Gravita India

New Issue Analysis - Gravita India

Gravita India (GIL) which is into manufacturing of lead metal by recycling and smelting process is tapping the primary market floor. GIL is offering 36 lakh shares with in a price band of Rs 120-125. Considering the price band, GIL is expected to raise Rs 43.20 on lower price band and Rs 45 crore on higher price band. GIL will be utilizing this money for capacity expansion, investment in overseas subsidiaries and working capital management.

Considering the kind of poor response smaller issues have received in the recent past investors might be curious to know about whether to invest or avoid the GIL IPO. Our recommendation is that, investors should avoid any investment. There are compelling reasons behind the same. First factor is, the company is going for expansion despite the fact that its current facilities are still under-utilised. Further, the cash flow from the operations has been inconsistent. On the valuation front also the issue seems to be costlier with its FY10 earnings discounting the higher price band by 12.86x. Even the EV/EBITDA of 11x seems to be on the higher side for smaller manufacturing company like GIL. Hence, we recommend the investors to avoid the issue.

The Company
As mentioned earlier, the company is into the manufacturing of lead metal by recycling and smelting process. In the process it also manufactures other lead-based products. The manufactured products find usage in industries like batteries, glass, ceramic, pharmaceutical and electronics. The main products of the company are pre-refined lead, lead ingots, lead alloys, grey oxide, red lead and litharge. As regards the capacities, it has refined lead is 12600 metric tonnes per annum (mtpa), unrefined lead ingots is 6000 mtpa, red lead is 1800 mtpa, grey oxide is 1800 mtpa and litharge is 1800 mtpa at its Jaipur facility.

Expansion Plans
As regards issue objects, company is setting up an additional capacity at Jaipur facility and will be setting up a new plant at Wada in Thane district of Maharashtra. Company is spending Rs 7.23 crore for expansion at Jaipur and Rs 5.79 crore at Wada. At its Jaipur facility it is adding 50 mtpa of lead wool, 75 mtpa of lead wire,  1000 mtpa of lead sheets and 1000 mtpa of lead powder. Capacity expansion is expected to get completed in 2012, but the main factor is company has not yet finalised the land for the same. At Wada also the situation is no different with the company planning to add up 800 mtpa of lead alloy capacity but is yet to finalise the land. But if we take a look at capacity utilisation in FY10 many questions arise in the minds of investors. In 2010, the capacity utilisation of refined lead, lead alloy was just 40 per cent, around 20 per cent in ingots and hardly any capacity was utilised in other products. So the question arises is, why the company is going for expansion?

Investment in Overseas Subsidiaries
GIL has kept aside Rs 5.85 crore for overseas acquisition of three companies where it already has some stake.
It is paying Rs 1.50 crore to buy 14 per cent stake (to take the stake to 52 per cent) in Sri Lanka-based Navam Lanka. Navam Lanka has capacity of 3000 mtpa of lead ingots. It is planning to cater its south-based clients from here. It is also paying Rs 2 crore towards investment in Gravita Senegal, which will manufacture ingots. The company will invest in building capacities here.

GIL is also investing in one of its subsidiaries Gravita Honduras (SA) and will invest Rs 2.35 crore here for a total holding of 33 per cent. This facility will manufacture 6000 mtpa of lead ingots to be sold in the local markets. In addition, the company is also investing Rs 18.60 crore to set up re-melted lead ingots facility in Australia. The prospectus does not mention about the exact capacity. The capacity will go on stream after two years and hence providing any valuation at current levels seems to be difficult.  In addition to above factors, GIL will utilise Rs 10 crore for working capital management. 

Financials
On the financial front the performance has been very good in past two years. With lead prices firming up and rising demand, on consolidated basis, in FY10 it posted a topline of Rs 166.97 crore and bottomline of Rs 13.22 core as against Rs 109 crore and Rs 5.42 crore respectively. But with the prices stabilizing we expect the margins to remain under pressure and hence do not expect any outstanding performance in FY11. Further, the inconsistent cash flow from operating activities also seems to be a dragger on the company’s financial performance. Considering the above factors we recommend the investors to avoid the scrip at current levels.

Share holding pattern	Pre Issue	Post issue*
Promoter group	99.94	73.52
Others	0.06	0
Public	-	26.48
Total	100	100
ISSUE INFORMATION	Rating 38
Issue opens on	1-Nov-10
Issue closes on	3-Nov-10
Number of shares (crores)*	0.36
Price Band  (Rs)	120-125
Issue route	Book Building
Promoters	Mahaveer Agarwal, Rajat Agarwal
Post issue Equity (crores)*	1.36
Minimum Bid	-
Lead managers	Keynote capital
Listing	BSE, NSE
Retail Portion (crores)*	0.12
QIB Portion (crores)*	0.18
Non-Institutional (crores)*	0.05
*Calculated on the basis of upper price band
Financials
Financials	FY10 Rs/Cr
Net Sales	166.97
Other Income	1.75
Manufacturing expenses	148.36
Finance and related charges	1.12
Net profit(/loss) after tax	13.22