Technocraft Industries: Avoid

Investors can refrain from subscribing to the initial public offering (IPO) of Technocraft Industries (India). The offer is being made in the price band of Rs 95-105 to finance expansion of capacities in its three divisions: Drum closures, pipes/scaffolding and yarn business.

At the stated price band, the price-earnings multiple works out to 7-8 times the 2005-06 consolidated per share earnings on the existing equity base.

While the PE multiple appears reasonable given its growth prospects, as a diversified play, the company may command a PE lower than peers in each of these businesses.

The positives linked to this offer are Technocraft's strong export presence in the drum closures division, good growth prospects for its pipes division and scope for improving margins through branding efforts in the yarn division.

The drum closures segment accounted for 27 per cent of revenues and 40 per cent of profit before interest and tax (PBIT).

The pipes (including scaffolding) division contributed 42 per cent of revenues and 26 per cent of PBIT and the yarn division chipped in with 26 per cent and 28 per cent of revenues respectively.

On the flip side, however, the scale and size of operations is likely to work to its detriment in the pipes and yarn division.

In addition, the volatility in raw material prices may be a cause for concern.

The competition is also likely to be fairly stiff in the domestic and export markets. In its drum closures division, the company plans to focus on the Chinese market for exports.

However, given the high duty structure and the fragmented steel capacities in China, penetrating this market may pose a considerable growth challenge.

The consolidated financial performance in 2005-06 too was hardly encouraging, with a 3 per cent drop in revenues and 2 per cent decline in post-tax earnings over 2004-05. The post-tax earnings have also stagnated in a narrow band in the last three years.

Offer details: The company is raising Rs 79-87 crore to part-finance its drum closure division (raising its bungs and flanges capacity by 36 per cent to 1,360 lakh pieces and clamps by 15 per cent to 230 lakh pieces), scaffolding division and set up a new yarn mill which will increase the spinning capacity to 61,104 spindles. It is also installing a 15 MW power plant to reduce its overall power costs.

The book running lead managers are Anand Rathi Securities and Centrum Capital. The offer opened on January 18 and closes on January 23.

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IPO - Technocraft Industries (India)

Promoted by the Saraf family, Technocraft is a diversified company with three divisions: drum closures, pipe, and yarn.

Technocraft is among the largest manufacturers and exporters of drum closures with an annual production of 25 million sets exported to 60 countries in the world.

The pipe division produces 3,500 tonnes per month of hot dip galvanised ERW steel tubes used extensively in irrigation, construction and transportation of gas, water, and chemicals. To enhance value addition, the company took a strategic step towards forward integration into scaffoldings. It developed Technocraft Scaffolding System to meet international standards with unique concepts like T Scaffoldings.

The drum closures division accounted for 27% of FY 2006 sales and 40% of FY 2006 profit before interest and tax (PBIT). The pipe division contributed 42% of FY 2006 sales and 26% of FY 2006 PBIT. The yarn division garnered 26% of FY 2006 sales and 28% of FY 2006 PBIT. Exports accounted for 89% of total sales.

Technocraft plans to upgrade the drum-closure plant and set up a new plant with a capacity of 9 million sets per annum. The company is set to increase the production of scaffolding systems in the pipe division and add a range of new products for the infrastructure and construction industries. About 25,200 spindles are to be added in the yarn division to increases its capacity to 61,104 spindles, and so also a 15-MW captive plant. Technocraft is entering the retail garment segment by opening 100 stores by 2007.

Between FY 2003 to FY 2006, consolidated sales registered a CAGR of 22.5%. But CAGR of net profit was only 3%. The consolidated FY 2006 EPS on the post-equity works out to Rs 9.7. At the price band of Rs 95- Rs 105, PE is 9.8-10.8. The first-half annualised consolidated EPS stands at Rs 13.5, and PE 7 - 7.8. Technocraft’s businesses attract poor PE. Being a diversified company, the applicable PE will be even lower.