Hyderabad-based industrial packaging player Midfield Industries — which manufactures all varieties of steel strapping, seals, collated nails and corner boards — has come out with an initial public offer (IPO) worth Rs 60 crore to fund its growth plans. The company intends to use 65 per cent of the IPO proceeds to fund its expansion plans for existing plants at Hyderabad, Mumbai and Roorkee, set up a new VCI paper facility at Hyderabad and a high-tensile steel strapping facility at Sharjah, UAE.
The industrial packaging industry is highly competitive and fragmented. Midfield’s business is working capital-intensive with average receivable days in the range of 155-207 days for the past three years. Both – the suppliers of raw material as well as customers – are relatively large companies leaving Midfield with little bargaining power.
On an average, while 90 per cent of revenues come from the domestic market, the company intends to increase the share of exports in total sales from 3.3 per cent in 2009-10 to 12 per cent in 2010-11. It plans to achieve this by earmarking around 80 per cent of the production in Thane (Mumbai) plant for export markets, which is expected to be operational in one or two months.
| GROWING FAST, BUT NOT CHEAP | |||
| In Rs crore | FY08 | FY09 | FY10 |
| Net sales | 67.4 | 83.5 | 90.5 |
| Ebitda | 11.6 | 15.7 | 19.0 |
| Ebitda (%) | 17.2 | 18.8 | 21.0 |
| Net profit | 4.2 | 5.4 | 8.1 |
| EPS (Rs) * | 7.5 | 7.8 | 10.8 |
| *Pre-IPO equity capital; Source: RHP | |||
Midfield has had negative cash flows from operations in three out of the last five years, owing to increased working capital investments. The company expects to utilise Rs 5.4 crore of the IPO proceeds to fund its growing working capital needs. While Midfield reported robust growth in the past, the high receivable days (and, hence, high working capital needs) are key concerns.
Notably, the IPO's valuations aren’t low either. While there are no strict comparables, on the post-IPO capital, the stock is available at a price-to-earnings (PE) ratio of 20-21, based on 2009-10 earnings, which is higher than single-digit valuations for most packaging stocks. Even if we assume one-year (2010-11) forward earnings, the valuations (PE of 14-15) clearly look expensive.
