Midfield Industries IPO Analysis

Focused on industrial packaging

Considering the size of the company and nature of business, asking price is very high



Midfield Industries, promoted by Madhu Mohan Reddy and his wife M. Supraja, is present in the organized segment of the packaging industry catering to the growing demand for industrial packaging consumables in India. Its product basket includes high tensile steel strapping in various dimensions and strengths, different seals for different applications, collated nails and corner boards and end-of-the-line packaging. The company also trades in VCI (volatile corrosion inhibitor) paper used for packaging of various metals to protect them from corrosion. It caters to companies across a wide spectrum of industries like steel, aluminum, glass, copper, paper, automobile, white goods and refractory.

Midfield Industries also undertakes operational contracts for comprehensive end-to-end packaging solutions at customers' locations, enabling clients to focus on their core products and competencies. The endeavor is to position itself as a one-stop shop for complete packaging solutions entailing supply of steel strapping, seals, angle boards, pneumatic packaging tools, L-plates, VCI paper, besides rendering field engineering services. Essar Steel, Nalco, Vizag Steel Plant and Bhilai Steel plant are some of the key clients for such contracts.

The company had an installed capacity of 12,000 tonnes per annum of steel strapping, 100 lakh meters per annum of angel boards, 2.5 crore per annum of seals, 8.4 lakh coils per annum of nails in FY 2010. It has production facility in Hyderabad, Andhra Pradesh, and Roorkee, Uttaranchal, and serves more than 500 customers worldwide.

On an average, 90% of revenue comes from the domestic market and rest from exports. In FY 2009, exports contributed 10% of net sales. The figure dropped to 3% in FY2010 due to capacity constraints and commitments to its existing operational contracts. The management expects exports to contribute approximately 12% of revenue this financial year once the Thane plant in Maharashtra, with an installed capacity of 6,000 tonnes per annum, starts operation of low tensile steel strapping, in August 2010. 80% of the production from the Thane plant will cater to the export market, while the rest will be used for clients in west India. Currently, the company exports to the USA, the UK, Canada, South Africa, Australia and Middle East countries.

The company intends to enter the capital markets to raise money in the range of Rs 56.7 crore to Rs 59.85 crore by issuing around 45 lakh equity shares of face value of Rs 10 each in a price range of Rs 126 to Rs 133 per share. Rs 13.15 crore will be used for expansion of its existing Hyderabad manufacturing facility to produce PET straps, stretch films, PP strapping, collated nails and seals, Rs 4.17 crore will be used to set up manufacturing units for VCI paper in Hyderabad; Rs 6.27 crore for expansion of the Thane manufacturing facility for production of angel board, collated nails, seals and heat treatment plant; Rs 1.6 crore for expansion of the Roorkee plant for manufacturing angel board and collated nails and seals; RS 1.27 crore for manufacturing high tensile steel strapping and seal production at Sharjah; and Rs 5.35 crore for augmenting long-term working capital requirement of Rs 5.35 crore.

Strengths

The Uttaranchal plant enjoys tax benefits like 100% excise exemption for 10 years, 100% income tax exemption for the first five year, and 30% tax deduction from income tax liability for the next five years, capital investment subsidy at 15% subject to a minimum of Rs 0.3 crore, exemption of entry tax on plant and machinery, and reimbursement of 75% of expenditure subject to Rs 2 lakh maximum incurred on obtaining approve quality marks. The company also enjoys the benefits of the sales tax deferment scheme in Andhra Pradesh. Under the benefit, it can avail sales tax deferment of Rs 1.72 crore on or before 22 March 2014.

The operating margin has been increasing over the last 4 years, from 14.2% in FY 2007 to 21.7% in FY 2010.

Positioning it as an end-to-end solution and one-stop shop provider of complete packaging solutions at the clients' production site will help in securing revenue stream.

Weaknesses

The company faces competition from the unorganized sector and change in preference form metal to plastic strapping.

There was negative operating cash flow in FY2006, FY 2007 and FY 2009 due to increased working capital investments, primarily in inventories and receivables.

The company has entered into joint venture with Centaur Equipos de Flejado of Spain to set up a steel strapping manufacturing facility in India and to sell in India steel strapping tools manufactured by Centaur.

Since a majority of the revenue (approximately 65%) comes from steel strapping, which uses cold rolled steel as raw material, fluctuation in raw material prices can adversely impact profitability.

Despite more than 500 customers, top 10 customers gives 50% of business. Loss of any key customers could adversely affect revenue.

The company has failed to pay six equated monthly installments amounting to Rs 1.06 crore for loan availed from S E Investments (SEI). SEI has the right to invoke pledge of shares offered as security.

Valuation

Midfield Industries has set a price band of Rs 126 to Rs 133 per equity share of Rs 10 face value. At the lower band of Rs 126 per share, the P/E would be 20 times the EPS of Rs 6.3 (on post-IPO equity) for FY 2010. At the upper price band of Rs 133 per share, the P/E would be 21.2 times the EPS of Rs 6.3 (on post-IPO equity) for FY 2010. There is no comparable listed company. However, companies in the packaging sector are currently trading at a composite average TTM P/E of around 10.