IPO Talk: Meghmani Organics

Dear friends, Investors with an appetite for risk can subscribe to the initial public offering (IPO) from Meghmani Organics being made in the price band of Rs 17-19 per share (face value Re 1). A consistent track record of financial performance and a well-diversified client base for pigments and agrochemicals suggest that the company can deliver secular earnings growth over the next few years. At the higher end of the price band, the offer is priced at about 9 times the likely earnings for FY-08. Despite reasonable earnings prospects, the lack of market fancy for stocks in this sector may curtail the scope for listing gains on this offer.

Meghmani Organics is raising Rs 102 crore through this offer to fund its working capital requirements, set up new manufacturing units for High Performance Pigments and agrochemical formulations, and invest in a subsidiary to finance a 3MW wind power plant. The company's current revenues are derived mainly from domestic as well as export sales of pigments (green and blue) and generic agrochemicals. Exports accounted for about three-fourths of sales in the latest financial year. The key clients for the pigments business are ink, paint and plastic manufacturers both in India and abroad. The company counts global majors such as the Flint Group and Paramount Colors among its clients for pigments and Micro Flo, Valent and FMC Corp as its agrochem clients.

Diversified revenue base:

Though Meghmani is only a mid-size player in the pigments and agrochemicals market, the company's revenue base appears well diversified both geographically as well as in terms of customers. The diversified client base ensures low reliance on individual customers (though some are large global players) and the geographic spread of sales reduces market- and currency-related risks.

The outlook for the pigments business appears strong in the light of the improving growth prospects for the paints and inks industry in the domestic as well as the global context.

Entry barriers to this business are relatively high by virtue of the company's specialisation and the customisation involved in the manufacturing process. The outlook for the generic agrochemicals business is less bright. Though the business offers scope for strong volume growth (India being a low-cost manufacturing base), it is subject to persistent pricing pressures. Generic products such as acephate, cypermethrin and imidachloprid, which are the key product lines for the company, have seen steady price declines in recent years.

Meghmani Organics on its part, has managed strong volume and sales growth over the past three years (sales have grown at a compounded annual rate of 23 per cent), despite the pricing pressures. The company's ability to sustain high revenue growth amidst rather sluggish market conditions and fairly intense competition in its businesses, suggests cost competitiveness. At the same time, operating profit margins have hovered at healthy 23-25 per cent levels. The profit growth has however lagged sales expansion, at 11 per cent annualised growth over three years. Though the company has managed strong volume growth, higher raw material costs (several inputs are linked to the crude oil basket) and declines in realisations in the agrochem business have tempered the profit rise.

From here, the company appears well-placed to deliver a 15 per cent earnings growth over the next couple of years, with the help of new manufacturing facilities, an improved product mix, a strong new product pipeline and reduced tax incidence. In the pigments business, it has 12 products at various stages of development. In the agrochemicals business, where the time and regulatory procedures involved in obtaining registrations are the key entry barrier, Meghmani already holds 90 registrations across 50 countries, with over 415 pending registrations. Expansion in the product portfolio would help the company sustain revenue growth and offset pricing pressures in its key businesses.

For the year ended March 2007, the company has managed net profits of Rs 40.7 crore (15 per cent growth) on net sales of Rs 470 crore (21 per cent). This translates into per share earnings of Rs 2.02 on the current equity base and Rs 1.60 on the fully diluted equity base (assuming pricing at the upper end of the band). The offer price, at Rs 19, dilutes trailing 12-month earnings by about 12 times. Despite the reasonable earnings prospects, the low valuation accorded to stocks of specialty chemical and agrochemical majors could be a constraint to significant price gains on this stock.(from Business Line)

IPO Talk: Nelcast

Dear friends, Investors with a two/three-year perspective can consider investing in the initial public offering (IPO) of Nelcast. In the Rs 195-219 band, the offer is priced at 11-13 times the likely FY-08 per-share earnings on the post-offer equity base. In the business of manufacturing casting components, Nelcast is likely to scale up its growth, given the increased demand for castings in both the domestic and foreign markets. It is also likely to benefit from its proposed increase in focus on exports and machined casts. This apart, its set of established clients such as Ashok Leyland, TAFE and TATA Cummins also lends confidence to its earnings growth prospects.

Investment rationale:

Nelcast, which derives more than 50 per cent of its revenues the commercial vehicles segment, could witness increased demand on the back of an expected growth in freight traffic and the proposed introduction of emission and loading norms. However, any slump in the growth of the interest rate-sensitive commercial vehicles industry may mute Nelcast's earnings.

In this context, Nelcast's decision to widen its product base towards small castings to cater to passenger cars and light commercial vehicles is a positive. This apart, the proposed increase in the manufacture of machined casts, aimed at 20-25 per cent of total production by the next fiscal year, could give a further fillip to the bottomline, as these products enjoy better pricing and margins.

On the export front, outsourcing of casting components is likely to remain buoyant, given the strict environmental norms, rising labour costs and shortage of skilled labour in markets such as the US and Europe.

Encouraged by this rising demand scenario, Nelcast proposes to dedicate about 25 per cent of its capacity (post-expansion) for exports. While Nelcast already has a presence in US through its subsidiary and supplies to Volvo Sweden through its Tier-I supplier, Arvin Meritor, the increased thrust on exports is likely to help it strengthen its presence in the global arena. Further, as exports enjoy better realisation, revenues should rise.For the financial year ended March 2007, the company reported a revenue growth of about 30 per cent to about Rs 350 crore. The earnings recorded a 182 per cent increase to about Rs 7 crore.On the operational front, margins expanded by about 5 percentage points to 25 per cent on the back of increased sales realisation and pruning of costs.The earnings per share on a fully diluted basis stood at about Rs 11 for FY-07.

Objects of the issue:

The issue proceeds will be used to fund the expansion and modernisation of production facilities at both the units of Nelcast. The company plans to increase capacities from about 102,000 tonnes to about 120,000 tonnes by FY-08 and an additional 30,000 tonnes by FY-09.

Concerns:

While Nelcast's decision to increase its focus on exports is a positive, its ability to source orders from global players could be crucial. Our concern stems from the increased competition in the export market from both the domestic and Chinese players. This apart, since most of the existing players in the domestic market are on an expansion mode, it could lead to an excess supply scenario, which could cap Nelcast's earnings.

Offer details:

The offer is open from June 4 to June 8. The company seeks to raise about Rs 95 crore through this offer. Karvy Investor Services and Bigshare Services Private Limited are the lead manager and registrar to the issue respectively.(from Business Line)