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A company whose aggregate profit in last five years was only Rs 2.6 crore and reserves is just Rs 1.1 crore is asking for a share premium of Rs 45 crore! How can one justify a market cap of Rs 360 crore plus for a company whose aggregate turnover in last five years was only Rs 135 crore? Absurd valuation short-circuits genuine appreciation prospects on M&B Switchgears .
OFFER AT A GLANCE
|
Name
|
M and B Switchgears Ltd
|
Offer Quantity
|
50 lakh shares of Rs 10 each
|
% on Total Equity
|
25.0%
|
Offer Price
|
Rs 180 to Rs 186
|
Offer Amount
|
Rs 90 cr to Rs 93 cr
|
Application Quantity
|
30 & Multiples of 30
|
Offer Opens
|
September 28, 2011
|
Bid/Offer Closes
|
October 5, 2011
|
Rated By
|
ICRA
|
Rating
|
2 out of 5
|
Lead Managers
|
D & A Financial
|
Registrars
|
Bigshare Services
|
The IPO
The present IPO is a fresh issue of 50 lakh equity shares of Rs.10 each constituting 25% of the company’s post-issue capital. The offer is being made through the book-building route with a price band of Rs 180-186 per share. Thus the IPO is valued Rs 90 crore to Rs 93 crore.
Issue Objective
The company proposes to set up a new grid-connected 4 MWp solar photovoltaic power plant at Gagorni in Madhya Pradesh at a cost of about Rs 72 crore. The balance issue proceed is meant for general corporate purpose. However, the project cost and funding plan are not appraised by any external agency.
Parentage
The promoters of M&B Switchgears Ltd (MBSL) are entering the capital market for the first time though they claim to have been in the manufacture of transformers since last 30 years. MBSL was promoted by Shyam Sunder Mundra in 1976 as a proprietorship concern. This was converted into a limited company in 1999.
Business
The company began with a capacity to manufacture 550 transformers per annum and 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. MBSL is reportedly manufacturing distribution transformers, power transformers, furnace transformers and special purpose transformers. The company primarily caters to the requirements of state electricity boards and government controlled utilities.
The company is now diversifying into solar power and is in the process of setting up a 2MWp grid connected PV solar power project (Phase I) in Madhya Pradesh. Post-IPO, the company is planning to set up an additional 4MWp grid connected PV solar power project (Phase II).
Track Record
Besides being present in the transformer manufacturing business, MBSL is also engaged in trading of iron & steel and sale of scrap. However over the years, the revenue contribution from this non-core business has witnessed a declining trend which has resulted in higher operating margins. Whereas the share of trading steel/scrap in the overall turnover has declined from 53% in fiscal 2006 to less than 14% in fiscal 2011, operating margin has improved from 3.6% to around 9% over the this period. MBSL has reported a healthy CAGR of 27% in revenues in the last five years albeit on a low base. Nonetheless, the more than a decade-old company’s bottom line is still below one Rs.1crore!
Prospects
The transformer industry’s prospects look good because of anticipated increase in power capacity in India and initiatives to reduce Transmission & Distribution (T&D) losses. With the proposed diversification into solar-power, the company can reduce the risk of excess dependence on single product line. However, the company’s limited customer base is a cause for concern as the payment cycle from SEBs is typically long on account of lengthy process for approval of bills since they have a weak financial profile. More over, the proposed diversification is in nascent stage and no institution is monitoring or funding such a large project.
Valuation
Power equipment industry commands better discounting in the market as it is dominated by multinationals like Siemens and ABB though purely Indian companies do not enjoy the same multiples. Many a leading Indian company is currently discounted only about 10 times the earnings, one and a half time net worth and less than one time sales.
In last three years MBSL’s average return on net worth was abysmally poor at 6.4%. Its aggregate net profit in last five years was only Rs 2.6 crore and reserves at the end of last year stood at just Rs 1.1 crore. Yet, it is asking for a share premium of Rs 45 crore! How can one justify a market cap of Rs 360 crore plus for a company whose aggregate turnover in last five years was only Rs 135 crore?
How M & B Switch compares with peers
|
SCRIP
|
NOS
|
M-CAP
|
P/E
|
P/BV
|
P/FV
|
P/R
|
OPM
|
PRICE
|
|
|
(Cr)
|
(x)
|
(x)
|
(x)
|
(x)
|
(%)
|
(Rs)
|
Voltamp Transformers
|
|
506
|
10.0
|
1.4
|
50.0
|
1.0
|
12.5
|
500.00
|
Bharat Bijlee
|
|
400
|
11.3
|
1.4
|
70.8
|
0.6
|
8.5
|
707.40
|
EMCO
|
|
345
|
-
|
0.6
|
26.4
|
0.3
|
3.6
|
52.90
|
Transformers & Recti
|
|
281
|
7.1
|
0.9
|
21.8
|
0.5
|
10.7
|
217.65
|
Jyoti
|
|
127
|
11.3
|
1.2
|
7.4
|
0.3
|
13.1
|
74.15
|
Indo Tech Transform
|
|
118
|
-
|
1.0
|
11.1
|
1.1
|
-
|
110.75
|
ECE Industries
|
|
90
|
-
|
0.6
|
10.2
|
0.5
|
-
|
102.10
|
IMP Powers
|
|
58
|
8.0
|
0.7
|
7.1
|
0.2
|
12.1
|
71.10
|
Tarapur Transformers
|
|
37
|
-
|
0.5
|
1.9
|
3.2
|
-
|
18.90
|
Marson's
|
|
35
|
7.2
|
1.3
|
1.4
|
0.3
|
10.9
|
14.18
|
RTS Power Corp
|
|
28
|
14.7
|
0.6
|
3.5
|
0.2
|
6.8
|
35.50
|
Accurate Transformer
|
|
17
|
2.7
|
0.3
|
5.8
|
0.1
|
12.5
|
58.10
|
Alfa Transformers
|
|
12
|
-
|
0.5
|
2.2
|
0.5
|
9.3
|
21.55
|
Industry Composite
|
26
|
79,121
|
26.5
|
3.7
|
69.9
|
1.7
|
10.7
|
|
M & B Switchgears
|
High
|
372
|
353.2
|
17.9
|
18.6
|
7.9
|
9.3
|
186.00
|
|
Low
|
360
|
341.8
|
17.4
|
18.0
|
7.7
|
|
180.00
|
(Source:India Aarthik Research)
Existing Shareholders’ Cost
Though yet to pay a dividend, MBSL issued a bumper 11:1 bonus in October 2010 which brought down the cost of original shareh
olders less than 85 paise per share. More over, only in December 2010 the company made a preferential allotment to promoter group at a price of Rs.10.25. Thus, the cost holding of the existing shareholders who control 75% of the post-issue equity would be between 83 paise and Rs.3.96 per share. As such once the lock-in lapses the private placement holders who have about 4.3% of the enlarged equity may rush in to dump the share at the first available opportunity.
Investment Bankers’ Track
The Gwalior-registered MBSL’s IPO is managed by the Mumbai-based D&A Financial Capital which has already brought out two IPOs this year whose performance on the trading screen is pathetic. What’s more, in its previous avatar as `Doogar Associates’ the investment banker brought out as many as 96 IPOs during the unprecedented primary market boom that lasted between 1994 and 1996. Of these, 62 companies’ shares are not traded now!
Performance of D & A Financial-associated IPOs
|
Sl.
|
Issuer
|
IPO
|
FV
|
IPO
|
Listing
|
3-Mon
|
Current
|
No.
|
|
Date
|
|
Price
|
Gain%
|
Gain%
|
Gain%
|
1
|
Shilpi Cable Tech
|
22-Mar-11
|
10
|
69.00
|
-31.0
|
-75.3
|
-81.2
|
2
|
Brooks Laboratories
|
16-Aug-11
|
10
|
100.00
|
-39.8
|
|
-72.4
|
Concerns
• Small scale of operations result in lower bargaining power vis a vis larger customers.
• Highly competitive industry with significant competition from small and medium sized players.
• Early stage of implementation of the diversification project resulting in higher execution risks.
• High cost of power generation make solar power projects highly unviable in the absence of subsidized feed in tariffs or other financial incentives.
• Financial closure for Phase I of the diversification is yet to be achieved and funding of Phase II is highly dependent on the success of the IPO.
• Large quantum of equity funding for the solar project resulting in expectations of modest equity returns as existing bottom line is too small to service the bloated equity.
