Salasar Techno Engineering IPO Review: Techno viable?

Salasar Techno Engineering IPO opens next week and it will be interesting to see this public offer which is among the smallest IPOs in recent times. In many ways, this is a reminder to the numerous IPOs in the decade of 90s. Priced at INR108 per share, Salasar Techno Engineering IPO aims to raise INR35.86 crore. The IPO will open on 12 July and investors can place their orders till 17 July. The IPO will be managed by Sarthi Capital Advisors while Bigshare Services will be the registrar. Through Salasar Techno Engineering IPO review, we try to find out if throwback to the bygone era deserves a serious consideration.

Here are some essential details about the IPO.

Salasar Techno Engineering IPO Review: Use of funds

As mentioned above, the upcoming IPO will raise just INR35.86 crore and this entire money will go to the company. Out of the total, INR31.87 crore will go towards working capital requirement while INR2.5 crore have been earmarked for general corporate purposes.

Salasar Techno Engineering: Business background

Established in 2001, the company offers customised steel fabrication and infrastructure solutions for Telecommunication Towers, Transmission Towers & Substation Structures and Solar Module Mounting Structures. As one can imagine, this requires supply of customized, high-quality material and the company’s service suit includes engineering, designing, fabrication, galvanization and deployment of these products.

The company commenced its manufacturing/fabrication activities in the FY2006/07 and its second unit became operational in FY2008/09. Salasar Techno Engineering recently increased its installed annual manufacturing/fabrication capacity from 50,000 MT to 100,000 MT with the installation of new galvanizing plant at Salasar Stainless Limited, a wholly-owned subsidiary.

UP Power Transmission Corporation Ltd, Tata Power Delhi Distribution Ltd, Unitech Power Transmission Ltd, ATC India Tower Corporation Pvt Ltd, Indus Towers Ltd, ATC Telecom Infrastructure Pvt Ltd, Bharti Infratel Ltd, Reliance Jio Infocomm Ltd, Tower Vision India Pvt Ltd, Viom Networks Ltd, Jakson Engineers Ltd, Prayatna Developers Pvt Ltd, and Welspun Renewables Energy Pvt Ltd are some of its prominent clients.

Salasar Techno Engineering IPO Review: Financial performance

As the description above indicates, Salasar Techno Engineering is into a business that is not easily scalable. Yet, the company has managed to grow its revenues from INR212.9 crore in FY2013 to INR384.6 crore in the latest year. This is quite impressive as majority of the growth has come from the single activity of erecting telecom and transmission towers.

The company has negligible long-term debt and this has helped in shoring up profits in these years. Earnings grew from INR4.9 crore in FY2013 to INR20.7 crore in FY2017. Once again, commendable job! As a result of growing profits and a strong control on costs, margins have been improving after hitting a low of 1.9% in FY2015. In the latest year ended 31 March 2017, net margin stood at solid 5.4%.

Salasar Techno Engineering IPO Review: Should you subscribe?

Salasar Techno Engineering belongs to the core industrial activity sector where economies of scale are essential but doesn’t ensure success alone. As a result, it is clear what the company has achieved in its 16 years of business is phenomenal. However, the absence of private equity investors shows that the business doesn’t hold promise of providing outsized returns in future and thus, isn’t particularly attractive to them. However, what’s not attractive for private equity investors may be lucrative for retail investors.

In terms of valuations, the issue price of INR108 per share and its consolidated EPS of INR20.83 mean that the P/E ratio is an attractive 5.2. This is much lower than comparable figures of 18.1 and 19.5 for Kalpataru Power Transmission and KEC International, respectively. Salasar Techno Engineering also boasts of a strong return on net worth (RONW) of 21.6% which is higher than most of its listed peers.

Without doubt, valuations look very attractive for Salasar Techno Engineering. However, it is worth noticing that this small IPO will be eventually listed in the T group which effectively means more restrictions on price movements and less attractiveness for investors. Past listings in this group have been mixed with GNA Axles making a strong debut but Pennar Engineered Building Systems ended in a soup. Another question investors need to ask is if they want to own a low-margin business which has limited scope for further growth. Once again, there is nothing wrong with low-margin businesses provided there is scale to be leveraged. In absence of economies of scale, a business may be good for promoters but not necessarily for small shareholders.

All in all, Salasar Techno Engineering IPO Review reveals that the company has witnessed strong growth in its operations and improving margins also strengthen its case. However, small operations and listing in T group mean a longer term perspective is required.