January 06, 2007

Autoline Industries IPO - Go Ahead

After more than a week IPO is back in action. The first for the year is Autoline Industries Limited. For once, reading the IPO was very refreshing. A good insight into the automobile industry.

Some of the key issues for the IPO

Issue Size : 75 Crores

Period : January 8 to January 12, 2007
Price Band : Rs. 200 to Rs.225
Lead Runner: BoB Capital Markets
The company has been extended loans by BoB, a prime reason for being the lead managers for the issue.


Objective of the Issue
  • The company is planning to upgrade, expand and modernise its existing facilities and desgn centre in Pune.
  • The company is planning to enter into new products such as door assembly and contract manufacturing for heavy vehicles
  • Building a new corporate office
  • 'Long Term' working capital requirements
Sourcing of Funds
  • The company is looking at an investment of Rs. 104 crores. The funding has been done as follows.
  • 75% of the funding is done from this IPO. 8% through private placement. 17% from raising debt.
Utilisation of Funds
  • Expenses on Construction / Upgradation / Modernisation : 72%
  • Joint Ventures and Acquisition : 11%
  • Working Capital : 11%
  • Others: 6%
Strengths and Weakness for the Industry
  • The industry is moving up in the value chain and also there is some element of scaling of business by existing players. This would help in driving the cost of manufacturing down.
  • The after market is mostly held with unorganised players, with more than 65% share. This is a good opportunity for companies with scaling business to take advantage of price. However, increase in scale can lead to differential taxation nulling such benefits.
  • Cost and quality advantage, esp in the export market, where India's contribution is increasing every year (CAGR >25% in the past 5 years).
  • The industry is moving towards e-auction. This is a big danger for companies that are in contract manufacturing.
  • There is a huge demand for cost reduction from suppliers. Also suppliers are engaged in active designing and the risk of performance is falling on automotive component suppliers.
  • Consolidation in the industry leading to fewer players in the market. The same should start occurring in the component supplier in which scale is giving key benefits.
Strengths and Weakness for the Company
  • The company is committed with this IPO fund deployment. The funding which is to be raised from debt has already been raised or commitment received from BoB and Kotak Mahindra Bank.
  • 25% of the cost of the plan requirements has already been implemented with existing source of funds. The promoters have contributed to this significantly. This might be reduced with the money raised. However, I like the promoters commitment to the venture.
  • The company has made some really strong predictions on its sales figures. 95% (almost on track 54% of the target sales figure reached in 7 months) for the current year. 140% for the next year and 20% the following year.
  • The company is also looking at mass production as a method to reduce its cost. This will make them competitive and can increase volume in the long run. This would increase the dependence of its customers on the company.
  • The company is moving up the value chain from being a mere manufacturer to be a part of the design team. The downside risk is the inherent problem with quality manpower. Its subsidiary company is involved in this venture and it is a reseller of a software and does CAD/CAM. The subsidiary company is planning to increase manpower. However, for a company which does not have a clear focus in this area, I still am not sure of the success of this venture. The company has a tie up with Detroit Engineered Products. This MOU seems to be a more successful idea than having a separate venture of its own.
  • The company is also setting a state of art control tool room that provides testing facilities. The customers are unclear and though this contributes only 5% of the cost of funds required, utilisation is under doubt.
  • The project expansion has taken the customer requirement in mind. The company has entered into some kind of contract manufacturing with the Indian subsidiary of Stokota, Belgium.
  • The biggest weakness for the company would be client segmentation. With more than 80% of the business coming from a single client Tata Motors, the company is running a big risk.Though the company has a small benefit being a sole supplier to Tata Motors, this however is product dependant.
  • The company's owners were more than willing to have the entire IPO handled by BoB, given that they have had very few issues last year. Merely being the bankers to the company, BoB was able to influence them quite easily for a complete issue.
  • The company has been given a covenant of not declaring a dividend till it has an adequate current ratio of 1.33:1 and also the bank's permission.
Financial Aspects of the company

Networth of the company before the issue : Rs. 298 million
Net worth of the company before the issue : Rs. 373 million
Book Value : 42.49
EPS (Latest) : 15.95 (Annualised)
RoE : 25%
RoC : 8.4%
  • The company has a employee manpower of 1588 and this is expected to increase by another 72. The incremental sales per employee is expected to increase by more than 75%
  • The company has just started declaring dividends over the past two years (18% last year).
  • The inventory is close to 15% of the sales, on the higher side.
  • Significant cost include: Raw Material and Manufacturing Expenses: 90%
  • In spite of huge investment in machinery to create scale benefits the depreciation cost contributes <2%>
  • The interest coverage ratio is now close to 6 times and this can go down further with increased sales.
  • The current CEPS for the company is around Rs. 14
The future financial projections can give the following EPS and the forward P/E for the company:



Relative Valuation
  1. Price/Earnings: 14 times on the higher side and 12.5 times on the lower side. Rasandik is at 12, Jay Bharat Maruti is at 12 and Automotive Stampings is at 20
  2. Price/Book Value : 5.29 times on the higher side and 4.7 times on the lower side Jay Bharat Maruti is trading at 2.5 times(RoE : >20%) and Automotive Stampings is trading at 2.7 Times (RoE : 9%) and Rasandik Engineering is at just 0.49 times (RoE : >20%)
  3. Price/Sales: 1.19 one the lower side and 1.33 on the higher side Net Profit Margin of the company is 6.3% while that of competitors are Rasandik is at 6%, Jay Bharat Maruti is at 2% and Automotive Stampings is at 1.5%

Others
  • The company has been receiving some funding from different entities in the past. The most recent one in August was at Rs. 130, a steep discount of 30% (lock in period is 20% 3 years and 80% 1 year)at the lower end of the issue for a company that is doing really well for the year and with clear plans for an IPO in place giving sight of exit options to the investor. Yet such a discount to the issue.
  • Mr.Vikram Bhat, the chairman of the company has strong credential with the Monitor Group, Mahindra British Telecom and other entities of the Mahindra Group. Also the board is largely filled with non technical people and also a marketing professor from IIM A.
  • The promoters networth would be close to 11 crores (on the lower side) with this IPO listing.One of the promoters of the company is a sitting MLA and also a former mayor of Pune. Surprisingly, the company does not look bureaucratic as a government institution The group has not ventured beyond this company. No company is sick though two companies of the two promoters are not doing any more business.
  • The company is not facing any major litigation and also the contingent liability is on the lower side and more on export obligation commitment.

Pricing of the IPO


The company has priced its IPO between Rs. 200 and Rs. 225. On a relative basis and given sales projection the forward P/E looks very attractive for an
investment in this company. However, the profits are dependant on two key factors: ability to meet its sales projection and its pricing power. With the product it has and the success of Tata Ace and Indica, the volume looks plausible. However, pricing and profit margins is still under threat. I have made some downward correction to the future margins. Given the strong RoE the Price/Book Value is attractive comparatively attractive to its peers. I would give a 'go ahead' to this IPO and a good investment for the future. There is a possibility of listing gains in this scheme. However, I would look at this stock for a long term rather than a short term story.

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