Engineering companies are among the most hit due to concerns of economic slowdown and contraction in industrial capex. This is also a reason that despite having scale, visibility and good track record, the share price of engineering companies has fallen sharply and valuations are at historically low levels–earnings multiple of 6-10 times. A relatively small player, Gemini Eng-Feb, engaged in fabrication and salvaging of various industrial equipments, is coming out with an IPO to raise Rs 41.25-44 crore wherein the price band is Rs 75-80 per share.
Gemini Eng-Feb undertakes work related to fabrication and salvaging of heat exchangers, pressure vessels, tanks and storage vessels. While it enjoys healthy operating margins of 22 per cent, it is a small sized company. Besides, it operates in a space where competition is high (entry barriers low) with many unorganized players. The fabrication industry is dominated by a large number of small and big players; among smaller players include Patels Airtemp (India), Artson Engineering, Mukand Engineers, and GMM Pfaudler. Till now, Gemini was operating at smaller scale where the size of orders ranged Rs 10 lakh to Rs 1.10 crore. Post IPO, the company will be bidding for the larger projects, which is dominated by companies like L&T and other mid-sized players, which mean more challenges for it to sustain growth and margins.
| LOW BASE EFFECT | |||
| in Rs crore | FY07 | FY08 | H1FY09 |
| Net sales | 12.8 | 21.1 | 15.9 |
| Operating profit | 1.1 | 4.6 | 6.5 |
| Net profit | 1.2 | 3.8 | 4.3 |
| EPS (Rs) | 1.0 | 3.2 | 3.6 |
| PE (x) @ Rs 75 | - | 23.1 | 10.3 |
| PE (x) @ Rs 80 | - | 26.2 | 11.0 |
| Note: EPS is based on the post issue capital; for H1FY09, the PE is based on annualised H1 earnings | |||
For now, Gemini’s order book of Rs 17.70 crore (as on September 30, 2008) is just 0.80 times its FY08 revenue, and indicates low revenue visibility. Going by mere growth rates, it seems that the company has done very well– revenues have grown at 86 per cent annually over the last four years. However, the high growth rates are also due to a low base; revenues have risen from just Rs 1.74 crore in FY04 to Rs 21.10 crore in FY08. Also, during FY08, as the company reported a revenue growth 65 per cent, it has led to a 125 per cent increase in debtors to Rs 10.02 crore. While the company says that the same is on account of its decision to increase credit period, it is not a good sign.
Going ahead, the company is increasing its capacities at a total cost of Rs 49.84 crore. It is setting up a workshop at Umbergaon, in Gujarat. A part of the capex cost of Rs 10 crore would be funded through the term loan (interest cost 12.5 per cent), while the rest will be through the proceeds of the IPO. The company aims to increase it crane lifting capacity from 27 tonne currently to 125 tonne.
Although the capacities will increase five-fold, a lot depends on the recovery in industrial capex, timely implementation of projects (Gemini is yet to place equipment order). The company plans to increase focus on the energy sector, which coupled with high expectations of order inflow from the state of Gujarat (on account of increasing industrial capex) are some of the positives.
Valuations
Overall, on the scale of five, Gemini's IPO has been rated two by rating agency, CARE, which indicates below average fundamentals of the company. Among key reasons include constraints like unorganised and highly competitive industry, moderate corporate governance, dependence on few customers and limited experience of the management. In terms of valuations, the issue is expensive. At the offer price and on the basis of annualised FY09 EPS of Rs 7.25 the PE multiple works out to 10-11 times. Even if the company were to report a 100 per cent profit growth in FY10, which is unlikely, the valuation (PE of 5.2-5.5 on FY10 earnings) is on the higher side considering that companies of similar size are trading at 3-5 times forward earnings.
Issue opens: February 3
Issue closes: February 6