India Cement
India Equity Analysis, Reports, Recommendations, Stock Tips and more!
Search Now
Recommendations
Sunday, February 14, 2010
Texmo Pipes and Products IPO Analysis
Investors can play it safe by staying away from the IPO of Texmo Pipes and Products. Despite the fact that the company's business does hold good potential, the asking price for the IPO appears high.
Texmo Pipes is yet to put its existing capacity into full use and the massive expansion plan therefore carries risks. Investors may be better off buying this stock in the secondary market, if the expansion plans pan out well for the company.
At the current levels of issued share capital of 62.7 lakh, the offer price would discount its trailing 12-month earnings by 15.8 times in the lower end of the price band (Rs 85) and at the upper end (Rs 90), by 16.8 times.
Post issue, when the capital base swells to 112.7 lakh shares, the PE would work out to 16.6 to 17.6 times. When compared to peers such as Precision Pipes and Profile (10.2 times PE), Tulsi Extrusion (3.3 times) and Kisan Moulding (12.8 times), the IPO of Texmo Pipes does seem stiffly priced.
Business structure
Texmo Pipes is engaged in the business of manufacturing PVC and HDPE pipes. These products find application in irrigation, agriculture, portable water supply solutions, sewerage and drainage systems, construction, telecommunications and underground water suction.
At present, sales to the agriculture sector account for a little over 50 per cent of the company's total revenues. Telecommunications and portable water supply segment are the next major pockets and contribute 25 per cent and 16 per cent, respectively, to sales. Idea Cellular, which accounts for 16 per cent of total sales, and Tata Communications (7 per cent) are some of its noteworthy customers.
In FY 09, about 47 per cent of the company's revenues were generated by HDPE pipes, while 52 per cent came from PVC pipes.
The company has two units in Madhya Pradesh and with a total capacity to make 25,094 metric tonnes per annum (mtpa) of PVC pipes and 11023 mtpa of HDPE pipes.
It plans to add another 16,580 mtpa of PVC products through the expansion plans and also add on capacities for CPVC pipes, DWC pipes, injection moulds and woven sacks. Much of the present capacity has been created by consolidating group entities only in 2008 and there is only limited track record to judge if the company has managed to scale up revenues in the past.
In 2008-09, the company's capacity utilisation at its PVC Pipe facility stood at 33.7 per cent and that on the HDPE pipe facility stood at 24.6 per cent.
Given the fragmented nature of the pipes business, it is sensitive to raw material cost increases. The spiralling prices of polymers as crude oil prices trend up, may impact margins. Raw material costs have already started climbing and are up by 50 per cent from December 2008 lows. This may dent the company's operating margins given that raw materials account for 72 per cent of its total sales.
Expansion of its current product line, namely, drip inline pipe plant has already commenced and about Rs. 343.18 lakh has been deployed on this though internal accruals. Commercial production of this product range will begin from August 2010, while that of the new products will commence from October 2010.
Out of IPO proceeds Rs 1,132 lakh will go in for expanding the drip inline pipe plant, Rs 2,206.27 lakh for setting up new product ranges and Rs 1,000 lakh for meeting working capital requirements. Texmo Pipe's IPO has been assigned ‘CARE IPO Grade 2'.
Financial scorecard
The company does not have a sufficiently long relevant financial record, as its current operations are a result of business transfer agreements with three of its promoter group entities in August 2008.
The company's net profits stood at Rs 336.38 lakh on net sales of Rs 3897.53 lakh in the first seven months of 2009-10.
There has been a substantial increase in borrowed funds (from Rs 9.2 crore in FY 08 to Rs 22.9 crore in 2008-09).
The subsequent increase in interest cost has resulted in a negative cash flow during FY 09. The situation persisted in the half year ended September 2009 also.
via BL
Apollo Tyres
Investors with a two-year perspective can consider buying the stock of Apollo Tyres. At its current price of Rs 55.75, the stock discounts its trailing 12-month earnings by 8 times. Sustained growth in tyre demand from the original equipment makers (OEMs) and a pick-up in the replacement market from the first quarter of the current fiscal are major positives for the company.
Demand in the commercial vehicles segment is beginning to pick up and is expected to further improve in the months to come. The company's broad-based customer profile and imminent ramp-up in capacity position it well to capture this demand.
Operations at its greenfield plant in Chennai, which has the capacity to produce radial tyres for both passenger cars and commercial vehicles, are set to commence by the first quarter of FY 11. This is likely to increase its market share in the OEM segment. At present, sales to OEMs account for just 14 per cent to the total sales.
The replacement market, which offers better margins and superior pricing power, is now Apollo Tyres' key source of revenue, accounting for 74 per cent of sales. The company has a strong brand recall and healthy market presence in this segment with over 4,000 network partners and 2,000 exclusive dealers. Due to muted economic activity, buyers, especially in the trucks and buses segment, deferred replacement decisions for most of 2008. However, a revival in the economy by the first quarter of 2009 and pent-up demand have helped tyre-makers stage a strong comeback.
From April to November 2009, the replacement market grew 11.7 per cent. While the truck and bus segment grew 15 per cent year-on-year, the passenger vehicles segment grew by just about 1 per cent. Apollo Tyres' strong presence in the replacement market made it one of the early beneficiaries of the revival.
The nine months ended December 2009 saw the company's sales expand by 26 per cent, while operating profits almost doubled. Net profits swelled from Rs 61.93 crore to Rs 298.81 crore. On the back of a healthy demand growth, the company is well-positioned to sustain the profit growth in the months ahead.
Raw material costs, mainly natural rubber, which account for 60 per cent of the total cost, have started spiralling once again and are up by over 30 per cent from their 2009 lows. However, market leadership allows Apollo Tyres the pricing power to pass on this burden to its customers; tyre prices have been hiked by 5-10 per cent across markets. This may partially help the company retain its current operating profit margins of 15 per cent. About 11 per cent of Apollo Tyres' revenue is generated through exports. The export market mainly caters to passenger cars, whose sales are showing signs of revival across the globe.
via BL
Man Infraconstruction IPO Analysis
Investors with a two-year perspective may subscribe to the Initial Public Offer from Man Infraconstruction (Man Infra), a construction contractor in the realty and infrastructure segment. The company intends to utilise funds to purchase capital equipment and for general corporate purposes.
With the price band due to be announced only later this week, investors may subscribe if the offer price is below Rs 400, resulting in maximum acceptable valuations of 20 times the estimated FY-11 earnings. Beyond this price, the offer is unlikely to provide attractive returns to investors. Peers in the listed space such as BL Kashyap and Ahluwalia Contracts are available at current valuations of 15 to 24 times trailing earnings, and 12 to 20 times estimated FY-11 earnings.
While the company does not possess too many distinguishing aspects, its superior margins, strong funding position and a secure client base set it apart from most other construction contractors. Strong order-book across segments further supports our recommendation.
Contract player
Man Infra undertakes and executes construction contracts besides providing project management and consultancy. In the infrastructure space, it takes up construction of roads and port container terminals and support infrastructure. In the realty sector, it undertakes residential and township construction, commercial and industrial construction.
Spread of the order-book over a variety of segments could mitigate risk to an extent, and allows flexibility to shift focus based on segment prospects. Man Infra has a secure client base with several repeat contracts from players such as Simplex Infrastructure, Gateway Terminals India, the Dynamix Group, and so on.
The company has not made any serious move to graduate to the status of an infrastructure developer from a contractor. Its current stance as a construction contractor may still serve it well; its ability to secure repeat orders bodes well here. As investment in infrastructure projects progresses and residential construction recovers from its slump, bigger developers will be looking to subcontract projects bagged by them. The company also does not have exposure to the slightly riskier IT parks and malls, focusing instead on schools and hospitals.
Order-book balance
Current value of unexecuted orders stands at Rs 2020 crore, 3.8 times the sales of FY-09. About 83 per cent of the order-book stems from residential contracts, a segment that has seen lower off-take and slowdown in construction. However, a good many of Man Infra's contracts come from repeat orders.
Further, about 22 per cent is under the slum rehabilitation programme of the Government of Maharashtra; providing a safe source of fresh orders as the State provides ample scope for business in this space, what with higher allocation to the said programme. Commercial construction accounts for 10 per cent of the order book. Ports and roads form 4.8 per cent and 2 per cent of the order book respectively.
Revenue contribution from the sectors is fluent, with ports accounting for 41 per cent and residential contracts 39 per cent of revenues for the nine months ended December 09, while contribution was 25 per cent and 60 per cent for the same period in 2008. This suggests that Man Infra has the ability to adapt order-book to suit opportunities. Orders are also slated to be executed with 24 to 36 months, providing medium-term revenue visibility.
Margin strength
Pass-through costs on primary inputs of steel and cement, project consultancy services and almost nil interest costs have helped the company record operating margins of 23 per cent and net margins of 14 per cent (consolidated 2008-09). Operating and net margins bettered to 32 and 17 per cent in the nine-month period ended December 09 on lower raw material and sub-contracting costs.
Increase in investments in capital equipment has largely led to high depreciation costs; both assets and depreciation almost doubled in 2008-09 over the previous year, and further increased by 20 per cent in the above-mentioned nine-month period, over the same period in 2008.
With Rs 122 crore of the funds raised marked for purchase of equipment, depreciation is set to rise in the coming quarters.
While this would increase capital expenditure in the short term, owning a good part of equipment reduces hiring costs and risks of delays due to unavailability of critical equipment besides allowing mobility of equipment between projects.
The company operates on a zero-debt basis, leaving it in a secure position to fund bigger projects in the future, should it be required. Sales have clocked a 71 per cent three-year compounded annual rate, while net profits have grown 69 per cent in the same period.
Offer details
The offer is open from February 18-22. On offer are a total of 5,625,150 shares. IDFC SSKI and Edelweiss Capital are the lead managers to this issue.
via BL
Sundaram Finance
Fresh exposures can be considered in the stock of Sundaram Finance, a conservative investment option in the non-bank financing space. An asset financing company, Sundaram Finance predominantly funds new commercial vehicles (CV) and passenger cars for retail customers.
With CV and passenger car segments posting higher sales growth in the current fiscal (2009-10) and with the growth expected to be sustained, Sundaram Finance's disbursements may grow at a strong pace.
This would, in turn, lead to improving earnings growth, going forward. For the nine months ended December, the company's disbursements grew by 20 per cent to Rs 4000 crore, contributed by a 25 per cent growth in car financing.
At the current market price of Rs 352, the stock trades at a modest valuation of 8.8 times its trailing one-year standalone earnings.
This is at a discount to Shriram Transport Finance (13.33 times) and M&M Finance (10.8 times). The stock trades at 1.6 times its December book value.
Sundaram Finance has a strong branch network of more than 450 branches with predominant presence in the South. This, together with a well-recognised brand name, helps it attract depositors; however, the reliance on depositors has come down over the years.
Currently, the liability profile is quite diversified with 15 per cent of the funds raised from public deposits, 47 per cent from the secured and unsecured debentures and 27 per cent from the bank loans. Sundaram Finance also raises funds by securitising loans.
Business
The receivables of Sundaram Finance stood at Rs 9,500 crore as of December 2009. Commercial vehicle finance and car financing form a chunk of financing, with 60 per cent and 30 per cent share respectively in the total loan book. Rest of it is contributed by equipment finance and tyre finance.
While the commercial vehicle segment witnessed a significant fall in sales in 2008-09, sales have picked up smartly during the first ten months of this fiscal, with stimulus measures and the improvement in the overall economic environment aiding a recovery.
According to ‘Society of Indian Automobile Manufacturers', commercial vehicles sales, which fell by 22 per cent in 2008-09, rebounded in the first ten months of the current fiscal. Commercial vehicles sales grew by 30.4 per cent between April-Jan 2010.
The passenger car segment, on the other hand, has been growing at a strong pace, after flat numbers in 2008-09. Passenger vehicle sales grew 25 per cent in the first ten months of this fiscal.
With excess capacity gradually being absorbed and freight demand picking up, CV sales may continue to make headway even if there is a partial rollback of stimulus. If salary hikes initiated by IT companies spread to other sectors, the demand for cars, which was earlier driven by the Sixth Pay Commission and stimulus incentives, may also continue.
Improving Financials
The company's loan book for the period 2004-09 grew at a modest 13 per cent annually. Sundaram Finance has actually weathered the slowdown of last year relatively well, despite its reliance on CV financing.
Though disbursements fell by 12.5 per cent in 2008-09, the company's adjusted net profits grew by 11 per cent. Despite the slowdown, Sundaram Finance managed to maintain its asset quality notwithstanding moderate slippages.
Net NPAs to advances ratio rose from 0.49 per cent to 0.75 per cent for 2008-09. Asset quality slippages may now bottom out, with the economy showing signs of revival and low interest costs.
For the nine months ended December 2009, Sundaram Finance posted 55 per cent growth in net profits. Improved interest spreads, coupled with strong disbursements, has aided earnings.
The company has a capital adequacy ratio of 14.7 per cent which, coupled with internal accruals, may support a loan growth of around 25 per cent for the company over next one year without having to raise any funds. In the current fiscal, even as the interest spreads of Sundaram Finance have improved, maintaining these spreads would be a challenge as the demand for liquidity increases.
Therefore, the earnings growth for the company would be primarily driven by higher disbursements, which appear likely given the high vehicle sales volumes. A strong branch network continues to offer scope for ‘other income' contribution.
Sundaram Finance also has a presence in insurance, logistics, mutual fund and housing finance segments from which it earns dividend income.
Sundaram BNP Paribas Asset Management is one of the bigger domestic mutual fund houses with asset under management of Rs 13,700 crore. AMC business and Housing Finance have reported a net profit of Rs 10.3 crore and Rs 26 crore respectively for the year-ended 31 March 2009.
Risks
As banks are expected to lend at a base rate and sub-PLR lending ceases to exist from April 1, 2010, the cost of borrowing may trend higher for NBFCs such as Sundaram Finance.
However, Sundaram Finance has a smaller proportion of bank borrowings compared to the other NBFCs.
via BL
Saturday, February 13, 2010
Subscribe to:
Posts (Atom)