and at the upper end, about 16 times.
This, in our view, is highly demanding compared to, say, Hindustan Copper or Precision Wires that trade at a multiple of 10-12 times forward earnings.
Considering the challenges mentioned above, generating earnings to support the current valuations is likely to be difficult.
On offer are 2.5 crore shares. The objects of the issue are to part finance the expansion and fund the working capital requirements.
The offer opens on December 4 and closes on December 8. Keynote Corporate Services is the lead manager to the issue.