AVOID NELCAST IPO---- Moneycontrol
Nelcast, a castings and component manufacturing company, is open for subscription with a 43.50 lakh share initial public offering, IPO. The issue closes on June 8.
The issue is being made through 100% book building process, with the price band fixed between Rs 195 and Rs 219 for the shares of face value Rs 10 each.
Khandwala Research report on Nelcast IPO:
Business Overview
The Company manufactures around 200 different castings in SG and Grey Iron. Cylinder Blocks, Flywheels, Flywheel Housings, Housings, Hubs, Spring Shackle, Brackets, Transmission Case, Axle Housings, Exhaust Manifolds etc. are some of the items that find application in the commercial vehicle and in the Tractor segments. The Company is a major supplier of auto components castings to Automobile and Tractor industry majors like TATA Motors, Ashok Leyland, Tafe, Mahindra & Mahindra, TATA Cummins, etc.
70% of the Company’s revenues are derived from HCV and Tractors followed by Auto Components. Apart from fulfilling domestic demand, the Company has been exporting to USA, Europe and Australia for many years.
Investment Rationale
Track Record
The Company has an envious track record of 21 years. The promoter, Mr. P. Radhakrishna Reddy, is a Metallurgical Engineer from Regional Engineering College, Nagpur. The Company has professional and skilled employees right from the Board level to the shop floor level. The Company has not recorded any labour unrest since last 21 years, which speaks very highly of the quality of its Human Resource Management. The Company is a major supplier to Tata Motors, Mahindra & Mahindra, Eicher Motors, Tafe, etc. Besides, it also exports to USA, Europe and Australia.
Expertise in Spheroidal Graphite (SG) Iron Castings in India
The Company is one of the largest manufacturers of Spheroidal Graphite (SG) Iron Castings in India. The advantages of SG Iron is its versatility, cost efficiency and the best combination of overall properties viz. high ductility and high tensile strength, excellent machinability, internal soundness, and close grain structure. In the past 40 years, the use of SG iron has grown rapidly, mainly through conversions from grey and malleable iron castings and steel castings, forgings and fabrications but also through its use in new components. The Company is well poised to take advantage of the incremental usage of this product as it is the core strength of the Company.
Latest Technology
The Company was among the first to implement the TS 16949 quality standard and it had obtained the ISO 9002 accredition as early as 1994. The Company makes use of the Kunkel Wagner fully automatic high pressure molding line and is among the first foundries to implement fully automatic molding technology in India. With the help of latest technology, the Company is able to manufacture a versatile product range from 0.5 kg to 250 kgs and in choice of several grades of Grey & SG Iron.
Growth in end user segments
Almost 70% of the Company’s revenues come from the Heavy Commercial Vehicle (HCV) and Tractor segments followed by Auto Components. The commercial vehicle segment recorded a CAGR of 20.8% during FY 2001-06. The medium and heavy commercial vehicle segment accounts for 56% of the total commercial vehicle segment. The growth in the economy plus Euro norms and restriction on maximum age and loading of vehicles will boost growth in the HCV segment. Thrust on agricultural credit has enabled greater resource allocation on farm automation.
The Bharat Nirman Project and micro irrigation schemes will also stimulate Tractor sales. Between 2000 and 2005, the Auto Components industry has witnessed a 20% CAGR. Global auto majors are sourcing critical components from India with exports touching USD 1.8 billion in FY 2004-05 (36% to Europe and 26% to North America). Also, with the closing of a large number of foundries in USA and Europe, developing countries like India and China are well poised to take advantage of the supply gap.
Concerns
Increase/shortfall in input costs
The Company’s major raw material is steel scrap along with ferro silicon magnesium. Other inputs like power, fuel, bentonite, steel shots, etc are required in the manufacturing process. Also, wage costs are very crucial as they are significantly lower as compared to developed countries. The Company may not be able to pass on any or all increase/shortfall in the input costs to the customers and this may adversely impact the profitability.
Dependence on key customers
The top five customers contribute 77% of the Company’s revenues as of 31 March 2007 and the top three contribute 58%. Any discontinuity of business from any of these customers, changes in their buying strategy/quality requirements, etc. could materially affect the business of the Company.
Adverse economic conditions and slowdown in user segments
The Indian Economy has been recording robust growth in the past couple of years. Real GDP grew from 7.5% in 2004-05 to 8.4% in 2005-06. Manufacturing and Service sectors have recorded rapid growth coupled with the recovery in the agricultural sector. Any increase in interest rates, slowdown in industrial activity and adverse weather conditions affecting the agricultural sector may also affect the Automobile sector esp. HCV and Tractor segments, which contribute nearly 70% to the Company’s revenues. This could negatively affect the growth of the business and the implementation of Company’s strategy.
Technological advancement
Technology plays a critical role in the manufacturing of castings. Stringent quality requirements of customers like Tata Motors, Mahindra & Mahindra, overseas clients, etc. require adherence to latest technology and consistency in quality. Failure to keep abreast of latest technology may affect the quality (and price) of products and delivery schedules placing the Company at a disadvantage as compared to its competitors.
Valuation
The company is offering its shares at a PE multiple of 17.16x – 19.27x on expanded capital. The company is proposed to be listed on BSE & NSE. We recommend investors to Ignore subscribing to this issue.
Zerodha (Trading Account)
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