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Should you invest in these IPOs?
September 06, 2006 11:06 IST
A lot of issues are opening up. Investment advisor S P Tulsian and Pradeep Kumar of Anand Rathi Securities give their tips on what one should subscribe or miss.
SP Tulsian is quite impressed with ACE's issue. According to him, the company is very established and is virtually debt-free; it also has high promoters' equity stake. Pradeep Kumar believes that ACE enjoys a good brand name and has an excellent client list. Hence, it is a good bet.
Excerpts of CNBC-TV18's exclusive interview with SP Tulsian and Pradeep Kumar:
Do you like ACE, Action Construction and Equipment?
Tulsian: I like this issue because it is a material handling company. This company has a turnover of close to Rs 170 crore (Rs 1.7 billion). It has also reported an EPS close to Rs 10 on their existing equity of about Rs 13 odd crore (Rs 130 million). They will be going in for an expansion of about Rs 80 crore (Rs 800 million), which is being financed by the private placement of equity to the extent of Rs 24 crore (Rs 240 million) and public issue of about Rs 56 crore (Rs 560 million).
So I hope that they will set up a new plant; it is virtually a debt-free company, so probably on the expanded equity, which will rise to about Rs 18 crore (Rs 180 million), they may have an EPS close to Rs 15. Bennett & Coleman and India Capital Venture Fund of ICICI have also subscribed to the shares at Rs 100 and Rs 130 in this company.
Material handling equipment companies generally enjoy very high P/E multiples on the bourses. One can compare this company with TRF Limited, which was earlier Tata Robins Fraser or other companies, which are into material handling equipment.
So this is very established company, it has high promoters' equity stake, it is virtually a debt-free company with very established products. They will be going into innovative products like mobile cranes etc and so I am quite impressed with the issue and I think it is a good one.
What are your thoughts on ACE and do you recommend a subscribe as well?
Pradeep: Rather than recommending a particular company, I would like to speak on the construction sector itself. It seems that the major concern is free cash flows for construction companies.
Although order books of these companies are bulging, still their margin expansion has not occurred and these companies continue to remain negative on the free cash flow side. So it is a question mark on the future prospects of sustaining this kind of growth for these companies.
Material equipment handling companies like ACE are different from the regular construction companies in that sense. Because for this, working capital is low, debtor days are hardly 30-40 odd days and again finance is available from NBFCs and banks for particular kind of equipments.
So that is not a concern for such companies. The major threat for such companies might be imports from China and raw material prices. Speaking about ACE, the return ratios are quite good but that should drop after the issue.
Operating margin seems to be at an average level of what the industry maintains. The company enjoys a good brand name and they are concentrating on a particular type of instrument right now; 90% of their topline comes from hydraulic mobile cranes.
So they have the ability and if they increase their portfolio, they can sell new products to the same clients. Their client list is very good; it includes the who's who from Indian Inc, from Reliance to Punj Lloyd. So the company seems to be a good bet.
What are your thoughts on Atlanta?
Tulsian: The company is highly leveraged. At present, they have a debt of over Rs 150 crore in their books. They are also going for a BOT project of about 40 km on Nagpur freeway, and so they are raising this money. So I am not impressed with the model where the ownership is not to the extent of 100 per cent because the market doesn't give value to such kind of investments.
Because they are ultimately treated as inter-corporate investments, where the value gets diminished by way of making investments in that fashion. Above all, the high leverage of the balance sheet is again a cause for concern. But if one takes their construction operations and compares it with other peers, then probably one will get convinced that their operations are on a sound scale.
Also for the BOT project, they have an operation period of 17.5 years only and a construction period of 2.5 years, which is fine. In case of other BOT projects, it has been observed that the operation period has generally been about 22.5 years.
In my opinion, even the operation period of the company is quite low plus the high leverage. As regards their financial performance, probably over the next two years, they will be able to cut their borrowings to a great extent and they will probably be able to bounce back.Therefore, considering this whole scenario, this is an average issue and if one wants to go for a construction company and has a liking for a very small infrastructure project, then one can go for it. But otherwise, I don't find too much attraction in this issue.
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