Bedmutha Inds

Bedmutha Industries is entering the capital market on 28^th September 2010 with a public issue of 90 lakh equity shares of Rs.10 each, priced in the band of Rs. 95 to Rs. 102 per equity share. The company plans to raise Rs. 86 - 92 crore via the IPO, depending on the price discovered. The issue, constituting 42.8% of post issue paid-up capital of the company, closes on 1^st October 2010.

Nashik-based steel wire manufacturer, Bedmutha Industries presently has an installed capacity of 60,000 MTPA of wire drawing and 26,050 MTPA of galvanised wires. However, it has not been able to ramp-up its wire drawing capacity utilization levels since past one year, where FY10 capacity utilization was only 56% as against 45-47%% in FY09 and FY08.  

The company is setting-up a new manufacturing facility, adjoining its existing facility at Nashik, for manufacturing low relaxation pre-stressed concrete (LRPC) wires (installed capacity 36,000 MTPA) and spring steel wires (installed capacity 18,000 MTPA), with an investment of Rs. 85 crore, to be funded entirely by the issue proceeds. LRPC wire manufacturing is a relatively new technology and only 3 companies (Tata Steel, Usha Martin and Ramsarup Industries) presently offer this product in India. The company, as stated in the red-herring prospectus, expects to implement the project in FY11. However, this will most certainly be delayed, since orders for all the plant and machinery worth Rs. 40 crore is yet to be placed, of which, 70% is imported machinery.

For FY10, the company reported sales of Rs. 164 crore, of which, 85% was from sale of manufactured goods while balance was sale of traded products. Its net profit was Rs. 12 crore, resulting in net profit margin of 7.4% and EPS of Rs. 10.13 on equity of Rs. 12 crore. During FY10, its working capital management showed deterioration. Closing inventory and debtor position, as on 31^st March 2010, more than doubled to 95 and 110 days of sales, as against 40 and 54 days of FY09 sales respectively, while sales increased only 12% between FY09 and FY10.   

The company is undertaking a heavy dilution to fund its expansion plans. Existing capacities have been funded by a mix of debt and equity. Networth and debt of the company, as on 31^st March 2010, stood at Rs. 26.5 crore and Rs. 95 crore respectively, leading to a debt-equity ratio of 3.6:1. Post-issue, this ratio will reduce to less than 1.

At the upper and lower end of the price band, the company is expecting a pre-money valuation of Rs. 202 crore and Rs. 210 crore, respectively, considering net debt of Rs. 88 crore (as on 31^st March 2010) and equity valuation of Rs. 114 to 123 crore (1.2 crore existing shares valued at lower and upper end of price band respectively). This works out to a valuation for the existing 86,050 MTPA capacity of almost one and half times the cost of setting up a brand new facility, with advanced technology, of 56,000 MTPA.

Existing listed peers such as Ramsarup Industries with an installed wire manufacturing capacity of 2,81,000 MTPA, sales of Rs. 2,059 crore and PAT of Rs. 44 crore, is ruling at PE multiple of 4.6 times with a market cap of Rs. 203 crore and net debt of Rs. 1,750 crore. Bedmutha IPO is being priced at PE multiple of 9.4 and 10.1 times respectively, at the lower and upper end of price band, respectively. This is very aggressive as the company justifies a PE multiple of not more than 5.

Considering all the above factors, the issue is expensive on fundamentals, and investors are advised to give this a miss!