Midfield Industries - IPO

Midfield Industries' IPO looks expensive even after considering its growth opportunities in the packaging industry. Investors with low-risk appetite can give it

IPO details

Company Name: Midfield Industries

Issue Size: Rs 58 crore

Price Band:Rs 126-133

Issue Date: July 19 to July 21


HYDERABAD-BASED Midfield Industries is entering the capital market with an initial public offer of 4.5 million shares to raise around Rs 58 crore. Post offer, the promoter group's holding will fall to 52 % from the current 80%. The industrial packaging company plans to use Rs 38 crore of the proceeds to increase its capacity and Rs 5.3 crore for working capital requirements.

BUSINESS:

The company is among a few players in the organised segment of packaging industry catering to the growing demand of industrial packaging consumables. The company provides packaging consumables, such as high tensile steel strapping collated nails and corner boards. It also provides end-to-end packaging solutions.

   The company is expected to benefit from growing demand in the organised packaging segment. Midfield Industries plans to expand its Hyderabad facility with the IPO proceeds by setting up a PET strap, nail making machine and seals. The company foresees growing demand in the Middle East.

   To cater to this demand, it is setting up a new facility for manufacturing high tensile steel strapping and seals at Sharjah with capex of Rs 12.7 crore.

   To reduce its transportation time for exports, the company is expanding its manufacturing facility at Mumbai with the investment of about of Rs 6.2 crore. Although exports were only 3.3% of net sales for year ended March 2010, the company intends to increase its global exposure. With all these projects in place, the company may increase its share of export revenue.

FINANCIALS:

Net sales grew at a compounded annual growth rate of 22% for the past five financial years. The company reported net sales of Rs.90.4 crore in the year ended March 2010, up 8% from the previous year. Net profit surged 37% to Rs 7.8 crore. The company was able to increase its margins, as operating margins increased from 18.6% to 21.3%.

VALUATION:

At the upper price band, the offer price works out to be around 21 times the company's earning per share for FY10 adjusted for IPO equity dilution. Although there are no strict peers of Midfiled, the broader industry average P/E comes around 9. Hence, the IPO looks expensive even after taking into account all growth opportunities in the packaging industry. Retail investors with low-risk appetite can give it a miss.

CONCERNS:

The company takes as many as 208 days to collect credit sales, which is extremely high, when compared with the industry average of 80 days. The company may face pressure on its cash conversion cycle in future if it is not able to decrease its receivable days significantly. The company's client base is not diverse as the top 10 customers account for around 48% of their sales. In the past 5 fiscals, the company had reported negative operating cash flows for 3 times time, which adds to the concern regarding availability of free cash flows.