M and B Switchgears IPO Review by MLR Securities (Avoid)

Review By MLR Securities Private Ltd on Oct 3, 2011

Issue Period: 28th Sep - 5th Oct
Price Band: INR 180 - 186
Issue Size: INR 93 Cr
Mcap: INR 360 - 372 Cr
Grading: ICRA IPO Grade 2
BRLM: D&A Financial Services ltd
Promoter: Shyam Sunder, Vikalp & Anurag Mundra
Listing: BSE & NSE

M and B Switchgears Limited (MBSL) is into manufacturing of distribution transformers, power transformers, furnace transformers and special purpose transformers. The company began with a capacity to manufacture 550 transformers per annum and has gradually increased its capacity to 5,109 transformers per annum. Existing annual production capacity is 9,00,000 KVA per annum on single shift basis.

The company is also planning to diversify its operations into solar power segment and is in the process of setting up a 2MWp grid connected PV solar power project in Madhya Pradesh which is expected to commence operations in Nov 2011. Further, the company is planning to set up an additional 4MWp grid connected PV solar power project in Rajgharh, MP for which the company will be utilizing IPO proceeds.

Promoter Mr Shyam Sunder Mundra is an Electrical Engineer and Masters in Electronics and Business Administration and has a total experience of 42 years in the power industry of which 8 years are in Madhya Pradesh Elecrical Board (MPEB) and remaining 34 years are in the transformer industry. Mr Vikalp Mundra, is an Electrical Engineer and Masters in Management and has an experience of 17 years in the transformer industry and Mr Anurag Mundra is a Chartered Financial Analyst (CFA) and holds a Master in Business Administration and has over 11 years experience in our Company which is in the business of manufacture of transformers.

Company's net sales grew at a CAGR of 22% in the last five years to Rs 33 Cr while PAT witnessed a CAGR of 22% during the same period. It posted a PAT of Rs 0.77 Cr in FY11. Company's EBITDA margins consistently improved from 4.5% in FY06 to 9.1% in FY11 on the back of reduction in the trading volumes in the share of total revenues and increased focus of the company on sale of specialized transformers like furnace transformers, mining and dry type transformer where the company enjoys higher margins.

PAT margins are quite thin with just about 2% in FY11 because of increase in the scale of operations and increase in working capital borrowings, which led to expansion in interest cost, which has resulted in less than commensurate growth in PAT despite healthy growth in operating profits.

The total debt of the company increased from Rs 2.9 Cr in FY07 to Rs 10.6 Cr in FY11. Increase in working capital borrowings has been largely to support the increased funding requirements owing to increase in scale of operations, long term loans have been used to fund the capacity expansion of the company. Currently debt equity ratio is quite comfortable at 0.7 due to capital infusion in FY10 and FY11, which also resulted in lower RoE of 5%.

Concerns
High off]take risks, as MBSL yet to tie up for sale of power with customers. However, risk is partially mitigated by the power shortage in the state of Madhya Pradesh and low capacity for the project (6MW).

Small scale of operations of the company in the transformer business resulting in lower bargaining power vis a vis larger customers and moderate economies of scale.

Highly competitive and fragmented nature of the transformer industry with significant competition from small and medium sized players

Utilization of Issue Proceeds
To set up 4MWp solar photo voltaic plant in Rajgharh, MP. It is expected to generate 6.56 Mn units of power at 19% plant load factor.


Conclusion / Investment Strategy

Company is asking for an exorbitant valuation of 350 to 362 times FY11 EPS and a market cap to sales ratio of 10. Established players like Transformers and Rectifiers, Voltamp Transformers are trading at a P/E and MCap to sales ratio of less than 10 and 1, respectively. We recommend investors to avoid this issue.

Reviewer recommends Avoid to the issue.

Review By MLR Securities Private Ltd on Oct 3, 2011

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