Rathi Bars
Rathi Bars is entering the capital market on 18th October, 2007 with a public issue of 71,42,857 equity shares of Rs.10 each at a premium of Rs.25 per share (total issue price of Rs.35 per share) for Rs.25 crores.
The company presently has CTD and TMT Bars manufacturing capacity of 80,000 TPA and had produced 73,517 MT for FY 07. Total income for FY 07 was placed at Rs.195 crores, PBT of Rs.7.77 crores and PAT of Rs.6.03 crores. EPS for the year, on equity of Rs.9.19 crores, is placed at Rs.6.56.
The company is now carrying out an expansion of Rs.34 crores, to expand its CTD/TMT Bars capacity from 80,000 TPA to 1 lakh TPA and also setting up a capacity of 67,500 TPA of Low Carbon billets. This is being financed by the proposed IPO of Rs.25 crores, term Loan of Rs.4 crores and internal accruals of Rs.5 crores.
Though the company is making a cash profit of Rs.8 crores, yearly, the nature of the business is highly working capital intensive. Margin for Working Capital of Rs.11.10 crores earmarked in the new project, may not be enough for the expanded level of activities. Even commercial production is scheduled for December 08. Hence FY 08 and FY 09, would continue with the existing activities and capacity
The re-rolling sector operates on a very low conversion margin with cash purchase and credit sales. When prices of M. S. billets, blooms and ingots rises, it becomes necessary for the company to increase its inventory holding. In such situation, margins remain under pressure. Also, stand-alone re-rollers have wafer thin margin.
Apart from this, the sector enjoys very low PE multiple of 5 to 6. Since company is already operating at its full capacity EPS for FY 08 and FY 09 is likely to remain at Rs.7 and present issue, discounts it, at a multiple of 5. Hence, not much upside is seen and such small issues, recently have been ruling at below its issue price.
Its better to avoid this IPO.