Sanghvi Forging & Engineering - Avoid

Anand Jain / 03 May 2011

Sanghvi Forging, a Gujarat based company having a turnover of Rs 28 crore for the last financial year, is planning an expansion scheme with a capex of Rs 120 crore for which the company is coming out with an IPO of Rs 36.90 crore having a price band of Rs 80-85.

Sanghvi Forging & Engineering 

Sanghvi Forging, a Gujarat based company having a turnover of Rs 28 crore for the last financial year, is planning an expansion scheme with a capex of Rs 120 crore for which the company is coming out with an IPO of Rs 36.90 crore having a price band of Rs 80-85.
 
The company is in the business of Non-Automotive forgings having present installed capacity of 3600 MT with a capacity utilization of 62 per cent. The company now wants to expand the capacity by another 15000 MT. Looking at its current operations we are of the opinion that company may find it difficult to manage this expansion to four times its present capacity smoothly. One of the reasons for this belief is that there has been a good amount of churning amongst its Key managerial personnel in the last few years. This gives us an impression that the company is not able to retain its senior employees. As per the prospectus, the company has nine key managerial personnel of which six are associated with the company for less than one year with the oldest employee amongst the same having joined in November 2008, meaning less than two and half years. The list of past Key Managerial personnel reveals that most of the employees have quit the company in near about one year of joining the company.
 
Another issue the company may face is in terms of selling its products. The company claims that 20-25 per cent of its new capacity would cater to demand from Larsen & Toubro for the next three years but there is no clarity in terms of who would be buying the rest of the capacities. The company gets 85 per cent of its revenue from the domestic market and rest comes from exports. In the domestic market competitions is quite stiff and that would mean the company may not be able to achieve desired level of capacity utilization as stated in the prospectus. Its new plant is supposed to go on stream by May 2012 and it hopes that it would be able to achieve 55 per cent capacity utilization by FY 2013 and 65 per cent by FY2014 which we feel is overestimated.
 
On the financial front, the company’s performance has been quite average. It reported sales of Rs 27.98 crore and a net profit of Rs 2.48 crore for the year ended March 2010. In the first nine months of the current year, sales stood at Rs 25.74 crore with a net profit at Rs 2.96 crore. In fact the kind of margins the company has enjoyed in the first nine months of last year, we doubt if the same can be sustained going forward. Assuming that the company would be able to maintain its first nine months growth in all probability it would report net profit of Rs 3.95 crore for the full year. Also assuming that the company is able to command the same PE ratio as other forging players are commanding it should have a market cap of near about Rs 60 crore. We are not expecting any substantial jump in the company’s net profit for FY 2012 as the expansion would go on stream only by FY 2013. Also in FY2013 we are not expecting a huge jump in the net profit as the company would need to shell out at least Rs 9 crore as interest impacting its profit. Depreciation cost would jump in FY2013 due to the plant going on stream. In other words, in the next two financial years we are not expecting any smart growth in its financial numbers. The company would have a market cap of Rs 104 crore based on its price band and hence fundamentally we feel that the IPO has been over priced. Keeping this fact in mind we are advising our readers to avoid the same. We feel that the company, based on its fundamentals should command a market cap of Rs 45 crore on the maximum side.
 
 
Issue Information
Rating 36
 
Issue Opens On
04-May-11
 
Issue Opens On
09-May-11
 
Number Of shares (crore)
4.61 crore equity shares
 
Fresh Issue
 4.61 crore equity shares
 
Offer for sale
NA
 
Price Band  (Rs)
Rs 80-85
 
Issue route
Book Building
 
Promoters
Babulal Sanghvi
 
Post issue Equity
5.45 crore
 
Minimum Bid
 
 
Lead managers
Arihant Capital
 
Listing
BSE, NSE
 
Retail Portion
1.62 Crore Equity shares
QIB Portion
2.30 Crore Equity Shares
Non Institutional Portion
0.70 Crore Equity Share



Financial Performance (`/Cr)
 
FY10
Total Income
29.10
Operating Expenses
23.05
Operating Profit
6.05
Depreciation
0.65
Net Profit
2.74



Share Holding Pattern
Pre Issue
Post Issue
Promoter & Promoter group
100
18.1
Public
0
81.9
Total
100
100



 
 
 

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