Gravita India is entering the capital market on 1st November 2010 with a public issue of 36 lakh equity shares of Rs. 10 each in the price band of Rs. 120 to Rs. 125 per equity share. The company is expected to raise Rs. 43-45 crore via the IPO. The issue constitutes 26.43% of post-issue paid-up capital of the company and closes on 3rd November 2010.
Gravtia India is a Jaipur-based secondary manufacturer of lead metal i.e. it manufacturers lead ingots and lead alloys through recycling and smelting lead products. The company has a 24,000 MTPA manufacturing facility in Jaipur and 12,000 MTPA facility at 8 overseas locations such as Ghana, Zambia, Ethiopia, Mozambique, Georgia, Senegal, Sri Lanka and Honduras. The company has, till date, invested only Rs. 6 crore in the overseas locations and is now embarking on a massive overseas expansion, mainly driven by raw material availability in those geographies.
The company plans to utilise proceeds of the issue to fund both greenfield and brownfiled expansion, in India and abroad. It plans to spend Rs. 7 crore for 2,125 MTPA lead sheets and lead powder facility in Jaipur and Rs. 5.8 crore for a new 8,000 MTPA lead refining facility in Maharashtra. Also, Rs. 5.9 crore will be invested in overseas ventures of Sri Lanka, Senegal and Honduras. While 8,000 MTPA Maharashtra facility will cost less than Rs. 6 crore, 6,000 MTPA facility in Honduras will need investment of Rs. 12 crore (to be funded by 3 equal partners). Thus, the capex outlay significantly varies among geographies. However, the company is compelled to tap newer markets due to raw material sourcing and other cost constraints.
Additionally, the company plans to spend Rs. 18.6 crore (over 40% of IPO proceeds) to set-up manufacturing facilities in new geographies of Australia, Belarus, Chile and Mexico, to be completed by December 2011. However, most of these plans look good only on paper, as not much head-way has been made in this direction and will most certainly lead to execution delays. Thus, not much capacity will get added in FY11, although the equity will get diluted by over 26%. Also, it is too difficult to manage such small plants, that too, spread over so many countries.
The present capacity utilization of the company is very low at about 30-40%. Moreover, for FY11, the company mentions an estimated production of 7,800 MT of refined lead/ lead alloy on page 75 of its RHP, of which, only 1,088 MT has been produced upto Q1FY11. Thus, concern remains on the operation front as well.
For FY10, the company reported a turnover of Rs. 159 crore, of which 36% was from sale of traded goods. Net profit for the year was Rs. 13.97 crore, resulting in an EPS of Rs. 13.97 per share, on equity of Rs. 10 crore. Operating and net margins stood at 11.7% and 8.8%, respectively. For Q1 FY11, its turnover increased to Rs. 58 crore, with the mix of sale of traded goods rising to 44%. Going forward, the company is likely to face pressure on the expense items such as raw material, employee and interest costs, as can be seen from the Q1FY11 numbers.
The company, engaged in re-cycling lead batteries and other lead products to manufacture lead and lead alloys, faces severe competition from the unorganised sector, as over 70% of India’s lead demand is met through recycled lead, with Hindustan Zinc being the sole primary lead producer in the country. Besides operating on very tight margins, the company also faces foreign exchange risks. It has to look for growth opportunities in newer markets, closer to the source of raw materials, and also does enjoy any pricing power for its finished product.
On the upper end of the price band at Rs. 125, share is being issued at PE of 9 times, based on FY10 earnings, which is quite expensive, as it deserves a PE of not more than 6 times.
Considering all the above factors, fundamentally the issue is an avoid.