Engineering Growth - Innoventive Industries (IIL)

Innoventive Industries (IIL) is a Pune-based multi-product engineering company entering the Indian capital market with an IPO of
Rs 219.58 crore. The issue proceeds will be used for capacity expansion of its manufacturing facility in Pune. Till the time of going to press, the company
had not come out with the price band or minimum bid. However, based on the company’s business and its earning projection, we have come out with our own price band under which one can subscribe. Should there be any material difference in the price band, we would keep you updated about the same on
our website: www.dsij.in.
Business Of The Company
The company is engaged in the manufacture and sale of precision steel tubes, tubular components, auto components and other steel products
that find application in diverse industrial sectors such as auto industry, power sector, oil and gas and general engineering. It is the transport sector which contributes to a maximum (49.3 per cent) of its revenue, followed by oil and gas that contributes to 12.1 per cent and power 11.4 per cent. It is general engineering that contributes to 24 per cent of the total revenue of the company. The company mainly manufactures a wide range of precision steel tubes, primarily ERW (electric resistance welded) precision tubes and CEW (cold drawn electric welded) tubes etc. Some of the regular clients of the company are Bajaj, BHEL, Alstom and Thermax etc. The company has six manufacturing facilities located in Pune and Silvassa. Currently the company’s capacity utilisation is at 70 per cent. The IPO proceeds will be primarily used for capacity expansion of the manufacturing facility and repayment of term loans. This investment will help the company to increase the production of ERW tubes from 64800 MT to 85000 MT and CEW from 16437 MT to 76701 MT. Part of the proceeds, that is `50 crore, will go towards debt repayment too, which will bring down the debt nearly to `300 crore. Coming to the financials, on a consolidated basis its sales grew at CAGR of 23 per cent and profit at 83 per cent for the four years ending FY11, after annualizing 9MFY11 figures. For
9MFY11, the total revenue posted by the company was Rs 457 crore and the profit stood at 36.91 crore. One thing interesting to note is that material consumption cost, which primarily consists of steel, has constituted 53.7 per cent, 62.6 per cent and 70.6 per cent of total sales for FY 2010, 2009
and 2008 respectively. This is despite an increase in steel cost last year. This is due to the diverse raw material hedging strategy that the company adopts.
As for its 55 per cent of requirement, it covers the material cost back to back and for remaining 45 per cent it sets prices quarterly and wherever there is an increase in raw material cost, they pass it on to customers. Similarly, they give a benefit of any decline in the material cost to the customers.We feel that a company like thisshould be trading at around market cap to sales of 1.1 - 1.25 times and a PE of 15-18 times looking at the type of growth that the company has exhibited and the type of capacity expansion. Doing the back of envelope calculation the price band that comes is between Rs 120-125 at which price we recommend our readers to invest in the scrip.