Salient features of the IPO:
- Bharat Wire Ropes Ltd. (BWR) is a wire rope & wires manufacturer engaged in the manufacturing and sales of wire ropes, structural strands, slings and wires. The company is also engaged in the business of trading in steel related products.
- BWR's existing steel wire ropes manufacturing facility is located at Atgaon, with an installed capacity of 12,000 tonnes per annum.
- Net proceeds from the issue will be utilized to part finance its proposed project of 66,000 tonnes per annum capacity of wire ropes at Chalisgaon, Jalgaon.
Key competitive strengths:
- Diversified product-mix
- Established player in the Indian wire rope industry
- Diversified client base
Risk and concerns:
- Under-utilization of existing capacity and proposed facility
- Shortfall in the IPO proceeds may delay the completion of project
- Revenue concentration risk
- High working capital requirements
Valuation & recommendation:
Based on FY15 earnings, at the lower price band of Rs. 40 per share, BWR's shares are available at a P/E multiple of 91x, while at higher price band of Rs. 45 per share, it is available at a P/E multiple of 102.4x, which are at significant premium to its peers average of 10.6x.
Annualizing its eight months performance, we arrive at a top-line of Rs. 656.1mn for FY16, representing a decline of 14.5% as compared to FY15. Annualized EBITDA and PAT stood at Rs. 86.1mn and Rs. 16.3mn, respectively, representing a drop of 6.8% and 17.4%, respectively, as compared to FY15. Based on FY16 annualized earning of Rs. 0.36, at higher IPO price band, BWR is priced at a P/E multiple of 124.1x, which is not justifiable based on the reasons given below:
- We are not expecting any recovery in the major end user sectors such as engineering & construction, oil & gas and mining; mainly due to subdued economic expansion and lower crude price.
- Post expansion, there will be sufficient un-utilized capacity, which will drag the performance of the company.
- Lower profit margin.
- Competition from small and established player like Usha Martin Ltd.
- Demanded market cap of Rs. 2,023mn post the IPO is too high on a FY16E top-line of Rs. 656.1mn (i.e. MCAP to sales ratio of 2.6x). In contrast, Usha Martin Ltd. is valued at MCAP to sales ratio of 0.1x. Thus, keeping in mind the above reasons, we would recommend a "AVOID" rating for the public issue.