Bharat Wire Ropes IPO opens for subscription on 18 March, the company said in its red herring prospectus. The INR70 crore IPO, managed by Intensive Fiscal Services and BOB Capital Markets, will conclude on 22 March. BWR IPO would also include reservation of equity shares worth INR3.5 crore for subscription by eligible employees. Price band of the IPO has been fixed in the range of INR40 to INR45 per share and investors can place bids in multiples of 300 shares. In this review, we analyze if retail investors should subscribe to Bharat Wire Ropes IPO.
Bharat Wire Ropes IPO details
|IPO dates||18-22 March 2016|
|Price Band||INR40-45 per share|
|Issue Size||INR70 crore|
|Minimum Bid||300 shares|
Unlike most other IPOs, there will not be an offer for sale (OFS) and all proceeds from Bharat Wire Ropes IPO will go to the company. Although the company is largely controlled by promoter group which holds 2.56 crore shares or 87.3% stake, Motilal Oswal and Ramdev Agarwal-led Visu Associates owns 18.37 lakh shares or 6.25% of the total shareholding. Non participation of these investors in the IPO is a sign of confidence that there are better days ahead for the company.
The promoter group is led by Gaji Mercantile Private Limited which holds substantially all the share of the promoter group. Remaining shares are held by the Shah family which sold the company to current promoters in 2010. The average cost of acquisition of the shares by Gaji Mercantile is INR41.57 per share. This is based on the average of several transactions between 2010 and 2012. On the other hand, the average cost of acquisition for individual promoters, Murarilal Mittal and Usha Mittal is INR200 per share.
Bharat Wire Ropes (BWR) is a wire rope and wires manufacturing company that caters to a wide range of industries including fishing, elevators, cranes, power transmission, suspension bridges, oil exploration, ports and shipping, mining, defence, and railways. Established in 1986, the company is now promoted by Murarilal Mittal, Usha Mittal, Manan Mittal, and Gaji Mercantile Private Limited.
The company’s existing steel wire rope manufacturing plant at Atgaon has an installed capacity of 12,000 metric tonnes per annum (MTPA). In addition, Bharat Wire Ropes has a Pyrolysis plant at Chalisgaon with an installed capacity of 1,260 MTPA. The plant produces oil which is used as fuel in its manufacturing process.
Where will the money go?
Bharat Wire Ropes IPO will primarily facilitate setting up of a new manufacturing plant at Chalisgaon, Maharashtra. Nearly INR60 crore have been allocated to part finance the 66,000 metric tonnes per annum (MTPA) plant which will be fully integrated in nature. The new project is expected to add massive capacity to the company as its existing manufacturing plant at Atgaon has an installed capacity of just 12,000 MTPA. Completion date of the new project is estimated to be 31 December 2016. The remaining amount left after issue related expenses will be used for general corporate purposes.
Bharat Wire Ropes has been a profitable company in all of the last five years, although the amount of earnings has not been high. With a net profit margin of 2.6% in fiscal 2015, this is certainly not among the best of the choices in the IPO market. The low profitability is despite the fact that it counts Kone Elevators, Bajaj Electricals and Suzlon among its top clients. The decline in the last fiscal year indicates growing competition for Bharat Wire Ropes. As mentioned in the red herring prospectus, the results for the eight months ended November 2015 give an impression that the company may be on its way to post another revenue decline this year as well. Profits are also following the same declining trend.
|Bharat Wire Ropes’ consolidated financial performance (figures in INR crore)|
|FY 2011||FY 2012||FY 2013||FY 2014||FY 2015|
Source: Bharat Wire Ropes RHP
Should you invest?
Bharat Wire Ropes claims to have a well-diversified customer base of more than 600 large and medium size customers across the country from different industries including oil & gas, mining, fishing, ports & marine, elevator, power transmission, railways, construction, infrastructure, defense, crane manufacturers, among others. We like that Bharat Wire Ropes receives repeat orders from approximately 30% of its customers. However, this appears to be a mere statistics as the diversified customer base is not helping the company to stop the decline in its sales. Clearly, the company is facing bigger issues.
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A dive into the red herring prospectus tell us that the company hopes to maintain capacity utilization rate at its Atgaon facility at 60% while the proposed Chalisgaon plant will maintain see progressively higher utilization rates, going all the way to 75% in 2018/19. Manufacturing businesses often require excellent operational control and companies can only earn single digit margins with these utilization rates.
Another issue we have with Bharat Wire Ropes IPO is timing. Bharat Wire Ropes’ operations are highly linked with Capital Expenditure (capex) sector. Without doubt, this is not the time to take exposure to this sector as India’s capex cycle is currently losing steam. A cursory glance at capex players like Larsen & Toubro pains a gloomy picture of this sector.
We simply don’t know where the company plans to sell its additional products and there is no indication of it in the prospectus. Remember, these are not FMCG products which are consumed at retail level. In its prospectus, the company notes:
As per industry estimates, the engineering & construction segment accounts for more than 60% of the end-use consumption share of the wire ropes industry. This includes demand from elevator ropes, aerial haulage, structural systems, general engineering ropes etc. Further, the oil & gas industry accounts for a share of another 20% (demand from offshore activities), followed by the mining industry, which accounts for a share of about 10%.
We don’t see any of these factors moving into the positive territory any time soon.
Valuations are excessive and that’s because we could not find a better word here. At the upper end of the price band, the company is asking for a valuation of 67.2 times to its FY2015 earnings. As mentioned above, the eight months of FY2016 have not been kind to the company, earnings are down and thus, price to earnings (PE) ratio is even higher for the period. Annualizing the earnings of the eight months leads to a PE ratio of 81.8 times.