V-GUARD INDUSTRIES
V-Guard Industries is entering the capital market on 18th February 2008, with a public issue of 80 lakh equity shares of Rs.10 each, in the band of Rs.80 to Rs.85 per share.
The company is presently into manufacturing and marketing of Electronic Voltage Stabilisers (42% of total sales in FY 07) Cables (20%) Pumps (19%) and various other electrical items like Water heaters (11%) UPS (4%) and Fan and other products, of about 5%. The major component of topline is from trading turnover. In FY 07, of total income of Rs.223 crores, Rs.170 crores came from Trading, on which, EBIT was at Rs.20.02 crores, resulting in a margin of 11.80%. However, manufacturing products gave an income of Rs.52 crores with EBIT of Rs.4.90 crores, resulting into a margin of 9.40%. So, why to have manufacturing, when trading gives a better margin?
Even, first 5 months of FY 08, had trading topline of Rs.80 crores, while manufacturing topline was at Rs.30 crores. During FY 07 and FY 08, the company earned Rs.27.70 crores, being profit on sale of long term investments, net of taxes which has resulted into a higher net worth of the company, at 31-08-07, at Rs.58.68 crores.
The company is now proposing to set up cable manufacturing unit at Coimbatore and Uttaranchal, as also enameling plant, pilot production plants and service and distribution centres. The total capex is estimated at Rs.70 crores. Adding General Corporate purpose and issue expenses, total fund requirement could be about Rs.85 crores, which is proposed to be financed by proposed IPO. At the upper band of Rs.85, total mobilization would be Rs.68 crores. So how shortfall would get met ?
The present equity of the company is very high at Rs.21.85 crores (thanks to 600% bonus issued on 09-09-06) which would rise post-issues, to Rs.29.85 crores. FY 08 EPS, on expanded equity, would be at around Rs.6 per share. Any increase in level of activity, puts huge pressure on working capital of the company. As at 31-08-07, investory of Rs.42 crores and debtors of Rs.34 crores, results into over 105 days sales. It is easy to ramp up topline as also earn profit by buying in cash and selling it on credit.
New project of the company, would not be contributing in FY 09 and hence expanded equity of Rs.29.85 crores, needs to be serviced from present operations. EPS of Rs.6 for FY 08, discounts issue price, at the upper band by about 14 times. Even if it is presumed that price gets discovered at the lower band of Rs.80, it works out to 13 times. This kind of discounting is not even available to mid size electrical equipment makers. Prominent amongst them are Stone India, Lakshmi Electrical Control, Indo Asian, Asian Electronics, Salora International, Compact Disc etc.
Since major component of topline and bottomline of the company is derived form trading, market would not give good discounting to the stock. Too much product profile of the company, also, leaves it into non-classified category and non-focussed. In this state of primary market, it is unlikely to get received and accepted by the market, when so many better plays are available in the secondary market.