Forging ahead

Cheap valuations and presence in a niche market make Shree Ganesh Forgings' issue attractive.

Shree Ganesh Forgings (SGFL), a niche player in the forgings industry, is the latest one to enter the primary markets. The public issue will be of 5 million equity shares at a price of Rs 30 per share and will be open from May 18 to May 24, 2005.

The company caters to the oil and gas and petrochemical industry apart from auto and auto ancillary segment. Considering the attractive valuations and low size, the issue looks attractive. However, competition in the auto and ancillary segment and the fragmented nature of the forgings industry are concerns.

The company manufactures flanges (a product which joins two lines of pipes together), automobile forgings and closed die forged components for industries such as earth moving, mining, etc. Its domestic customers include BPCL, HPCL and IOC while foreign customers include Syncrude Canada, Stemcor GmbH and Qatar Petroleum. 
 

Financials
(Rs Cr)	FY03	FY04	% change	9 months ended Dec, 04
Net sales	34.89	41.76	19.69	40.8
OPM (%)	8.03	9.17	-	11.34
Net profit	0.82	1.22	48.78	2.16
NPM (%)	2.35	2.92	-	5.29
EPS (Rs)	4.10	5.40	-	4.97

Exports constituted around 65 per cent of sales during the nine months ended December 31, 2004. The company's plan to raise installed capacity from 11,000 million tonnes to 19,640 million tonnes is likely to aid its export thrust.

But here's the catch. Even at the existing capacity, utilisation levels are low at 29 per cent. Analysts note that this is because SGFL is focusing on export of stainless steel flanges for oil and gas and chemical industries.

These industries need more product varieties in lesser quantities compared to segment like automobiles which need lower varieties of products, but higher quantities.

"The company has shown an improvement in performance, despite low utilisations apart from a fall in productivity. So it is clear that realisations are on the rise," notes an analyst with a securities firm. Apart from lower margins, the focus on exports carries with the risk associated with exchange rate fluctuations.

Though the forging industry has seen an improvement in the past couple of years, analysts are cautious about the outlook as prices of raw materials like steel, coke and pig iron increase frequently. They say competition may force SGFL to cut prices of its products, which may impact margins and market-share.

Also, given the thrust on exports, much will depend on the demand from overseas markets and procurement of large orders, which will improve margins. Despite improvements in topline and bottomline, margins at operating and net levels remained under strain due to input pressures and lower capacity utilisation.

SGFL's valuations are attractive compared to peers like Bharat Forge (34.75), Amforge Industries (28.10) and Ahmednagar Forgings (11.4). Based on the pre-issue EPS of Rs 5.40, the valuation at the issue price of Rs 30 stands at 5.55x.

"Unlike peers, SGFL caters more to the oil and gas and petrochemical segment, which constitutes 75 per cent of revenues rather than the auto and ancillary segment which constitutes only 10 per cent of revenues," notes an analyst.

Issue opens: May 18, 2005
Issue closes: May 24, 2005