Investors with a two/three-year perspective can consider investing in the initial public offering (IPO) of Nelcast. In the Rs 195-219 band, the offer is priced at 11-13 times the likely FY-08 per-share earnings on the post-offer equity base. In the business of manufacturing casting components, Nelcast is likely to scale up its growth, given the increased demand for castings in both the domestic and foreign markets. It is also likely to benefit from its proposed increase in focus on exports and machined casts. This apart, its set of established clients such as Ashok Leyland, TAFE and TATA Cummins also lends confidence to its earnings growth prospects.
Investment rationale
Nelcast, which derives more than 50 per cent of its revenues the commercial vehicles segment, could witness increased demand on the back of an expected growth in freight traffic and the proposed introduction of emission and loading norms. However, any slump in the growth of the interest rate-sensitive commercial vehicles industry may mute Nelcast's earnings.
In this context, Nelcast's decision to widen its product base towards small castings to cater to passenger cars and light commercial vehicles is a positive. This apart, the proposed increase in the manufacture of machined casts, aimed at 20-25 per cent of total production by the next fiscal year, could give a further fillip to the bottomline, as these products enjoy better pricing and margins.
On the export front, outsourcing of casting components is likely to remain buoyant, given the strict environmental norms, rising labour costs and shortage of skilled labour in markets such as the US and Europe.
Encouraged by this rising demand scenario, Nelcast proposes to dedicate about 25 per cent of its capacity (post-expansion) for exports. While Nelcast already has a presence in US through its subsidiary and supplies to Volvo Sweden through its Tier-I supplier, Arvin Meritor, the increased thrust on exports is likely to help it strengthen its presence in the global arena. Further, as exports enjoy better realisation, revenues should rise.
For the financial year ended March 2007, the company reported a revenue growth of about 30 per cent to about Rs 350 crore. The earnings recorded a 182 per cent increase to about Rs 7 crore.
On the operational front, margins expanded by about 5 percentage points to 25 per cent on the back of increased sales realisation and pruning of costs.
The earnings per share on a fully diluted basis stood at about Rs 11 for FY-07.
Objects of the issue
The issue proceeds will be used to fund the expansion and modernisation of production facilities at both the units of Nelcast. The company plans to increase capacities from about 102,000 tonnes to about 120,000 tonnes by FY-08 and an additional 30,000 tonnes by FY-09.
Concerns
While Nelcast's decision to increase its focus on exports is a positive, its ability to source orders from global players could be crucial. Our concern stems from the increased competition in the export market from both the domestic and Chinese players. This apart, since most of the existing players in the domestic market are on an expansion mode, it could lead to an excess supply scenario, which could cap Nelcast's earnings.
The offer is open from June 4 to June 8. The company seeks to raise about Rs 95 crore through this offer. Karvy Investor Services and Bigshare Services Private Limited are the lead manager and registrar to the issue respectively.