IPO Analysis - Gemini Engi-Fab

Investors can give the initial public offering of Gemini Engi-Fab, which is engaged in manufacturing and salvaging of process equipment, a definite miss.

Besides the macro-economic concerns regarding the impact of the economic downturn on the revenue and profitability of both Gemini and its user industries, our recommendation is also driven by the ambitious pricing of this offer.

At the price band of Rs 75- 80, the company is valued at about 10-11 times its estimated (annualised) FY09 per share earnings on its post-offer equity base.

Not only is this at a premium to the market, it also compares poorly with pure-play capital goods and engineering companies, which are currently available at lower valuations in the secondary market.
Company details

Gemini Engi-Fab has been in the business of manufacturing and salvaging of process equipment for well over a decade now.

The company fabricates heat exchangers, tower and column internals, reactors and vessels for a fairly diversified user industry base.

It plans to use the proceeds of the public offer to expand its operation and set up a manufacturing workshop in Umbergaon, Gujarat.

As on September 30, 2008, the company had an order book of over Rs 17 crore (0.8 times its FY08 revenues).
Investment argument

The worsening economic situation may take a higher toll on Gemini Engi-Fab considering the small scale of its operations and dependence on few customers.

While the company did manage to grow its revenues (86 per cent CAGR) and profits (249 per cent) at enviable rates in the last four years, it is to be borne in mind that the growth was on a smaller base and during a period of rapid economic growth.

Replicating these growth rates in the present times when the economic outlook is anything but promising would be difficult.

To add to problems, companies that constitute its user industry are contemplating (some have already begun) scaling down their capex and expansion plans significantly, which may also tell on future revenues.

The company may also have to grapple with margin pressure with the shrinking revenue-pie and the highly competitive and unorganised nature of the fabrication industry.

However, the company’s presence in salvaging business may hold more promise in times such as these when companies are tightening belts.

Salvaging, which involves changing or reworking of the corroded portion of equipment instead of completely overhauling it, may certainly find more takers. But here again, Gemini may not be able to command a high pricing power since this business too is unorganised and has low entry barriers. That most large companies have in-house fabrication units may also act as a challenge.
Valuation matters

But what argues strongly against investing in the IPO is the pricing. This Rs 21-crore company has been valued at about 10-11 times its annualised FY09 per share earnings (post-offer equity) in the given price band, failing to price in the many business risks.

Much larger companies today suffer lower multiples owing to uncertainties on order flows, higher debt incidence or increasing pressure on working capital; even the Sensex-30 or Nifty-50 basket of stocks are available at lower valuations.
Offer details

The initial public offer is open during February 3-8. The company seeks to raise Rs 41-44 crore through this offer.

Almondz Global Securities is the book-running lead manager and Karvy Computershare Private Ltd is the registrar to the issue.