Salasar Techno Engineering has entered the primary market on Wednesday 12^th July 2017 to raise Rs. 35.87 crore via a fresh issue of 33.21 lakh equity shares of Rs. 10 each, at a fixed price of Rs. 108 per share. Representing 25.01% of the post issue paid-up share capital, the IPO will close on Monday 17^th July and listing is expected on 24^th July, in the ‘T’ market segment. 50% of the issue is reserved for retail investors.

New Delhi based Salasar Techno Engineering, is a 10 year old company, providing customised steel fabrication and EPC (engineering and technical) solutions to telecom, power transmission, and solar sectors. It counts marquee names such as Reliance Jio, Bharti Infratel, Power Grid, Rajasthan Rajya Vidyut Prasaran Nigam, NTPC, UP Power Transmission Corporation, Acme Cleantech Solution, Bharti Hexacom, Renew Solar Energy, Mahindra Susten and Paschimanchal Vidyut Vitran Nigam among its clients. However, client concentration risk is high, as top five clients contributed approximately 64 % of H1FY17 revenues. As on 31-5-2017, it had a healthy order book of Rs. 576 crore, implying book-to-bill ratio of 1.5x, based on FY17 revenue of Rs. 385 crore.

As of 31-3-17, company’s total installed capacity stood at 57,200 MTPA (50,000 on standalone basis + 7,200 at wholly owned subsidiary Salasar Stainless), across 2 facilities in Uttar Pradesh. Since production on standalone basis peaked out at 91% (FY17 production of 45,395 MT), although subsidiary had very low utilisation of 8.4% (with production of only 606 MT), company has increased installed capacity to 1,00,000 MTPA currently, via installation of new galvanizing plant at the wholly owned subsidiary. However, numbers do not support this, as Capital work in progress, as per consolidated balance sheet as of 31-3-17, is nil. If installed capacity has nearly doubled post 31-3-17, there must be huge assets waiting to be capitalised on closing date in the balance sheet, which is not the case here.  

Company has been investing part of surplus funds in equity markets, exposure to which was Rs. 1.19 crore, as of 31-3-17, which has now been curtailed to Rs.16.5 lakh, after incurring loss of Rs. 20 lakh on sale of shares, post 31-3-17. Ironical, that company files for IPO on one hand and has ‘surplus’ to deploy in equities, on the other!

Coming onto financials, FY17 revenue grew 24% YoY to Rs. 385 crore, on back of higher volumes. EBITDA jumped 41%YoY to Rs. 41 crore, leading to an EBITDA margin of 10.7%. It is surprising to note that raw material cost as a % to sales fell drastically in FY17 to 62%, from 68% in FY16, just before the IPO, as FY17 was a year when steel prices have strengthened! Thus, FY17 PAT grew 88% to Rs. 20.7 crore (5.4% net margin), yielding an EPS of Rs. 20.83, on an equity of Rs. 9.96 crore, having expanded pursuant to 1:1 bonus in June 2016.

As on 31-3-2017, company had Net Worth of Rs. 96 crore, leading to BVPS of Rs. 96. Promoters own 100% stake currently, which will shrink to 74.99% post IPO. The issue proceeds will finance working capital needs of Rs. 32 crore and general corporate purposes of Rs. 2.5 crore. Company’s total debt stands at Rs. 69 crore, while cash and equivalents are at Rs. 8 crore. Thus, net debt-to-equity ratio stands at 0.64:1. 

At Rs.108 per share, company’s market cap will be Rs. 143 crore, with enterprise value of Rs. 204 crore, which discounts FY17 earnings by PE multiple of 5.2x and EV/EBITDA multiple of 5x. Due to expansion in equity post IPO, FY18 EPS is expected to be on the similar lines as FY17, yielding similar valuation multiples. It is futile to compare the issue with biggies like RPG Group company KEC International, having revenue of Rs. 8,800 crore and market cap of Rs. 7,500 crore or Kalpataru Power Transmission with revenue of Rs.7,600 crore, 12% EBITDA margin and market cap of Rs. 5,300 crore, both ruling at EV/EBITDA multiples of 9x, who are EPC contracting companies, while Salasar Techno basically does value-add on steel, as sale of galvanised steel structure accounts for ~90% of its topline. Hence, its lower multiples are justified, in addition to its much smaller size. 

Another peer, Skipper Limited, with over three times the topline at Rs. 1,700 crore, much stronger EBITDA margin at 15%, in addition to 12% institutional holding, is trading at an EBITDA multiple of 9x. Skipper’s raw material cost as a % of sales increased from 62.7% in FY16 to 64% in FY17, again not supporting Salasar’s declining input costs for FY17. Moreover, Sarthi Capital, banker to the issue, also does not have a credible track record as this is its maiden IPO on the main segment, as it has previously handled only SME IPOs (28 since 2012).

While expanded manufacturing capacity (although 31-3-17 balance sheet does not support it) and robust order book are key positives, working capital intensive nature of business, tiny issue size, coupled with listing in the ‘Trade-to-Trade’ segment may limit investor participation and market interest. Hence, it is best to wait and watch the financial performance over next few quarters before taking a call on the fundamentals. For now, skip the issue, if you don't have speculatice and momentum play in mind.

Disclosure: No Interest.