Shriram EPC
Shriram EPC is entering the capital market on 29th January, 08, with a public issue of 50 lakh equity shares of Rs.10 each, in the band of Rs.290 to Rs.330 per share. It is strange to see the cover page of RHP where face value of Rs.10 per share has not been stated but given as a bullet, which means undecided or uncertain.
The company is into providing turnkey engineering solutions for biomass-based power plants, bio-ethanol production plants, process and metallurgy plants including Thermal Power Plants, Water and Waste-water treatment plants, Water and Sewer infrastructure and Pipe rehabilitations. The company is also a leading 250 KW wind turbine generator.
Inspite of such an impressive list of engineering services being provided by the company, its financial performance is not all that impressive. FY 07 had total income of Rs.300 crores with PAT of Rs13.14 crores, resulting in a NPM of 4.38%. First 6 months of FY 08, ending 30th September 07 had total income of Rs.225 crores with PAT of Rs.10.44 crores, resulting into a NPM of 4.64%. Though PAT margin rose by 26 bps, but this has been achieved with increased period of credit line. Sundry Debtors as at 30-09-07 were at Rs.217 crores, which is almost for a period of 174 days. The same were at Rs.136 crores as at 31-03-07, translating into 165 days of debtor cycle. The increased levels of operations were financed by current liabilities of Rs.184 crores as at 30-09-07 which were at Rs.96 crores as at 31-03-07.
When we compare the financial performance of this company with GEI Industrial System, a similar company, later has better performance. GEI for 9 months ending 31-12-07 had topline of Rs.112 crores with PAT of Rs.6.10 crores giving a NPM of 5.45% and an expected EPS of Rs.6 for FY 08. The share is presently ruling at Rs.100, thus ruling at a multiple of close to 16 on historical earnings.
If we look to the revenue break up of this company for 6 months ending 30-09-07, Rs.120 crores have come from Engineering Construction Contracts while Rs.103 crores from Wind Turbine Generators (WTG). The total order book of the company as at 31-12-07 were at Rs.2,280 crores. Though order books appear quite attractive but this would put a challenge of working capital management before the company. Even if it is presumed that these orders may get executed in the next 36 months, this may translate into an annual topline of Rs.750 crores which may result into a debtor of atleast Rs.300 crores, to say least.
Presently, the company has huge financial pressure which is evident from its increase in debt from Rs.20 crores in FY 07 to Rs.63 crores in FY 08, as also, increase in current liabilities from Rs.96 crores in FY 07 to Rs.184 crores in FY 08. This is, inspite of the fact that company mobilized close to Rs.100 crores on 31-03-06 by issuing Preference Shares, which were finally converted on 20-09-07 at Rs.79.22 per share. Now, shares are valued by more than 300%, at the upper band of Rs.330 per share.
The company would be able to mobilize Rs.165 crores, at the upper band of Rs.330 per share, while, it has defined and crystallized requirement of only Rs.88 crores. Balance would get used under General Corporate Purpose head. Of this Rs.88 crore, about Rs.40 crore is for related business of the company which include 51% investment in Shriram Leitwind Ltd. which would be marketing wind turbines and components.
On the other hand, 49% investment is proposed in Leitner Shriram Manufacturing Ltd., which would be making wind turbines and its components. However, on Page 35 of RHP, in fourth para, it is stated that 49% investment would be made in Shriram Leitwind Ltd., while actually it is 51%. Conversely, 49% is in Leitner Shriram Mfg. Ltd.
Due to confusing, overlapping and multiple business model and companies, this is likely to happen. But this doesn't go well with the prospective investors as this reflects wrong disclosures and non-clarity of thoughts and structure at the company's end.
The present equity of the company is Rs.37.87 crores and expected EPS of Rs.6 for FY 08, discounts issue at 55 times. The company is comparing itself with Praj, Suzlon, Thermax and L&T which are high multiple companies on the bourses. But the company is nowhere to these companies, and more comparable with GEI Industrial which has market capitalization of Rs.150 crores, EPS of Rs.6 and topline of Rs.160 crores.
The company has been operating in all the segments with below industry average margins. Even, unrelated diversification into making investments in bio-mass based power projects, does not deserve this kind of valuations. Hence, it would be better to skip the issue and look for much better and cheaper stocks available in the secondary market.