Commercial Engineers & Body Builders Company (CEBBCO) is one of the leading
designers and manufacturers of vehicle bodies for goods commercial vehicles
(CV) in India. The company is also involved in the refurbishment of railway
wagons. It proposes to partially utilise the IPO proceeds to set up a wagon
manufacturing unit. CEBBCO’s core business fetches a P/E of 25x on FY2012
estimates at the upper price band. Moreover, to justify the implied market capital
of Rs698cr, the company’s wagon manufacturing plant would have to operate at
100% utilization within one year and generate profitability in line with existing
players, which we believe at the current juncture appears stretched. Hence, we
recommend Avoid to the IPO.
Opportunities galore: The Eleventh Five-Year Plan (2007-2012) has outlined a
number of infrastructure expansion projects, including those in the rail and road
sectors. The CV industry and the railway transportation network is expected to
benefit from the pan-sector investments in infrastructure as CVs and trains are an
integral part of the construction process – from sourcing of raw materials, their
transportation to installation and fabrication. Total investment in infrastructure
during the Eleventh Plan is projected at Rs205,615cr. In the wagon manufacturing
business, at present, there are about 13 players. Six are in the public sector and
seven companies in the private and joint sector. It may be noted that the PSUs,
which account for 30-40% of market share of the wagon industry, have not been
able to execute the orders since the last three years.
Core business faces high competition from unorganised sector: CEBBCO’s core
business of manufacturing and supplying vehicle and locomotive bodies faces
intense competition from the large unorganised sector.
High contribution from single buyer resulting in low bargaining power: CEBBCO
derives significant revenues from its single largest customer, Tata Motors (TTML)
restricting its bargaining power. In FY2009 and 9MFY2010, the company derived
a substantial 69% and 49% of its total revenues from TTML, respectively.
Moreover, given intense competitive pressures, CEBBCO is compelled to sell its
products at low prices in turn impacting its margins. The company also doesn’t
have in-built clause in the contracts to pass through the fluctuation in raw material
prices.
New Business – Difficult to break ground: The company expects to partially utilise
the IPO proceeds to set up a manufacturing unit for wagons. However, we believe
that CEBBCO being a relatively new entrant in the business has yet to prove itself
in winning tenders, executing the same and generating profitability at par with the
existing players.
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