Shilpi Cable
Shilpi Cable Technologies has entered the capital market on 22nd March 2011 to raise Rs. 55.88 crore via a fresh issue of 81-86 lakh equity shares of Rs.10 each, in the price band of Rs. 65 to Rs. 69 per share. The issue, constituting 25.1%-26.2% of post-issue paid up capital of the company, depending on the price discovery, will close on 25th March.
The company is a small-scale manufacturer of radio frequency (RF) cables, connectors and accessories used in mobile telecom towers. It has a manufacturing unit at Alwar, Rajasthan with installed capacity of 18,245 km of RF cables. However, historically, its capacity utilization level has been very low (3% in FY08 and 14% on FY09), due to dispute with its German JV partner, resulting in production halt for 11 months in FY08 and for 6 months in FY09. However, even in FY10 utilization was a just 52% while it is expected to close FY11 with 70% capacity utilization, which is still quite low.
An important risk to the company’s business is huge dependence on imported raw materials, mainly from China, Germany, US, Korea, UAE, which account for around 73% of total raw material requirement. We have seen that small regional companies are very sensitive to foreign exchange fluctuations which can adversely affect profitability, as the company has not entered into any hedging arrangements for its forex positions.
The company is undertaking the IPO to fund the following objects:
- Augmenting cable manufacturing capacity for Rs. 16 crore
- Working capital funding worth Rs. 15.5 crore
- Capital expenditure on cable / wire assembly shop and tools for 3G enabling worth Rs. 13 crore
- Investment of Rs. 5 crore in a subsidiary company, Shilpi Cabletronics Ltd., which will get used for working capital, in which the Promoters Group also has a substantial interest
Thus, we can see that over Rs. 20 crore raised in the IPO (representing 36% of the total fund raising) will be utilized just for working capital requirements.
Sometimes we wonder how the Regulator approves the IPO, considering the very poor and casual disclosures standards adopted by these companies, hitting public doors for capital. Page 36 of the RHP states capital expenditure on cable / wire assembly shop as Rs. 8.65 crore, while this same expenditure increases to Rs. 11.65 crore on page 44 of the same document! Also, Page 44 of the RHP states that company will deploy all the funds raised in the IPO upto March 2011, which is practically not possible considering the issue closes only on 25th March. The utterly poor approach towards drafting the first public issue documents definitely instils no confidence in the promoter, company and merchant bankers, leave alone the reliance that can be placed on future revenues numbers given by the management (although barred by SEBI from giving future guidance) on TV channel.
For FY10, company clocked revenues of Rs. 170 crore, of which Rs. 38 crore was from sale of traded goods. PAT for the year stood at Rs. 9 crore, resulting into EPS of Rs. 3.74 on equity of Rs. 24.20 crore. For H1FY11, sales increased to Rs. 108 crore, of which RS. 35 crore was from sale of traded goods and balance from manufactured goods. PAT was Rs. 7 crore leading to half-yearly EPS of Rs. 2.88.
As on 30-Sep-10, company’s networth stood at Rs. 44 crore, while its debt was Rs. 89 crore, indicating DE ratio of 2.04:1. Post issue, net worth will rise to Rs. 100 crore, while debt will also increase to meet increased business volumes. It is noteworthy to mention that 1 crore shares (representing 41% of pre-issue capital) owned by promoters have been pledged with lenders.
At upper band of Rs. 69, share is being offered at PE multiple of 11.5x, based on expected FY11 EPS of Rs. 6, while peers are ruling in single-digit PE multiples. Sterlite Technologies with sales of Rs. 2,500 crore and 10% PAT margin is commanding market cap of Rs. 1,700 crore, translating to a price to sales multiple of 0.7 and PE of less than 7. While Shilpi Cable, with turnover of Rs. 200 crore and PAT margin of 6.5%, is seeking market cap and EV of Rs. 223 crore and 311 crore respectively, which is definitely very aggressive.
Fundamentals do not warrant a subscription to the issue. Avoid!