Vaswani Industries - Avoid

Anand Jain / 29 Apr 2011

Vaswani Industries which is a small scale manufacturer of coal based sponge iron in the state of Chattisgarh, is tapping the primary market with a public issue of 1 crore equity shares of Rs 10 each, priced between Rs 45-49 per share. On the lower price band level it is expected to raise Rs 45 crore and around Rs 49 crore on the higher band. The issue, constituting 42.57 per cent paid-up capital of the company, opens on 29th April and closes on 3rd May 2011. There will be a high level of curiosity among readers to know whether to invest in the IPO or avoid it. We have been repeatedly warning our readers at large, against highly priced IPOs being offered by promoters to trap gullible retail investors. Vaswani Industries is another such issue and there is nothing compelling in the company, which could call one to park money in it. There are various concerns like lower capacity utilization, lower contribution to the topline from the core business activity of sponge iron and finally the higher valuation at which the shares are being offered. On the valuation front, considering an EPS of Rs 2.23 the lower price band of Rs 45 discounts its FY11E revenues by 20.20X and at the higher price band the P/E stands at 21.97X. This is much higher as compared to similar players like Monnet Ispat which is trading at 12X and MSP Steel which trades at 11X. Even the EV/EBITDA of 8.72X on the lower price band and 9.27X on the higher price band seems to be higher for a smaller company like Vaswani Industries.

Vaswani Industries

Vaswani Industries which is a small scale manufacturer of coal based sponge iron in the state of Chattisgarh, is tapping the primary market with a public issue of 1 crore equity shares of Rs 10 each, priced between Rs 45-49 per share. On the lower price band level it is expected to raise Rs 45 crore and around Rs 49 crore on the higher band. The issue, constituting 42.57 per cent paid-up capital of the company, opens on 29th April and closes on 3rd May 2011. There will be a high level of curiosity among readers to know whether to invest in the IPO or avoid it. We have been repeatedly warning our readers at large, against highly priced IPOs being offered by promoters to trap gullible retail investors. Vaswani Industries is another such issue and there is nothing compelling in the company, which could call one to park money in it. There are various concerns like lower capacity utilization, lower contribution to the topline from the core business activity of sponge iron and finally the higher valuation at which the shares are being offered. On the valuation front, considering an EPS of Rs 2.23 the lower price band of Rs 45 discounts its FY11E revenues by 20.20X and at the higher price band the P/E stands at 21.97X. This is much higher as compared to similar players like Monnet Ispat which is trading at 12X and MSP Steel which trades at 11X. Even the EV/EBITDA of 8.72X on the lower price band and 9.27X on the higher price band seems to be higher for a smaller company like Vaswani Industries.

Understanding the Business

Vaswani Industries is a small-scale manufacturer of coal-based sponge iron with an installed capacity of 90000 MTPA of sponge iron and 36000 MTPA of steel billets, supported by an 11.5 MW captive power plant - 9MW is waste heat generation and 2 MW is a coal based power plant. The core business of the company is sponge iron manufacturing. However, its capacity utilization has been very low and stood barely at 53 per cent and 12 per cent for sponge iron and billets respectively in FY10. The sponge iron capacity utilization dropped to barely 34 per cent in 7MFY11 (April to October 2010) raising concerns on the company’s business and operations. As if that was not enough, the company has hardly used its billets capacity. Ravi Vaswani (Managing Director, Vaswani Industries) states that, “We have started selling the excess power recently. As there were higher margins in the power segment we diverted the resources to the power segment and hence have not used the billets capacity”. When asked about the impact of the switch of capacity on long term clientele in billets division, the management stated that “We sell the billets in open markets and hence do not have any long term contract”.  We are of the opinion that, while this sort of a decision may help in short term, having no long term contracts will be a concern in the long run.

Use of Funds

Here also the company scores low, as it is not raising money for capacity expansion. Out of the raised amount, Rs 25.20 crore will be utilised in repaying debt and Rs 19.14 crore will be utilised for long term working capital. Rest will be used for general corporate purpose and issue expenses.

Financials

The impact of a switch in the business segments is also visible in the financial performance of the company. For FY10, the company reported a topline of Rs 92 crore, of which, one-fourth came from sale of power. The EBIT for the year stood at Rs 11.1 crore, of which, Rs 5.9 crore was contributed by the power segment alone. This clearly indicates that, the company’s core business of iron and steel accounted for less than half of its operating profits standing at just Rs 4.2 crore. PAT for FY10 was barely Rs 3.7 crore, eaten up grossly by a huge interest burden of over Rs 5 crore, leading to a net margin of just 4 per cent.

Further for the seven months ended 31-Oct-2010, sales were Rs 69 crore, maintaining the 3:1 mix of sponge iron and power. However, EBIT, which stood at Rs 7.3 crore for 7MFY11, saw significantly higher contribution of almost 80 per cent from the power segment, which puts a big question mark on the working and prospects of the company’s core business of sponge iron. Another factor is, in FY10 the topline consisted of Rs 38.09 crore from related party business and for 7MFY11 related party business stood at Rs 33.16 crore. This also raises questions about the company’s ability to show growth.

For FY11 as a whole the company expects to touch a topline of Rs 144 crore and a bottomline of Rs 5.25 crore. This will result into an EPS of Rs 2.23 on the expanded equity and a P/E of 21X. We have already mentioned that it is on the higher side. We advise our readers to avoid the same.


Issue Information
Rating:
 
Issue Opens On
29-Apr-11
 
Issue Opens On
3-May-11
 
Number Of shares (crores)
1 crore equity shares
 
Fresh Issue
 1 crore equity shares
 
Offer for sale
NA
 
Price Band (Rs)
Rs 45-49
 
Issue route
Book Building
 
Promoters
Ravi Vaswani
 
Post issue Equity
2.35 crore
 
Minimum Bid
 
 
Lead managers
Ashika Capital
 
Listing
BSE, NSE
 
Retail Portion
0.35 Crore Equity shares
 
QIB Portion
0.50 Crore Equity Shares
 
Non Institutional Portion
0.15 Crore Equity Share
 
 
 
 
Financial Performance (`/Cr)
 
FY10
Total Income
90.85
 
Operating Expenses
76.34
 
Operating Profit
14.51
 
Depreciation
3.38
 
Net Profit
3.69
 
 
 
Share Holding Pattern
Pre Issue
Post Issue
Promoter & Promoter group
100
57.43
Public
0
42.57
Total
100
100

 

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