Bedmutha Industries IPO Analysis

Bedmutha Industries (formerly Bedmutha Wire Company (BIL)) is one of the leading steel wire manufacturers in western India. The company's product portfolio is wide comprising galvanized wires, cable armor wires, ACSR wires, wire nails, earth wires, stay Wires, spring steel wires, barbed wires, etc. Its products are used in various areas such as roads, bridges, flyovers, power, automobile, engineering, agriculture, railways and defence. The company was promoted by K R Bedmutha, Vijay K Vedmutha and Ajay K Vedmutha.



The company started its commercial production in 1992 by setting up its first galvanized wire plant at Sinnar, Nashik, and has over the years expanded and the company's current wire drawing production capacity aggregate to 60,000 mtpa. Today, BIL operates four manufacturing units in Nashik, all of them strategically located in proximity to the source of raw materials and markets, ensuring cost savings and logistic benefits.

The company has promoted a subsidiary company, Kamalasha Infrastructure & Engineering (KIEPL), for implementation of turnkey contracts in the infrastructure sector including power, roads, railways etc. KIEPL has been awarded a sub-contract of Rs 60 crore by the Dharangaon division of Maharashtra State Electricity Distribution Company (MSEDCL). This job includes preparation of new sub-stations, augmentation of old sub-stations, laying of 33KV and 11KV lines of approximately 600 km, installing around 500 distribution transformers (DT) etc. This subsidiary offers direct synergy as it consumes GI and stay wire from the company's wire unit and also offers indirect synergy by consuming PSC poles, cables and conductors using wire produced by the company.

The company has 49% stake in Ashoka Pre-con (APPL), which manufactures pre-stress concrete products such as cement poles, RCC pipes, cement piles, railway sleepers etc. The other partner in APPL is Ashoka Buildcon, which has 51% stake in APPL. APPL has commenced commercial production and has begun supplying electrical cement poles for the infra projects launched by MSEDCL. This investment offers direct synergy by consuming GI wire, MS wire and PC wire from its wire unit.

The company is also pursuing initiatives for setting up a galvanizing plant, using latest technology, with capacity of 48,000 tpa and manufacturing aluminum rods and conductors, with capacity of about 42,000 tpa.

BIL proposes to set up a new plant at Nashik for manufacturing new product low relaxation pre-stress concrete (LRPC) wire with manufacturing capacity of 36,000 mtpa and spring steel wire with manufacturing capacity of 18,000 mtpa. This project has been awarded the status of mega project under the package scheme of incentives by the government of Maharashtra.

The issue proceeds are to finance the LRPC and spring steel wire project and general corporate purpose.

Strengths

Is one of the leading manufacturers of galvanized wires in the western part of India and has strong marketing setup as well as established relationship with clients. Established clientele comprises Sterlite Industries, Apar Industries, Finolex Cables, RPG Cables, Universal Cable, Ravin Cable, Suprajit Industries, Godrej, GTL Infrastructure, and Ashoka Buildcon.

Products are approved by Power Grid Corporation, electricity boards of various states etc. apart from Bureau of Indian Standards (ISI).

BIL enjoys package scheme of incentives (PSI) awarded by the government of Maharashtra as it is located in backward area. For the present expansion of LRPC wire, BIL is entitled to receive sales tax incentive up to 20% of the capital expenditure, exemption in stamp duty and subsidy in electricity duty by way of refund of MVAT. The sales tax benefits are applicable to the company up to 2015. With the expansion, BIL will have extended benefit on sales tax up to 2017.

Forwardly integrated to services/ products using wire products through its investments in KEIPL and APPL. This offers direct as well as indirect synergy.

Weaknesses

The steel wire market is characterized by both large/medium players as well as small and unorganized players in India as well as overseas. The large/ medium peers of the company are backward integrated with access to captive mineral resources and are better equipped to withstand the volatility in material cost and competition from unorganized players (unbranded wires) than non-integrated organized player such as BIL.

The implementation of the project for which the proposed issue is planned is at a very preliminary stage and commercial production is expected only by September 2011. Any delay in implementation may increase the capital cost and also affect returns from the project. The plant & machinery to be purchased include those that have to be imported. Any fluctuation in exchange rate may have an adverse impact on the cost.

Corporate guarantee given by the company stood at Rs 32.44 crore end of March 31, 2010. Of this, about Rs 27.93 is to Axis Bank for working capital limits sanctioned to subsidiary KIEPL and the balance is for Ashoka Pre Con.

Valuation

In FY 2010, consolidated sales were higher by 12% to Rs 164.37 crore and the growth in the bottom line was 73% to Rs 12.19 crore. On post-issue equity of Rs 21.03 crore the EPS for FY10 works out to Rs 5.8. At the offer price band of Rs 95-102, the stock quotes at 16.4-17.6 times its FY 2010 EPS. In comparison, peer Usha Martin quotes at a PE of 16.5 times its FY 2010 consolidated earning and Rajratan Global Wire at 14.3 times, while Ramsarup Industries quotes at a PE of 4.48 times.

via BL