Verdict: Sectoral Uptrend but Richly Priced

Rs. 731 cr IPO:

• 90% issue is OFS by PE Rivendell (formerly New Silk Route), trimming 41% holding to 16% on the 14 year old investment
• Rs.70 cr fresh issue for working capital

IPO Date: Wed 28^th Jul to Fri 30^th Jul 2021

Price band: Rs. 880-900 per share

Post Issue M cap: Rs. 2,465 cr, implying 26.6% dilution

Listing: 9^th Aug 2021

Rajkot based Auto Component Player

Rolex Rings, with 1.45 lakh TPA installed forging capacity, manufactures forged bearing rings used by bearing makers, accounting for 54% of Rs. 616 cr revenue in FY21. Auto components accounted for balance revenue, while 56% revenues comes from exports.

Sectoral Headwinds Impact Adversely

Since FY13, company was under corporate debt restructuring (CDR), as Rs. 480 cr debt led expansion undertaken in 2007, faced global meltdown post Lehman crisis. Company is likely to exit CDR in March 2022 upon Rs. 34 cr repayment of restructured debt. Its credit rating of BB on 0.7:1 debt equity ratio is lower than A rating for both the peers Ramkrishna and MM Forging.

De-Growth from FY19

Company faced another round of financial stress between FY19-21, when topline and EBITDA declined 32% and 47% respectively, as capacity utilization plummeted to 33% from 50% in 2 years, on auto sector slowdown. FY19’s revenue of Rs. 904 cr contracted to Rs.616 cr in FY21, with EBITDA nearly halving from Rs. 201 cr to Rs. 109 cr during this period. Thus, the highly cyclical financials pose high risk for the small cap stock.

Performance Inferior to Peers

Company’s performance fell short of peers, as FY21 revenue and EBITDA fell 7% and 10% YoY, in contrast to Ramkrishna and MM Forging reporting marginal growth to flat performance during the year respectively.

Of Rs. 109 cr EBITDA reported by Rolex for FY21, H2FY21 accounted for Rs. 83 cr, implying brighter prospects, as sector demand revives. However, capacity ramp-up will be gradual as business is working capital intensive and company already has pending repayment liabilities. Also, deferred tax credit boosted FY21 EPS to Rs. 36 as PAT was Rs. 87 cr on PBT of Rs. 75 cr. Unutilized MAT credit will lower taxes in FY22, but this benefit may more-or-less exhaust by FY23 onwards.

Aggressive Pricing

If we annualize H2FY21 EBITDA (as H1 was severely covid-impacted), Ramkrishna and MM are ruling at an EV/EBITDA multiples of 10-11x, while Rolex is priced at 16x, despite similar EBITDA margins of about 20-21%.

Ramkrishna with H2FY21 revenue of Rs. 923 cr and EBITDA of Rs. 186 cr, is ruling at an enterprise value (EV) of Rs. 3,735 cr, while Rolex’s EV comes to Rs. 2,700 cr, despite lower revenue of Rs. 392 cr and half the EBITDA of Rs. 83 cr in H2FY21. MM Forging’s revenue and EBITDA of Rs. 513 cr and Rs. 101 cr respectively, is higher than Rolex, but its EV is 20% lower at Rs. 2,100 cr. Thus, valuation of Rolex is very rich and seems to be making the best of current IPO boom.

Such steep pricing without leaving any cushion for performance shortfall and without factoring in de-growth of the recent past makes it risky, despite healthy sector outlook.

Conclusion

Small cap stock with aggressive pricing before establishing a performance track record does not provide much comfort. Hence, one can skip the IPO.

For small cap investment ideas in upcoming sectors like auto ancillary, refer to Little Gems column in Member Zone instead.

Grey Market Premium (GMP) of Rolex Rings: Grey Market Premium of Rolex Rings is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No Interest.