Somi Conveyor Beltings IPO Analysis

Investment can be avoided in the initial public offer (IPO) of Somi Conveyor Beltings (SCB), which makes rubber conveyor belts for industries such as cement, sugar and coal. Although the company’s revenue prospects appear healthy, the low barriers to entry in SCB’s business and the lack of significant competitive advantage and pricing power make investments in this offer unattractive. At Rs 35, the offer appears expensively priced at about 28 times its likely FY-09 per share earnings on a post-offer equity base. Investors may be better off adopting a wait-and-watch approach to this offer since there may be better opportunities to enter the stock once listed.
Investment prospects

SCB’s products are likely to enjoy healthy growth in demand driven by the ongoing capex boom across industries such as coal, mining, sugar and cement. And since rubber tends to wear itself out over time, SCB also enjoys a large replacement market for its products.

Notwithstanding this, SCB’s future earnings growth may be subject to uncertainty. Firm price trends of its key raw materials — natural rubber and carbon black — may exert pressure on the company’s profitability since it may not be able to pass on the higher input costs completely to its clients.

Moreover, given the current supply shortage of rubber, SCB’s ability to procure adequate supply of this raw material may also be put to test. The government’s steps to curb the rise in the price of natural rubber by imposing a ban on its futures trading, may offer little respite for SCB on the cost front. Domestic rubber prices have continued to rise despite the futures trading ban.

Over the last three years, the company’s revenues and earnings have grown at a compounded rate of over 62 per cent and 177 per cent respectively, on a low base. Operating profit margins have also improved over the years to the current levels of about 18 per cent.
Business and proceeds

SCB makes rubber conveyor belts of various sizes used for industrial applications in various industries such as coal, lignite and steel.

The company proposes to use the offer proceeds to set up new manufacturing unit, purchase land and building for office use, meet the margin money requirement for enhanced working capital and interest cost during the construction period. The offer is open from June 24-27.

The company seeks to raise Rs 21.8 crore through this offer. Ashika Capital is the lead manager to the issue and Mondkar Computers is the registrar.