Innoventive Industries is entering the capital market on 26^th April 2011 to raise Rs. 219.58 crore via a public issue of equity shares of Rs.10 each, priced between Rs.117 to Rs. 120 per share. The issue, constituting about 32-33% of post issue paid-up capital of the company, closes on 28^th April for QIB bidders and on 29^th April for retail and HNI bidders.

The company manufactures electric resistance welded (ERW) precision steel tubes, cold drawn electric welded (CEW) tubes, tubular components, auto components and machined components for the domestic and export markets. With 6 plants located in Silvassa and Pune, the company's customer base includes names such as Bajaj Auto, BHEL, Thermax, John Deree India, Alstom Projects, Gabriel with Bajaj Auto being its largest client accounting for 20% of total sales during 9mFY11 and top 10 customers accounting for 50% of the turnover during this period. 

From the IPO proceeds, company plans to spend Rs. 163 crore on capex to add 47,916 MT of CEW manufacturing capacity at a new site in Pune while Rs. 50 crore will be utilized for part debt repayment, which stood at Rs. 444 crore as at 28-Feb-2011.

The company has undertaken several rounds of PE investment in the past as also the promoters have off-loaded their shares through secondary sale. On 7-Jun-2008, Kavos Capital acquired 2.5 lakh shares from the promoters at Rs. 600 per share. Two years later, on 30-Jul-2010, a bonus issue in the ratio of 1.52:1 was made only to Kavos as the promoters renounced their right to the bonus shares. This brings back memories of Reliance Power where minority shareholders were compensated for aggressive pricing during IPO by issue of bonus shares only to them and not to the promoters.

Then, in less than one month, on 16-Aug-2010 a preferential allotment of 7.1 lakh shares was made by the company to Kavos at Rs. 492.62 per share followed by 5:1 bonus to all (Kavos and promoters) on 18-Sep-2010.

In another instance, in the most recent round of PE, a pre-IPO placement of 26 lakh shares was made at Rs. 117 per share by the company on 8-Feb-2011 to Standard Chartered Private Equity (Mauritius) II Limited. On the same very day, Standard Chartered Private Equity (Mauritius) III Limited (another fund of the same PE firm) acquired 15.6 lakh shares from a member of the promoter group, Ajay Yervadekar, for Rs. 99.67 per share. Can the company and promoters explain the rationale behind allotment / sale of shares on the same day to the same acquirer at differential rates, varying as much as 17%?

To us, the above fresh issue by the company at Rs. 117 seems more as a benchmarking exercise for the upcoming IPO, which only puts both the promoters and company in poor light in the public shareholders' eyes.

Coming onto the financials - In FY09, company reported consolidated sales of Rs. 362 crore, EBITDA of Rs. 70 (EBITDA margin 19.4%) and PAT of Rs. 16 crore. In FY10, sales rose 16% to Rs. 421 crore while EBITDA jumped 64% to Rs. 115 crore (EBITDA margin 27.3%) while PAT more than doubled to Rs. 35 crore, thanks to the reduction in raw materials consumed to Rs. 228 crore in FY10 from Rs. 232 crore in FY09.  

During April-December 2010, company posted sales, on consolidated basis of Rs. 453 crore and EBITDA of Rs. 123 crore, maintaining EBITDA margin at 27.1% and PAT of Rs. 42 crore. On equity of Rs. 38.46 crore, EPS after accounting for minority interest, stood at Rs. 9.6.

The company's inventory holding period of 4.3 months, as of 31-Mar-2010 and 3.8 months, as of 31-Dec-2010 is very high, given the industry it operates in. Also, its outstanding debtors suddenly rose to Rs. 38 crore, as of 31-Dec-2010 which have historically been as low as Rs. 1.3 crore (on 31-Mar-10) and Rs. 1.8 crore (on 31-Mar-09).

As on 31-Dec-2010, company's networth stood at Rs. 149 crore which increased to Rs. 179 crore, post pre-IPO placement worth Rs. 30 crore. The company's present equity stands at Rs. 41.06 crore which will rise to about Rs. 57 crore via IPO, based on price discovered. Promoter holding, currently at 65.60%, will fall to around 47%, post-IPO.

At the upper end of price band at Rs. 120, company is issuing shares at PE multiple of around 9x, considering expected EPS of Rs. 13.50 for FY11. This is on the higher side when compared with peer Lumax Auto Technologies, as done in the RHP. On page 107 of RHP, a comparison has been made between company's 9mFY11 numbers with peer's FY10 numbers, which is not an apple-to-apple comparison. Also standalone numbers have been compared, again fundamentally wrong, thereby mis-leading the prospective investors. Lumax Auto Technologies is currently ruling at PE multiple of 5.3x, considering expected EPS of Rs. 30 for FY11. Thus the issue is aggressively priced.

Given the company's operations in the competitive precision tube and auto component industry, with track record of differential issue to shareholders and aggressive pricing, the issue does not seem very exciting and one can give it a miss!