A poor track record and a low entry barrier product isn't the combination you should bet your money on. | |
| To capture the growth in the automotive industry, Zenith Birla, a tube manufacturer from the Yash Birla stable, has made a follow-on public offer to mop up Rs 131 crore by issuing 2.38 crore shares at Rs 55 each. |
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| Though the shares in the public issue are priced at a 12.6 per cent discount over its current market price of Rs 62.95, analysts are not bullish as the group has had an unimpressive track record. Shares of group company Birla Power, which were issued at Rs 48 in March this year, are now trading at Rs 33.40 "� a 30 per cent discount to its issue price. |
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| Besides, Zenith Birla hasn't had a consistent record of profitability "� it made losses between 1989-90 to 1994-95 and then from 1990-00 to 2002-03. It is only now that the company has restructured itself and hived off loss-making units. |
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| The proceeds from this issue will primarily be used to set up a new facility at Khopoli in Maharashtra to manufacture mechanical (cold drawn welded or CDW) tubes. Commercial production at this 60,000 tonne per annum plant will commence from December 2007. |
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| CDW tubes are value-added tubes used in both two- and four-wheelers, tractors and other automobiles. While a bulk of Zenith's revenues would come from this segment, the company is also eyeing the hydraulic and pneumatic cylinders market. |
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| "About 95 per cent of our revenues will come from auto applications, but for profit optimisation, we are also considering the cylinders segment," says Yash Birla, chairman, the Yash Birla group. |
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| Zenith Birla is upbeat about the growth prospects in the automotive segment. "With so many players setting up shop here and more and more companies aiming to source from India, we expect the demand for auto components to increase exponentially in the years to come," says Birla. |
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| As per an Automotive Component Manufacturers Association of India (ACMA) - McKinsey report, the auto component industry, that today stands at $7 billion, has the potential to touch $34 billion by 2015 if necessary policy decisions and investments take place. |
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| Also a demand-supply gap is expected in the CDW pipes segment. While the demand was 99,708 tonne in 2004-05, the supply was just 70,836 tonne. To benefit from this, many companies besides Zenith, like Tata Tubes, KTL and Bhushan are expanding capacity. |
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| In 2009-2010, the projected demand in 2009-2010 is 2.45 lakh mt but the expected supply is 2.14 lakh mt, narrowing the demand-supply gap marginally. |
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| "The company is banking on demand that would arise in 2010. It just takes around 15-20 months to set up the project and any other player can come and put up capacity in this while," says Arun Kejriwal, director KRIS. |
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| Another concern is pertaining to the prices of the key raw material. The primary raw material for Zenith is hot rolled coils, the price of which is generally volatile. But Birla brushes away this. |
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| Says he, "As ours is a value added product, we can easily pass on the hike in prices to our customers within two months. Our quarterly performance would not be affected unless the hike is too steep." Moreover, he expects the prices to remain stable in the future. |
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| Analysts are also wary of the fact that the company has been changing its book closure years in the past. For the June quarter, the company's sales grew 19.86 per cent to Rs 73.86 crore and its operating profit was up 119.59 per cent to 5.38 crore. The operating margin has improved 331 points to 7.28 per cent. |
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However, the margins of the company are far lower as compared to its peers. The stock is currently trading at 6.66 times its FY06 earnings. Analysts advice investors to steer clear of the issue.
| 'MARGIN'ally POOR | | | Mar 06
(12months) | Mar 05
(18months) | Sep 03
(15months) | | Zenith Birla | | OPM | 4.05 | 1.25 | 2.89 | | NPM | 1.67 | 1.48 | 0.51 | | | Mar 06 | Mar 05 | Sep 03 | | Tube Investments of India | | OPM | 11.15 | 9.74 | 7.64 | | NPM | 11.95 | 7.27 | 6.64 | | Bhushan steel and strips | | OPM | 14.18 | 15.08 | 17.5 | | NPM | 5.53 | 5.72 | 5.72 |
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The company is presently into steel pipes and machine tools and has plants at Khopoli, Aurangabad and Nashik.
| VALUATIONS | | P/E (FY06 earnings) | | KTL Industries | 16 | | Bhushan steel and strips | 8 | | Zenith Birla | 7 | | Tube Investments of India | 2 |
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| The issue opens on October 16 and closes on October 20 and the lead managers to the issue are IDBI Capital and Keynote Corporate Services. |
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