The Vadodara based Sanghvi Forging and Engineering Limited (SFEL) is entering the capital market on 04-05-11 with an IPO. The company intends to raise Rs 42.50cr with issue shares of Rs 10 FV, in the price band of Rs 80-85. Arihant Capital Markets are the BRLM. The issue closes on 09-05-11.
The company, incorporated in 1989, is a manufacturer and exporter of forging products for the non-automotive sector. It manufactures forged flanges, forgings and machined components for various industries like oil & gas, fertilizers, power, desalination & water treatment, ship building, defense, fabrication of process equipments, instrumentation etc.
SFEL has an installed capacity of 3600 MTPA for manufacturing of forged flanges and precision machined components (with single piece forging up to 4 MT) in the area of open and closed die forgings.
The existing manufacturing plant consists of forging shop, die shop, heat treatment shop, conventional and CNC machining shop backed by related quality assurance equipments.
The company regularly exports to Europe, Middle East and Canada.
OBJECTS OF THE ISSUE:
SFEL proposes to set up a 15,000 MTPA open die forging unit at estimated to cost Rs. 120.39cr. The IPO is to part finance the above projects for which SBI and BOB have sanctioned TLs.
RS IN CRORES
(* Annualized - on pre Issue capital of Rs 7.65cr)
MATTERS OF CONCERN:
- The apprising bank – SBI has expressed concern over cost and time over-run, operating risk and on the capability of the management in execution of the proposed expansion.
- Compared to the current turn over and net worth of the company, the expansion envisaged is very huge at Rs 120cr.
- High working capital intensive unit.
- There are audit qualifications on certain accounting methods.
- Average cost of acquisition of shares by the promoters is around Rs 2/-
- IPO grade 3 by CARE.
VALUATION AND RECOMMENDATIONS:
The post issue capital of the company would be around Rs 13cr. At Rs 80-85, the company is demanding a PE multiple of 20plus, which is expensive. The shares of established peers like Ahmednagar Forging (6PE) and Ramakrishna Forging (11PE) are available at much cheaper valuation. The are risks associated with the huge expansion, the company is undertaking. The BRLM is also not known for bringing quality issues. It appears this is one more IPO for operators.
A clear AVOID.