IPO Review: Sanghvi Forging and Engineering

VADODARA-BASED Sanghvi Forging and Engineering (SFEL) plans to raise 36 crore through an initial public offer to partially fund its 15,000 metric tonne per annum open die forging unit. This unit will enable the company to supply large single piece forgings, majority of which are currently being imported in India. But when compared to other forgings manufacturers, the issue appears expensive.

BUSINESS:

SFEL manufactures and exports forging products for the non-automotive sector. With a capacity of 3,600 MTPA it caters to clients like Mazagon Dock, IOCL, HPCL and GAIL among others with product offerings, which include forged flanges, closed and open die forgings and machine components. Since its products are used by a variety of sectors such as oil and gas, power, shipbuilding and defence, it is less prone to industry downturns. The key inputs used in production include carbon steel, alloy steel and stainless steel, which is sourced from domestic and foreign markets. SFEL procures inputs at the time of securing orders and is not exposed to fluctuations in input prices. It is changing its product mix by reducing its focus on high-volumelow-value standard products to made-to-order products, which have higher margins. These products, which can weight up to 40 tonne each, will be made from its new 15,000-mtpa open die forging unit. The project will reduce the lead time for major customers in India which are importing a majority of their forging requirements, thereby enabling SFEL to better leverage its client base.

FINANCIALS:

Over the past four years, SFEL's sales have grown at 17% whereas profit has grown at 18%, when compounded annually. It has been improving its operating profit margin from 13% in 2006 to 20% in the nine months ended December 2010. It has been generating cash from its operations from 50 lakh in 2006 to 2.83 crore in 2010. In the first three quarters of FY10, operating cash flow almost tripled, which is a point of concern, as sales growth have not kept pace.

VALUATIONS:

At 85, SFEL quotes at 17 times its nine months earnings per share, when
annualised. Compared with Ramkrishna Forgings and MM Forgings, which are available at 11 times and 5.2 times, respectively, their 12-month trailing P/E, SFEL is expensive.

CONCERNS:

The company's EPS has been decreasing over the past three years. Further, due to the size of the IPO, only investors with a highrisk appetite should participate.

 

IPO Details

Company: Sanghvi Forging and Engg
Issue Date: May 4-9, 2011
Issue Size: 36.9 crore
Price Band : 80-85 per share