Betting on builders

IPO REVIEW

Kamdhenu Ispat hopes to piggyback on the growth in the construction sector.

The growth in housing and infrastructure continues to create demand for construction material.

Kamdhenu Ispat, with a turnover of less than Rs 100 crore and net profit margin of just over 2 per cent for the nine months ended December 2005, is entering the capital market to raise Rs 32 crore to expand its operations and meet working capital requirements.

The company manufactures and trades in construction materials such as steel bars, cement and SS water pipes. It has five stock yards and another five will be set up in two to three months.

Manufacturing accounts for less than 10 per cent of the steel products that the company sells. Analysts feel that the heavy dependence on the franchisee model may lead to higher volumes but lower margins, in the future.

Kamdhenu had undertaken a project to manufacture sponge iron in 2004. But it could not execute the project because it did not get mining rights. Satish Agarwal, chairman and managing director, says, "We have plans to make sponge iron and also produce power in the future."

Steel products such as TMT/CTD bars contribute about 97 per cent of the company's revenues. The company started the cement business a couple of months ago. It has undertaken its first housing project near Chandigarh through its franchisee, with an outlay of about Rs 35 crore.

The company's main manufacturing facility in Rajasthan manufactures steel bars and ingots. Through its franchisee arrangments with 30 units, the company manufactures HSD/TMT bars, cement and SS pipes. The company gets royalty from franchisees for those products which they sell under the Kamdhenu brand.

"We will increase the franchisee network rather than expand manufacturing to avoid the cost of fixed assets," says Agarwal.

Kamdhenu's net sales for FY05 grew 55.09 per cent, while operating profit increased 26.82 per cent. The company's EPS for the nine-month period ended December 2005 was Rs 3.04 and its P/E stood at 8.22x (pre-issue).

The issue will remain open from April 3-8. Post-issue, the promoters' holding in the company will go down from 41.59 per cent to 21.47 per cent, without the greenshoe option.