IPO Review: INNOVENTIVE Industries

 

INNOVENTIVE Industries was founded by first generation entrepreneurs, who left their job with Bajaj Auto to develop innovative engineering steel products. They have developed certain products which used to be imported for the oil & gas and power sectors. Its products, which are developed through in-house R&D and find applications in critical application, are the key advantage or differentiator for the company. Successful product development also enabled the company acquire major clients like BHEL, Thermax, Alstom Projects and Bajaj Auto.

GROWTH, BUT WITH HIGH DEBT

Backed by its focus on value-added products, ability of the management, demand from user industries and, to some extent, the low base, the company's net profit has grown six-fold in the last three years — from `8crore in financial year 2007-08 to about

`50 crore in 2010-11 (based on annualised net profit for the nine months to December 2010). High growth, coupled with the niche product profile, also attracted investments from private equity players. The latest PE investor is Standard & Chartered Private Equity, which has invested `30.4 crore, at `117 a share or, at the IPO price. However, growth also brought with it the heavy burden of debt. Due to lack of own funds, the company relied on banks for funds, thanks to which its debt-equity ratio stood at 4.2 times at the end of December 2010. In fact, the company paid 56 crore in interest expenses during April-December 2010, wherein it reported net profit of `34 crore. However, it has maintained decent interest coverage, given its operating profits have, at most times, remained over two times the interest cost. WHAT TO EXPECT?

The company is expanding its capacities (capital expenditure of `163 crore). It will be spread over the next one year. In 201112 though, revenue growth of 25-30 per cent (or, turnover of `750800 crore) will come from higher utilisation and launch of new products. With the commissioning of new capacities, the major gains will come in 2012-13. For instance, on the current `385crore gross block of assets, the company generated revenue of 457 crore for the nine months ended December 2010. Additionally, considering the expected profit generation in 2010-11 and 2011-12, and the increase in net worth due to the IPO and private equity placements, its debt-equity too should come down to near one-time by the end of 2011-12. Higher sales (increase in capacity), lower leverage (lower interest costs), along with the expected improvement in the margins (due to high margin products), will help the company report strong profit growth over the next two years. The key risk to the IPO is that on absolute numbers, the debt will still remain high.