Nelcast Ltd

Nelcast Limited is entering the capital market on 4th June 2007 with a public issue of 43.50 lakh equity shares of Rs.10 each in the band of Rs.195 to Rs.219 per share. The issue size would be between Rs.85 crores to Rs.95 crores. The dilution is to the extent of 25% and present equity would rise from Rs.13.05 crores to Rs.17.40 crores. Promoters' stake in the company would be 68% post-issue. The company has two plants, one at Gudur in A.P. and another one at Ponneri in Tamil Nadu. The capacity of the two plants was at 72,000 TPA upto 31.03.2006. The company has stated on page 48 of RHP, that this capacity is being increased to 102000 TPA in current financial year. But the page 20 of the same RHP states capacity at 102000 TPA for FY07. Even page 8 states the capacity at 72000 TPA. So what exactly is the capacity? The company now has taken up expansion and modernisation at the existing facilities to increase the capacity from 102000 TPA to 120000 TPA in FY08 and to 150000 TPA in FY09. The total cost of the project is estimated at Rs.87 crores, which is to be met from the proposed issue. The company seems to be quite slow in implementing the expansion programme. It is not clear how the company carried out its previous expansion from 72000 TPA to 102000 TPA. The expansion is likely to get implemented in two phases by Sept 07 and Sept 08 of 18000 MT and 30000 MT respectively. There is an increase of just Rs.15 crores in gross block in FY07. Does it mean that 30000 TPA capacity has been raised with Rs.15 crores? Then, why capex of Rs.86 crores for an expansion of 48000 TPA? The company has posted a topline of Rs.306 crores with PAT of Rs.19.78 crores for FY07, resulting in an EPS of Rs.15.15. On fully diluted equity, EPS works out at Rs.11.37. At upper band of Rs.219, PE multiple works out at 19 plus. Now that's really expensive! Ennore Foundries with an equity of Rs.16.30 crores and promoters stake of 80% has reported sales of Rs.395 crores and PAT of Rs.16.20 crores, resulting in an EPS of Rs.10 for FY07. The share is ruling at Rs.190 at a PE of 19. Ahmednagar Forging having an equity of Rs.33.22 crores with promoters stake at 50% has posted a sales of Rs.175 crores and PAT of Rs.20.60 crores for March 2007 quarter. For FY07 (June ending) the company is likely to post an EPS of Rs.22 and share is ruling at Rs.250 resulting in a PE multiple of 11. Electrosteel Casting having equity of Rs.20.76 crores with promoters stake of 55% posted sales of Rs.1123 crores and PAT of Rs.106 crores, resulting in an EPS of Rs.51 for FY07. The share is ruling at Rs.386 giving a PE multiple of less than 8. The composition of company's total production is more towards low margin castings as machined casting is just 10%. The company is planning to increase its machined castings volume by 20-25% of the total production in the next two years. In spite of this, the share at the upper band is definitely not recommended and even at the lower band of Rs.195, it seems expensive, especially when compared to its peers available in the secondary market.

Nelcast Ltd

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