IPO Opens Jan 27

Precision Camshafts is going to be the first IPO to be launched in 2016. The company is engaged in manufacturing and suppling of camshafts, a critical automobile engine component. The company supplies over 150 varieties of camshafts for passenger vehicles, tractors, light commercial vehicles and locomotive engine applications from its manufacturing facilities in Solapur, Maharashtra. On January 27 its initial public offer (IPO) will open and the same will close on January 29. The price band at which the company is offering its share is Rs 180-186 and it aims to raise Rs 410 crore in the upper price band by issuing 2.21 crore equity share of Rs 10 each (fresh issue for Rs 240 crore + offer for sale of Rs 170 crore). This IPO will also be the first one to be introduced under the new T + 6 rule i.e. listing of shares will be on the sixth day after applications are closed. Therefore the entire IPO process becomes cheque-free as Application Supported by Blocked Amount (ASBA) has been made mandatory now by SEBI.

The main objectives of the issue are: (a) setting up of a machine shop for ductile iron camshafts at the export-oriented unit at a cost of Rs 200 crore, (b) general corporate purposes and (c) to enhance its visibility and its brand image among its existing and potential customers. Meanwhile, the company also proposes to set up two new machine shops at Solapur, for ductile iron camshafts and assembled camshafts respectively, by FY17 and FY18. Going forward, the company would also diversify into validation process along with manufacturing in the future which would help in de-risking the business.

Among its several marquee global original equipment manufacturers like Ford Motors, Hyundai, General Motors, Maruti Suzuki, Tata Motors and Mahindra and Mahindra. Recently, the company also bagged its first Japanese client in the form of Toyota Motors, which will use camshafts for its new models in India. As of March 31, 2015, the company has supplied over 58 million units of camshafts in the last ten fiscals to all over the world. Despite of slower growth in the automobile industry in the last five years, the company was able to consistently increase its global market share in passenger vehicle camshafts market from 5-6 per cent in 2010 to an estimated 8-9 per cent in 2014. Going forward, the company is looking at a 20 per cent market share globally in the next five years. A lot of it would come from the inorganic route and also currently scouting for niche machining companies to acquire as well, as per management comment.

On the financial front, on a consolidated basis the company has posted turnover Rs 542.8 crore in FY15 with a CAGR of 20.4 per cent in last four years. The company’s 78 per cent revenue comes through outside India in FY15 as against 70 per cent in FY11. Operating income was reported at Rs 151.16 crore in FY15 with a CAGR growth however it’s not a true picture due to major growth seen in FY15 with a growth of two fold along with margin expanded by more than 1200bps to 27.9 per cent. Even margin of the company at bottom-line expanded by 500 bps to 11.5 per cent in FY15 against 6.5 per cent each in FY12 and FY13. For the company FY14 has remain dull sharply decline in margin at operating as well as bottom line level. For first half of FY16 it has reported net profit of Rs 34.10 crore on a turnover of Rs 263.56 crore. Operating profit was reported at Rs 825.8 crore with a margin of 31.3 per cent.

Coming to the valuation, at the higher price band the company is available at around P/E of 25.84x as we annualised H1FY16 earning of Rs 3.60 per share. When compared on EV/EBIDTA basis the issue will be available at 11.14x and market cap to sales comes at 3.34x.

Valuing company from PE multiple looks little bit stretched at current level especially when market itself is trading at around 19 times. Nonetheless comparing valuation of other auto ancillary companies (such as Motherson Sumi Systems is available at PE of 29) and looking at good customer base with long term relation, high return on net worth of 26.7 per cent at the end of FY15, we believe that you can subscribe the issue with long term investment horizon.