Sanghvi Forging & Engineering Ltd IPO Review (Avoid)

Review By MLR Securities Private Ltd on May 5, 2011

Issue Date: 6th May - 9th May
Price Range: INR 80-85
Issue Size: INR 36.9 Cr
Mcap: INR 102-108 Cr
Grey Market Premium: INR 3-3.5
IPO Grading: CARE IPO Grade 3
Promoter Holding: 56% (Post Issue)
BRLM: Arihant Capital Markets

Sanghvi forgings and Engineering incorporated in 1989, is a Gujarat based manufacturer and exporter of forging products for the non-automotive sector. The current capacity of the company is 3,600 MTPA for manufacturing of forged flanges and precision machined components. The company's product profile caters to industries like Oil & Gas, Power, Ship Building and Defence.

Mr. Babulal Sanghvi is the promoter of the company along with his three sons, Mr. Jayanti B. Sanghvi, Mr. Naresh B.Sanghvi and Mr. Vikram B. Sanghvi. Mr. Babulal Sanghvi has experience of more then two decades in the forging industry.

The company proposes to expand its current capacity by 15,000 MTPA by FY13. The total project cost of the expansion is Rs 120 Cr.

Sources of Finance for the proposed capacity expansion

Gross Proceeds of the issue - Rs 42.5 Cr
Term Loans - Rs 72.0 Cr
Unsecured Loans - Rs 0.64 Cr
Internal Accruals - Rs 5.3 Cr

Financials

  • The share of exports in the total sales of the company is continuously declining from 31% in FY08, it has come down to 15% in 9mFY11. The major chunk of the exports is to Europe, Middle East and U.S.
  • The capacity utilisation of the company is quite low at just 53.3% and 57.5% in FY09 & FY10 respectively. However, the company expects to increase the utilsation levels to 62.5% in FY11 and 65% in FY12 & FY13 of the current facility. The management expects that utilisation rate of the new capacity would be 55% in the year of commissioning that is FY13 while in the subsequent years it would increase to 65% and 70% in FY14 and FY15 respectively.
  • The company's total income grew at a CAGR of 15.6% in the last five years to Rs 29 Cr in FY10. Bottomline grew at a CAGR of 18.5% in the same period to Rs 2.5 Cr in FY10. In 9mFY11 the company posted total income of Rs 29.32 Cr with a PAT of Rs 3 Cr.
  • The company has been able to maintain EBITDA margins of 20% on an average while PAT margins are in the range of 9% in the last five years which is one of the best in the industry. Going forward, the margins would be affected on account of high interest cost on debt which the company has taken to part finance the proposed capacity expansion.
  • The company's current leverage position is quite comfortable with debt equity ratio of 0.27:1 post issue. However, going forward it will increase to 1.54:1 as the company has taken a term loan of Rs 72.6 Cr which will make it highly levered.
  • The operating cycle of SFEL increased from 117 days in FY09 to 153 days in FY10 mainly due to higher average collection period.

 

Valuations

The company's market cap is coming to around Rs 102-108 Cr on a price band of Rs 80-85. The company is asking for a P/E of 26-27 on an annuliased EPS of FY11. P/BV of the company is coming to around Rs 1.4-1.5 on the lower and upper price band of Rs 80-85. The valuations are quite expensive when compared to other other players like MM forgings, Ramkrishna Forgings, Ahmdenagar Forgings are trading on an average TTM P/E of 7.3. We believe the asking price does not justify its size of operations.

 


Conclusion / Investment Strategy

Investment Rationale

We recommend investors to Avoid the issue as the company is asking for a valuation of 26-27 times its FY11 annualized EPS which is very high considering its size of operations when other players of the same size like MM Forgings, Ramkrishna Forgings, Ahmednagar Forgings are available at an average valuations of 7.3

 

Reviewer recommends Avoid to the issue.

Review By MLR Securities Private Ltd on May 5, 2011









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