VMS Industries Ltd IPO Review (Avoid)

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Review By MLR Securities Private Ltd on May 31, 2011

• Issue Date: 30th May - 2nd June
• Price Range: INR 36-40
• Issue Size: INR 25.8 Cr
• Mcap: INR 60 - 66 Cr
• IPO Grading: ICRA IPO Grade 1
• Grey Market Premium: INR 2.5 - 3
• BRLM: Ashika Capital ltd

Gujarat based VMS is a relatively new player in the ship-recycling industry having commenced its operations in May 2009. Till FY08 VMS’ revenue largely comprised of fee income from 'Management services and consultancy'. Prior to venturing into ship recycling activity, VMS was providing consulting and information technology services to Bhavnagar Municipal Corporation and also had a share in the profit of a partnership firm 'M/s Eternal Automobiles' - a dealer of two wheelers for 'Honda Motor Cycle and Scooter India Pvt. Ltd'(HMC). VMS holds 25% stake in Eternal Automobiles with 75% stake being held by Mrs. Sangeeta Jain who is also one of the promoters of VMS. The company owns a tug and a speed boat that are leased out to third parties.

Issue proceeds are proposed to be used for modernization of ship recycling plot for Rs 5.6 Cr, setting up of corporate office at Ahmedabad for Rs 1.1 Cr and for meeting long-term working capital requirement of Rs 17.4 Cr.

VMS is promoted by Mr. Ajit Kumar Jain, his son Mr. Manoj Kumar Jain and Mrs Sangeeta Jain. Mr. Ajit Kumar Jain has around 50 years of experience in the field of activities related to ship breaking, dealing in automobile sales and transportation activities.

• In FY09, company recorded a total turnover of Rs. 1.4 Cr of which 93.0% was due to the leasing activity; 3.5% was in the form of Management services & consultancy and 1.6% was from share in the profit from partnership firm. In FY10 with the commencement of ship breaking activities, the company’s scale of operations increased significantly and it discontinued its Management services and consultancy business.
• Driven by ship recycling activities; VMS’ operating income grew from Rs. 1.4Cr in FY09 to Rs. 28.7 Cr in FY10 of which 89.8% was from ship-breaking division; 9.9% from leasing activity of the offshore division and 0.1% though profit from share in partnership firm. The operating margin and net profit margin of the company had been healthy at 15.3% and 9.1% in FY10 respectively backed by the upturn in demand of steel. The margins were also supported by high profitability in offshore business.
• The FY09 OPM & NPM of 74% and 51% respectively are not comparable to those of FY10 since the company was not involved in ship recycling activities till FY09. In FY10; Return on capital employed and Return on net worth stood at 15% and 14% respectively.
• During 9mFY11 the company posted total income of Rs 102 Cr with a PAT of Rs 2.5 Cr. The company’s return on networth is at 15% for FY11 annualised. The company is highly levered with debt equity ratio of 2.5:1 which will come down to 1.2:1 post issue.
• Going forward, the company’s ability to time the purchase and dismantle the ships; efficiently execute the cutting operations by way of employing additional equipments and hedging the foreign exchange risks would be critical to ensure its healthy performance.