CEBBCO IPO Analysis

Investors can skip the IPO of Commercial Engineers and Body Builders (CEBBCO). The company manufactures vehicle bodies for commercial vehicles, components for railway wagons, coaches and locomotives and also refurbishes railway wagons. It plans to raise Rs 150.5-153 crore through a fresh issue, predominantly for setting up a combined wagon and EMU (Electric Multiple Unit) coach manufacturing facility with a production capacity of about 1,200 wagons and 150 EMU coaches per annum. A small part of the issue proceeds will also be used for prepayment of loans.



The entry into the high-margin railway segment holds promise, but dependence on largely one client in its existing vehicle body-building business, relative inexperience in railways and demanding valuations imply that investors with a low to medium risk appetite need not subscribe to the offer.

At the upper end of the price band of Rs 125-127, the offer is priced at about 36 times FY10 earnings and 28 times expected FY11 earnings on a post-issue equity base. Titagarh Wagons, a company focussed on heavy equipment and railway wagon manufacture, trades at a forward PE of about 11 times.

Play on CVs

CEBBCO builds bodies for OEMs (Original Equipment Manufacturers) engaged in the production of fully built vehicles. Tippers and trailers used in mining, road construction and goods transportation form a major portion of its product offering. During 2006-10, the company has derived 50-85 per cent of its revenues from one client, Tata Motors. As is common in the industry, the company's business is conducted on purchase-order basis depending on the OEMs' requirement of vehicles and not on the basis of long-term contracts. Hence, to de-risk its revenues as well as to widen its product base, the company has included Volvo Eicher CVs, Man Force Trucks, Asian Motor Works and Ashok Leyland among its clients; but, contribution from these OEMs to the top-line is yet to gain traction.

Out of the order book of about Rs 525 crore in the CV segment as of July 2010, orders from Tata Motors are about Rs 475 crore. The shift to the production of fully built vehicles by OEMs, robust CV sales and improving road infrastructure bodes well for CEBBCO's growth in this segment.

But the industry itself is cyclical, is dependent on availability of finance and also gives only limited pricing power. So, the company has stepped into the railways segment which has promising prospects and higher margins.

The company made an entry into the railways segment in 2008, supplying components such as side-walls, end-walls, stainless steel fittings for wagons and long hood structures for locomotives. In 2009-10, about 27 per cent of revenues came from this division.

This contribution can be expected to increase as the forward integration into the manufacture of rolling stock (wagons, coaches, locomotives and EMUs) holds promise.

At the end of the Eleventh five-year Plan period (2007-12), Indian Railways is targeting freight loading of 1100 million tonnes and 700 billion freight tonne km, almost 50 per cent above the target of the Tenth Plan.

It is also setting up Dedicated Freight Corridors, initially in the western and eastern routes thus fuelling demand for wagons. In fact, the railways targets a procurement of about 3,00,000 wagons and about 5,000 diesel and electric locomotives by 2020.

Considering the growing demand and the supply shortages, the company will stand to benefit from the entry into the manufacturing of wagons. But, given that the company is a relatively new entrant to the railway business and does not have any orders in hand for rolling stock, investors would be better off buying the shares in the secondary market when earnings from this source become more visible.

Financials

For the year ended March 2010, the company's net sales stood at Rs 183 crore and net profits at Rs 19 crore, growing at a CAGR of 39 per cent and 66 per cent, respectively, during 2006-10. EBITDA margin for the year was at 15 per cent.

The offer is open till October 5. ICICI Securities and Edelweiss Capital are the book running lead managers.

via BL