India Strategy - March 20 2008
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Friday, March 21, 2008
Kiri Dyes and Chemicals IPO Analysis
Kiri Dyes and Chemicals manufactures reactive dyes and dye intermediates. Promoted by Pravin A. Kiri and incorporated on 14 May 1998, the company’s production plant is located in Gujarat: three units in Ahmedabad and one unit in Vadodara.
The product range comprises more than 120 dyestuffs used by textiles, leather, paints and printing-ink industries. Production capacity totals10,800 tonnes per annum. Integrating backward, Kiri Dyes and Chemicals commenced manufacturing vinyl sulphone (VS) in April 2006, with a capacity of 3,600 tonnes, and H-acid from March 2007, with capacity of 3,600 tonnes, giving it a presence in the dye intermediate business.
With plans for further backward integration, the IPO is to fund capital expenditure to set up a plant to manufacture sulphuric acid, oleum and chloro sulphonic acid, with a combined capacity of 1,80,000 tonnes, and a dyes and intermediates unit. A 2.9-MW power plant that can run from the steam generated by the sulphuric acid plant is also on the anvil. The electricity generated will be sufficient not only to run the sulphuric acid plant but also the intermediate plants of VS and H-Acid.
Following the expansion, the capacity to manufacture sulphuric acid will be 1, 00,000 tonnes, oleum 43,200 tonnes and chlorosulphonoic acid 36,000. The plant to manufacture sulphuric acid and its sub-products is to be completed by December 2008. Around 25% of the capacity of sulphuric acid, oleum and chlorosulphonic acid will be used to produce dye-intermediates: H-Acid and V.S. The remaining produce will be marketed directly to bulk end-users in the detergent and chemical industry and other large consumers.
The capacity to produce dyestuff will be increased 3,000 tonnes to 15,000 tonnes by the fiscal ending March 2010 (FY 2010). The capacity to manufacture dyes intermediates VS will become 4,200 tonnes in FY 2009 and then further increase to 4,800 tonnes in FY 2010. The capacity to produce H-acid will increase to 4,200 tonnes in FY 2010.
Kiri Dyes and Chemicals entered into a memorandum of understanding with the Zhejiang Lonsen Group on 1 November 2007 to establish a manufacturing facility in India to produce reactive dyes. Both the parties have agreed to start with a production capacity of 20,000 tonnes of reactive dyes and to increase it further to 50,000 tonnes when the opportunity arises after successfully implementation and operations of the initial production capacity. The new plant is to be set up by end 2008. The initial capital investment would be US $ 10 million. Of this, Lonsen is to invest US $ 6 million and Kiri Dyes and Chemicals US $ 4 million to establish a new manufacturing plant in India.
Strengths:
- Stringent environmental laws in the western countries have led to discontinuance of production of certain dyes for textiles and leather. This has led to shift in manufacturing capacity from the US and the European Union to South East Asia. Climatic conditions in India are favourable for the manufacture of such products. Also, the new usage of dyestuffs in electronic, high-tech printing, and bio medical applications augurs well for the high-valued dyestuff products.
- Backward integration and JV with global giants will help to save cost and strengthen research and development facility.
Weaknesses:
- Operates in a highly competitive and unorganised business environment with many big and small players exporting and manufacturing dye and dyestuff. The increased competitive pressure may adversely affect margin.
- Had negative cash flows of Rs. 4.88 crore and Rs.9.42 crore from operating income in FY 2007 and FY 2006.
- Currently paying MAT (minimum alternate tax) on account of benefits of exemption received under Section 10 B of the Income-Tax Act, 1961, as it is a 100% export-oriented unit (EOU). This status will expire in March 2010. The withdrawal of tax incentives would increase the tax liability and adversely impact profitability.
Valuation
At a price band of Rs 125-Rs 150, the P/E works out to 10.5-12.6 times on half-yearly annualised EPS of Rs 11.9 on post-issue equity of Rs 15 crore, The average TTM P/E for dyes and pigment industry is around 6.
Titagarh Wagons IPO Analysis
Promoted by J P Chowdhary and his family, Titagarh Wagons (TWL) is one of the leading manufacturers of railway wagons. The company also manufactures bailey bridges, heavy earth moving and mining equipment (HEMM). It is an approved and registered supplier with the Ministry of Defence, supplying bailey bridges and wagons.
Incorporated in 1997, TWL purchased land and machinery from Titagarh Steels (now Titagarh Industries, a listed promoter group company) in 1998 to set up a wagon manufacturing unit at Titagarh. In 2005, it acquired the loss-making Heavy Earth Moving equipment division of Hyderabad Industries at Uttarpara, West Bengal.
The wagon manufacturing business of the company primarily caters to Indian Railways. Its clients also include Container Corporation of India (Concor), National Thermal Power Corporation (NTPC), Wagon Investment Scheme (WIS) customers and private container transport players. The current wagon-manufacturing capacity at both Titagarh and Uttarpara aggregates 5,000 numbers of railway wagons. Product range of railway wagons consists of wagons meant for carrying and discharge of coal and ballasts, wagons for transport of cement, food grains, coal, iron ore, stone and containers, and specialised wagons such as merry go round (MGR). On 22 January 2008, the company entered into a joint venture (JV) agreement with FreightCar America Inc to jointly promote and incorporate a private limited company to develop, design, manufacture, service and distribute railcars and other wagon products. The wagon division accounted for a lion’s share of 78.9% and 83.7% of the total income of the company for the fiscal ended March 20’07 (FY 2007) and six month ended September 2007.
Acquisition of the Uttarpara unit from Hyderabad Industries in 2005, apart from augmenting its wagon capacity, and addition of earth-moving and mining equipment into the product portfolio has also facilitated backward integration into steel forgings required to manufacture wagon. The Uttarpara unit consists of a 5,000-tonne steel foundry, and a machine and a fabrication shop. TWL has the capability to manufacture various types of hydraulic excavators ranging from one cubic meter to 14 cubic meters and crawler cranes with capacity varying from 75 tonnes to 92 tonnes. With an installed capacity to manufacture 50 equipments per annum, the HEMM division contributed about 4.8% and 5% of the total income in FY 2007 and six months ended September 2007.
In 2007, TWL entered into a tie-up with JP Morgan Mauritius Holdings to propose a scheme to revive and rehabilitate Cimmco Birla to the Board of Industrial and Financial Reconstruction (BIFR). Cimmco Birla has a wagon-manufacturing unit in Rajasthan.
The proceeds from issue of new shares to fund the capex to set up an electric multiple units (EMU)-manufacturing unit, expand and modernise existing units, establish axle and wheel-set unit at Uttarpara, and build a new corporate office and for strategic acquisition. The setting up of the EMU unit and modernisation of the existing units are expected to be completed by FY 2009.
Strength
Order book stood at Rs 753. 11 crore end Janaury 2008. Current order book translates into 2.7 times FY 2007 revenue, lending revenue visibility. Order book also consists of order for manufacture and supply of nine car rakes of EMU from Indian Railway, depicting the successful foray into passenger EMU vehicles.
Though Indian Railways continues to be a significant customer, the business of wagons to non-railway clients is growing with the entry of private players in container movement through railway, ending Concor’s monopoly along with schemes such as wagon investment scheme. Moreover, economic growth provides strong support. Sales of wagons to non–railway clients and their share in total revenue by value increased to 68.26% in FY 2007 compared with nil in FY 20’04. This results in better utilisation of capacity and insulation to a large extent from the risk of delay in placement of orders or delivery of free items by Indian Railways.
Orders placed by Indian Railways usually include free supply of materials of high value such as steel, bogies and wheel sets. There is a price-escalation clause linked to the wholesale price index (WPI) for labour, thus insulating margin. Similarly, orders from public sector undertakings (PSUs) such as Concor and NTPC also have price- escalation clause for iron and steel and labour linked to the WPI.
Weakness
Has to source Dispatch Memo (DM) components from Research and Development Standard Organisation (RDSO)- approved vendors. There are global supply constraints for wheel sets. Thus, operation/ production of wagons depends on supply of critical components. Penalty has to be paid for missed delivery schedule.
In addition to the bogies and couplers manufactured at the Uttarpara foundry unit, not running to its full capacity, these components are procured from Titagarh Industries, a group company, resulting in clash of interest.
Titagarh Industries (formerly Titagarh Steel (TSL)), one of the promoter-group company, along with its directors was declared a willful defaulter by the Reserve Bank of India.. Subsequent to a one-time settlement, it was removed from the list in 2007.
Propose to invest Rs 35 crore in Cimmco Birla, a company under BIFR scheme of revival and rehabilitation, subject to necessary approvals from BIFR. Signed an agreement with JP Morgan to propose a joint revival scheme. Though the takeover of Cimmco Birla brings additional wagon-manufacturing capacity, specially at a different geographical location in Rajasthan, the ability to successfully turn around it has to be seen as quite a few promoter group companies are in the red.
The share of Indian Railways by value in total revenue has come down to about 10%. But in terms of volume it is significant. Any delay in placement of orders may hit operations and margin.
Valuation
The first-half (ended September 2007) annualised EPS works out to Rs 28.2. On the offer-price band of Rs 540-Rs 610, the PE works out to 19.1 times at the lower price band and 21.6 times at the upper price band. In comparison, peer player Texmaco quotes at a PE of 27.6 times its first-half annualised standalone earning.
Via CM
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