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Shilpi Cable Technologies Ltd IPO Review (Avoid)

Review By MLR Securities Private Ltd on Mar 22, 2011

  • Issue Size: Rs 56 Cr;
  • Price Band: Rs 65 - 69;
  • Issue Date: Mar 22 - Mar 25;
  • Grey Market Premium: Rs 4 - 5;
  • Market Cap - Rs 209 - 223 Cr;
  • BRLM: D & A Financial Services ltd

Issue objects

Utilization of Issue Proceeds Rs Cr
For capital expenditure to augment cable manufacturing capabilities 16
For working capital requirement 16
For capital expenditure on Cable/ wire Assembly shop 9
For investment in the Subsidiary of the Company, M/s Shilpi Cabletronics ltd 5
For capital expenditure on Tools for 3G enabling 4
For General corporate purposes 3
To meet issue expenses 3
Total 56

Shilpi Cable Technologies Limited (SCTL), incorporated in July 2006 was formerly known as MIS Rosenberger Shilpi Cable Technologies Ltd. which was a 50:50 joint venture between Shilpi Communications Pvt. Ltd. (SCPL) and MIS Rosenberger Hochfrequenztechnik GmbH & Co. KG, Germany. SCTL was set up to take up the project of manufacturing of Radio Frequency (RF) Cables with an installed capacity of 18,245 km of cables used in telecom towers. On account of differences between JV partners, the plant stopped production soon after it started in January 2008 and could again restart the production in September 2008 after the completion of buyout process among JV partners and SCTL acquiring stake from the JV partner.

The company currently manufactures RF cables of various sizes, Low Voltage Power Cables and trade in Cable accessories for the telecom sector. Company has executed orders for various corporates like BSNL (Bharat Sanchar Nigam Limited), Ericsson India Private Limited, Tata Teleservices Limited etc.

The proposed expansion project entails setting up of new capacity for 20,000 kms of cables and wires along with 80,000 nos of cable assembles at the existing manufacturing unit in Alwar, Rajasthan.

  • Standalone sales of the company increased significantly to Rs 170 Cr in FY10 from Rs 48 Cr in FY09 on account of the company having full year of operations in FY10. The company could operate for only 6 months in FY09 as compared to the whole year of FY10. On the consolidated basis the company posted total income of Rs 259 Cr in FY10 with a PAT of Rs 9.4 Cr while in 1HFY11 the company posted total income of Rs 171 Cr with a PAT of Rs 7.4 Cr during the same period.
  • Consolidated EBITDA margin was 13% in 1HFY11 while in FY10 it was 9.4%. PAT margin was 4% in 1HFY11 with negligible PAT margin in FY10. The company is highly leveraged with a pre issue debt equity ratio of 2.5:1 while post issue it will come down to 1.1:1

Valuations

The company's market cap is coming to Rs 210]223 Cr on a price band of Rs 65]69. The company is asking for a post issue price earnings multiple of 14]15 times its annualized EPS of Rs 4.6 of FY11. There is no direct comparable in the listed space while in the unlisted space the company faces competition from Microqual Techno Pvt.Ltd. and LS Cable Limited. We believe such a high multiple does not justify its fundamentals considering its exposure to voalitility in copper prices a major raw material with a limited operational history. We recommend investors to Avoid the issue.

 Concerns

  • Exposed to Raw Material Price volatility

The company's major raw material is copper which formed around 95% of the total cost during FY10. The main components of raw material are Copper Tube, copper cladded aluminium wire, copper tape, linear low density and black jacketing polythene and HDPE. Since the copper prices are wildly fluctuating, any volatility in prices may impact the profitability of the company.

  • Contingent Liability

As of 31st Mar'10 the company had contingent liabilities of Rs 26 Cr which was almost 3 times the PAT of FY10. Out of Rs 26 Cr almost 95% of the contingent liability is on account of related parties. While as of 1HFY11 around 97% of the contingent liability is towards related parties. If any of these contingent liabilities materialize the company's financial conditions and result of operations would be adversely affected.

Details (Rs Cr) FY10 1HFY11
Bank Guarantee (For EPCG and performance) 1.2 1.1
Corporate Guarantee (For working capital loans to subsidiary co from Bank) 25.0 45.0
Total 26.2 46.1
  • Pledged Shares

Shilpi Communications ltd one of the promoter of the company has pledged 42% of the paid up share capital of the SCTL. Post issue pledged shares will account for 32% of the total paid share capital of the company.

Promoters

Mr Mukesh Kumar Gupta is one of the founder promoter of the company. He has 32 years of experience in cable manufacturing. He is in charge of overall supervision of the operations of the company. Mr Manish Goel aged 29 years is the son of Mr. Mukesh Kumar Gupta. He is on the board of the company holding charge of chief commercial officer. He holds Bachelor’s Degree in Business Management from Rai University, Institute of Learning and Management. Mr Goel joined his father’s business in 2005.


Conclusion / Investment Strategy

A small player in Radio Frequency (RF) cable segment with limited operational history, exposure to volatility in raw material prices, highly leveraged and expensive valuations, we recommend investors to AVOID the issue.

The recommendation does not factor in any listing gains as speculative interest cannot be ruled out considering the small size of the issue.

Reviewer recommends Avoid to the issue.

Review By MLR Securities Private Ltd on Mar 22, 2011