Commodity play

IPO REVIEW

The offer by Manaksia Limited looks fully priced at the upper band and factors in the near-term growth

Manaksia Limited, listed on Calcutta Stock Exchange, has come out with a follow-on offer of Rs 210-240 crore to expand its metal business and prepay some debt. Manaksia is mainly into three businesses including metal, packaging and mosquito coils.

The company has 18 manufacturing facilities in India and abroad and, derives nearly 40 per cent of its revenues from overseas markets.

Metal
Over 75 per cent of its total revenues come from sale of metal products including value-added aluminium and steel coils, alloys and sheets, which find application in the construction and auto ancillary industries. Notably, it's profit before interest and tax (PBIT) margins at 19.8 per cent in 2006-07 are the best among the three businesses.

Little wonder, the company is expanding capacities in this business. It has already started setting up a 50,000 tonne per annum steel cold rolling mill (expected to be completed by March 2008) and plans to invest Rs 115.50 crore in de-bottlenecking its aluminium rolling line.

About 50 per cent of the new capacity for cold rolling mill will be used for captive consumption, while the rest will be sold in the market.

On the other hand, de-bottlenecking of aluminium plant (including addition of some plant and equipment) should help increase output to 34,000-36,000 tonne (equivalent to 90-100 per cent capacity utilisation), compared with 18,000 tonne currently.

Packaging
The packaging business, which accounts for 12 per cent of revenues, produces aluminium bottle caps, crowns, metal containers, coil stands and plastic caps for companies like Coca Cola, UB Group, Dabur, etc.

Though Manaksia is a large player, this business is very competitive with low entry barriers. Here, while the declining trend in margins has reversed in the last one-two years, PBIT margins at 11.3 per cent is not exciting. Additionally, sales has declined too, from Rs 140.10 crore in 2002-03 to Rs 98.80 crore in 2006-07.

Going forward, the net margins in this business could decline. That's because, many of Manaksia's manufacturing facilities are based in tax havens, wherein they avail of 30-100 per cent income tax incentives. These exemptions are expected to expire from 2009-10 onwards.

Mosquito coils
Here, the company contract manufactures for brands such as Maxo, Odomos and Mortein. While this segment accounts for just 6.7 per cent of revenues, it's margins have improved lately. PBIT margins stood at 12.8 per cent in the first five months of 2007-08 as compared with 8-8.5 per cent in the previous two years.

The flip side is that this segment has reported a marginal sales growth of 1.54 per cent over the last four years. And, it seems that the growth may remain flat in the future as the competition is increasing besides, introduction of newer products (liquids).

Valuations
Increased thrust on the metal business, which is expected to grow at 20-25 per cent annually, should partly help offset the muted growth in other business.

The other trigger is that a part of the current issue (Rs 65 crore) is planned to be used for the general corporate purpose, which could include inorganic growth opportunities. These augur well for the company.

At Rs 140-160, the P/E works out to 9 times (at upper band) based on its annualised earnings for 2007-08. Here, the offer seems fully priced, given the commodity nature of the business.

Issue opens: December 17
Issue closes: December 19