Commercial Eng

Commercial Engineers & Body Builders Co. Ltd. has entered the capital market on 30^th September 2010, with a public issue of Rs. 153 crores, in the price band of Rs. 125 to Rs. 127 per share. There is also an offer for sale of 15.29 lakh equity shares of Rs. 10 each, at the same price band.

The company is engaged in making vehicle and locomotive bodies for road and railway transportation and has been doing large part of work for Tata Motors Ltd. apart from doing it for Indian Railways, BHEL, Ashok Leyland, Volvo-Eicher JV, and many large industrial corporates.

However, it seems that we are seeing very loose or poor disclosure in RHP, as seen from a statement that there are no comparable listed companies with the same business as that of the company. Infact, Automobile Corporation of Goa, a company promoted by Tata Motors (holding 42.37% stake) and EDC with promoters stake at 6.31%, is engaged in business of sheet metals stampings & assemblies, as also, making bus bodies with state of art paint shop. This company has collaboration with Fuji Heavy Ind Ltd. of Japan for chasis mounted bus bodies and with FHI Ltd. for monocoque buses. This company had a flat FY10, wherein total income was at Rs. 234 crores with net loss of Rs. 2.14 crores, on tiny equity base of Rs. 6.42 crores. The company vastly improved its performance for quarter ending June 10, with total income at Rs. 78 crores with PAT at Rs. 3.20 crores, resulting in an EPS of Rs. 5 for the quarter. Apart from this, the company is debt free with book value per share at Rs. 205, as at 30-06-10.

In contrast, this company also had flat year for FY09 with topline at Rs. 126 crores and PAT at Rs. 1.74 cores. In FY10, the company improved its performance with topline at Rs. 183 crores and PAT at Rs. 19.20 crores, resulting in an EPS of Rs. 4.48 for the year, on fully diluted equity base of Rs. 42.90 crores. The massive increase in equity has happened due o issue of bonus shares of 600%, during the year. Even if we assume the FY10 as its normal year,( though margins in the previous years have been quite low) share is being issued at a PE of close to 28 times.

The company claims to have orders of Rs. 623 cores as at 15^th July 2010, of which, major orders are indicative ones,  as given by its customers and hence may not materialize into orders. Does not this concept of treating "enquiry as order" seem too risky? Net worth of the company is meager at Rs. 71 crores, with debt of 54 crores, as at 31-03-10, also does not bode well. Even book value per share at Rs. 16.60 is not exciting at all.

New York life Investment Management India Fund is selling part of its stake, which they have acquired in December 2007, at an effective price of Rs.30 per share. Don't you think that they are expecting too much, or, the value should have been at 60 to 75 per share?

As stated above, Auto Corporation of Goa with expected EPS of close to Rs.20 for FY 11 and now ruling at 370 is ruling at a PE of about 19 times, while it is at a price to book value of just 1.80 times. If Tata Motors have 14% stake (Pre-IPO) in this company, it is the promoter of Auto Corp. of Goa with stake of over 42%

Considering all these, it can definitely be, concluded that the issue is overvalued and does not deserve a valuation of more than two digits.

Better to give a pass to the issue and buy Auto Corporation of Goa instead.