CEBBCO - Avoid

IPO Analysis – CEBBCO

RATING 40

Recommendation - Avoid

Do Not Expect Listing Gains

Commercial Engineers and Body Builders Co. (CEBBCO) is coming out with an IPO to fund its expansion plans. Through this IPO the company expects to raise around Rs 172 crore. However, this issue is a combination of a fresh issue aggregating Rs 153 crore and an offer for sale from New York Investment Management India Fund (12.85 lakh shares) and Commercial Automotive Private (2.43 lakh shares), a promoter group company. The company has set the price band for the issue at Rs 125-127. Through the fresh issue the company expects to raise Rs 153 crore, while the balance Rs 19 crore would go towards the offloading investors. Considering that Rs 153 crore would come to the company, at a price band of Rs 125-127, the company would be issuing fresh shares of around 1.22 -1.20 crore equity shares taking the post issue capital of the company to approx. 5.5-5.48 crore equity shares.

Of the net funds so raised Rs 80.30 crore would be utilised towards capital expenditure for the railway project, where the company is setting up a combined wagon and EMU Coach manufacturing facility with a production capacity of 1200 wagons and 150 EMUs coaches per annum. In addition to that the company would utilise the Rs 59.05 crore to pay off debts, while balance would be used towards general corporate purposes.

As for the business, CEBBCO is in the business of manufacturing vehicle bodies for the commercial vehicle industry. That apart, the company has also forayed into the railway segment in 2008, wherein it does refurbishment of railway wagons and manufacture of railway wagons, coaches and locomotives for Indian railways. Currently, almost 73 per cent of the revenues come from the commercial vehicles division, while the balance comes from the railway segment. In the commercial vehicle division, it manufacturers vehicle bodies for companies such as Tata Motors, Eicher Motors, Ashok Leyland, Man Force Trucks, Asia Motor Works, etc. However, Tata Motors is the single largest client for the company and accounts 52.46 per cent of the total sales of the company. As on July 15, 2010, the company has orders worth Rs 525.53 crore for commercial vehicles division, while the orders for the railway division stood at Rs 98.15 crore.

Though the company is a niche player in the commercial vehicle segment and with the railway division it finds itself as part of the sunrise industry, there are some concerns.

The company’s major revenues of around 52 per cent of total sales are skewed towards one single client - Tata Motors, which increases not only the revenue risk for the company, but also reducing its negotiating ability, thereby keeping its margins very low. Even though the company management claims it’s a market leader in vehicle body manufacturing in India, they weren’t able to tell us their market share, nor the total size of the vehicle body manufacturing industry.

Secondly, though CEBBCO has forayed into the railway segment, which does offer good prospects considering the Rs 59480 crore outlay in the 11th plan for enhancing rolling stock of railways, the company is fairly inexperienced and could face stiff competition from the well established peers in the railways segment such as Texmaco, Titagarh Wagons. Besides, even after considering its current expansion of 1200 wagons, its capacity will still account for 4 per cent of the total wagon capacity, which is quite miniscule and raises questions on its ability to bag large orders and successfully execute them.

That apart, the company also seems to be asking a huge premium from the investors. For FY10, CEBBCO’s revenues stood at Rs 196.87 crore, while profits stood at Rs 19.19 crore. At these numbers and fully diluted capital of approx. 5.5-5.48 crore equity shares, CEBBCO is available at PE of 35.83- 36.27x. This, we believe, is quite high when comparable peers such as Automobile Corporation of Goa and Texmaco, which are available at PE of 14x and 22x. What’s the rationale behind such steep valuations is beyond our understanding, but clearly the company is trying to take advantage of current buoyant market conditions. However, this would cap the upside on listing and hence we don’t expect listing gains for CEBBCO.