Commercial Engineers and Body Builders IPO: Expensively priced
Moneylife Digital Team 29 September 2010

The company is a relatively new entrant in the railway wagon refurbishment business and could face intense competition from more well-established players. Dependence on Tata Motors presents a client concentration risk for its commercial vehicle business

Issue Details

Number of shares: 12.24 crore shares
Issue duration: 30th September-5th October
Issue Price: Rs125 - Rs127 per share
Face value: Rs10 per share
Minimum order quantity: 55 shares
Listing: BSE, NSE
Lead book running managers: ICICI Securities Ltd and Edelweiss Capital Ltd  

Valuations

Its EPS for FY10 stood at Rs4.48 per share. The PE works out to 27.90 at the lower end and 28.34 at the higher end of the price band. The pricing looks steep.

Business model

Commercial Engineers and Body Builders Co Ltd (CEBBCO) is entering the capital market to raise Rs153 crore through a 100% book building issue. Private equity players New York Life Investment Management India Fund (FVCI) II LLC
(1,285,101 shares) and Commercial and Automobiles Pvt Ltd (243,486) will offload a total of 15,28,587 shares. 

The company produces vehicle and locomotive bodies for diverse applications for road and railways transportation. It also conducts refurbishment of railway wagons and manufactures components for railway wagons, coaches and locomotives.

The company has bagged orders for manufacturing different vehicle bodies from original equipment manufacturers (OEMs) such as VE Commercial Vehicles Ltd (a joint venture between the Volvo group of companies and Eicher Motors Ltd), Ashok Leyland Ltd, Asia MotorWorks Limited, Man Force Trucks Private Ltd and Hino Motors Sales India Private Ltd (belonging to the Toyota group of companies), all of which also manufacture fully-built vehicles. For FY2010 and FY2009, its net sales from the commercial vehicles division were Rs121.16 crore and Rs109.36 crore respectively. As of 15 July 2010, its order book in the commercial vehicles division was Rs525.53 crore and in the railways division was Rs98.15 crore. The company is promoted by Kailash Gupta and Ajay Gupta.

Financial snapshot

Its cash flows were in the red in FY10 and FY09 at Rs0.30 crore and Rs17.39 crore, respectively. 

Objects of the issue

The company plans to incur capital expenditure for the railway project at Gram Imlai in Jabalpur district at a cost of Rs80.30 crore. The combined wagon and EMU coach manufacturing facility will have a production capacity of approximately 1,200 wagons and 150 EMU coaches per annum. The total cost of the railway project is Rs130.30 crore which would be implemented in 2 phases. Phase-I of this project involves setting up the wagon manufacturing facility, while Phase-II of the project is for the EMU coach manufacturing facility. The funding will be through a mix of net proceeds, internal accruals and debt. It will prepay loans of Rs59.05 crore.

Analyst's take

Rating agency CRISIL has assigned an 'IPO Grade 2' to the issue indicating 'Below Average Fundamentals'. The report notes that CEBBCO is a relatively new entrant in this segment and could face stiff competition from existing incumbents in the refurbishment and wagon businesses. Post the commissioning of its wagon capacity, it would account for just around 4% of the total wagon capacity as of 2008-09. Its ability to bag orders remains contingent on how well the company is able to establish strong contacts within the Indian Railways. Organised players in the fabrications business as well as existing wagon manufacturers could easily cater to the Indian Railways' demand for both refurbishment and new wagons as the business is neither very capital intensive nor requires a long gestation period and orders are tender driven.

Strengths

  •  Strong track record with reputed customers in the commercial vehicles industry
  •  Wide range of product applications and offerings
  •  Ability to continuously expand product offerings
  •  State-of-the-art technology and certifications for design, production standards and quality assurance
  •  Strategic geographic location
  • Competitive cost structure
  • Ability to compete effectively with the unorganised body builders

Weakness

  •  Limited customer concentration

In FY 2006, 2007, 2008, 2009 and 2010, it derived 56.32% (Rs28.24 crore), 86.36% (amounting to Rs82.59 crore), 73.91% (Rs88.11 crore), 69.23% (Rs77.57 crore) and 52.46% (Rs95.93 crore) respectively, of its net sales from Tata Motors Ltd.

In FY 2009 and FY 2010, it derived 2.39% (Rs2.67 crore) and 27.49% (Rs50.27 crore), respectively, of its net sales from the Indian Railways.

  •  Cyclical business

The commercial vehicles industry is cyclical in nature. A substantial part of its sales are realised during the second half of the financial year due to low demand in monsoons from mining and road-construction sectors.

  •  Competition

It faces competition in the commercial vehicles division from the unorganised sector.

Concluding notes

The IPO is expensively priced.

Comments
k a prasanna
1 decade ago
The EPS for FY 10 on the post issue capital of Rs 55cr comes to Rs 3.45. At Rs 125 -127, the company is demanding a valuation of 37 PE, which is very expensive. The company’s net profit margins are inconsistent. CRISIL IPO grade 2/5, indicating below average fundamentals. The company had negative cash flow for FY 10.

INVESTORS ARE ADVISED TO SKIP THE ISSUE. THE ISSUE IS EXPENSIVE. FIRST CHOICE IPO.
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