By Geetanjali Kedia
Precision Camshafts is entering the primary market on Wednesday 27th January 2016, to raise Rs. 240 crore, via a fresh issue of equity shares of Rs. 10 each and an offer for sale of up to 91.5 lakh equity shares, by promoters and directors, both in the price band of Rs. 180 to Rs. 186 per share. The total fund raising aggregates to Rs. 410 crore, at the upper end of the price band, of which, offer for sale portion is Rs. 170 crore. Representing 23.28% and 23.62% of the post issue paid-up capital, at the upper and lower end respectively, the issue will close on Friday 29th January.
Precision makes camshafts, mainly for passenger vehicles, as also, for tractors, light commercial vehicles and locomotive engines, having 2 manufacturing facilities in Solapur, Maharashtra, with aggregate annual capacity (30-9-15) of 13.38 million camshaft castings from foundries and 2.22 million machined camshafts from machine shops. Exports are significant (78% of FY15 revenues), while 2 customers alone, Ford and General Motors, made up for 71% of FY15 revenues, indicating huge customer concentration, a risk factor which has haunted a couple of auto component players lately.
Company is undertaking Rs. 200 crore capex for a new machine shop, for ductile iron camshaft at Solapur (export unit), with capacity of 0.96 million tons per annum, to be funded via fresh issue proceeds. In the offer for sale, 2 promoters (Shah), a promoter group company (Cams Technology) and a company director (Jayant Aradhye) will off-load equity shares.
Since significant turnover is through export sales, rupee depreciation since FY14 has helped company improve margins (although Rs. 50 crore ESOPs charge in FY14 dented margins a little for that year). FY15 consolidated revenue stood at Rs. 561 crore, on sales volumes of 10.11 million units, and EBITDA was at Rs. 151 crore. Net profit came in at Rs. 62 crore, resulting in an EPS of Rs. 7.62, on high equity of Rs. 81.84 crore. H1FY16 was quite flat, in terms of growth, with revenue and net profit of Rs. 271 crore and Rs. 34 crore respectively, translating into an EPS of Rs. 4.16 for the first half.
Annualising H1FY16 EPS, expected earnings for FY16 may be at Rs. 8.50 per share, which discounts the upper end of the price band of Rs. 186 by a PE multiple of about 22 times (pre money). On FY17 estimates, after accounting for the dilution (post money), PE multiple remains upward of 22x, which is very expensive for an auto component maker, with single product profile and regional manufacturing capabilities. Comparable peers are ruling at PE multiples in low-to-mid teens. On a topline of Rs. 550 crore, company is seeking market cap of Rs. 1,760 crore and an enterprise value of Rs. 1,870 crore, which is extremely rich and unconvincing.
As of 30th September 2015, company’s net worth stood at Rs. 269 crore. It had total debt of Rs. 212 crore and cash and equivalents of Rs. 102 crore, leading to net debt of Rs. 110 crore. Promoter holding of 81.51% will shrink to 63.60% post IPO.
Tata Capital had invested in the company, holding equity since the year 2008. Cams Technology Limited, a company whose 100% equity is owned by promoters, was incorporated in June 2013. On 17th August 2013, Precision Camshafts subscribed to preference shares of Cams Technology worth Rs. 62 crore. Also, in August 2013 itself, 80,394 equity shares of Rs. 100 each held by Tata Capital in Precision Camshafts were acquired by Cams for Rs. 62 crore! Thus, to give exit to the PE investor, company structured the transaction, by creating a new entity / group company and avoid buy-back of its own equity shares. Was this done since Tata Capital couldn’t find a buyer for its 5 year old investment?
Rs. 62 crore in August 2013 is a valuable resource at the company’s disposal, given company’s net worth of Rs. 110 crore and net debt of Rs. 153 crore, as of 31-3-13. Now, Cams Technology is one of the selling shareholders in the ensuing offer for sale. On effective cost of acquisition of Rs. 38.56 per share, it is now expecting sale price of Rs. 186 per share (i.e. 4.8x in 30 months!), which is not justified by the financials.
Such unusual structuring to facilitate PE exit does not bode well, in terms of corporate governance, which may not be illegal on the face of it, but may not get pardoned by the market, as well. In essence, a group company, in which promoters own 100% equity (just Rs. 50 lakh), while preference share capital (of Rs. 62 crore) subscribed to by the company, is used as a structuring vehicle. Company has essentially used its own funds to buy shares from the PE investor and, in spirit, is holding its own equity!
To conclude, corporate governance seems to be an issue with this company, coupled with valuations being extremely expensive. In addition, auto industry, and auto components sector in particular, is not currently in ‘flavor’ so as to get away with premium valuations. To top it all, current secondary market conditions are definitely not conducive, which are giving many players in auto ancillary segments at much cheaper valuations in the secondary market. Thus, nothing in the issue seems to be going in its favour, making it a clear avoid.
Disclosure: No interest.