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Radhika Kamath

AN investment in the initial public offering (IPO) of Shree Ganesh Forgings (SGF) can be avoided, as the risks and challenges in this offer outweigh the scope for capital appreciation in the medium term. Given the fragmented nature of the industry, thin margins and stiff competition from like-sized peers, SGFL may not provide an attractive entry point through this IPO. At an offer price of Rs 30, SGF is priced at six times its annualised per share earnings for 2004-05.

SGF is in the business of making steel forgings catering primarily to the requirements of auto/auto ancillary and petro-chemical sector. In the past few years, the capacity utilisation level for the company has been low at 25-30 per cent, owing to the inability to secure large-sized orders. The company has attributed this to bottlenecks in production facilities. The nature of the industry also poses a threat to a small player like SGF. Forgings is a highly fragmented industry with few large players in the organised sector and a number of small ones in the unorganised space. The capacity utilisation has also been low, primarily on account of sluggish demand from the user industries. Although the year 2003-04 and the first nine months of 2004-05 has been a good one for the forging industry, a long spell of recession in the past (2000 to 2003) has led to most companies refraining from capacity expansion.

SGF derives a major chunk of its revenues from exports to the US, Canada and Europe. Although the proposed capacity expansion would enable it to cater to the growing demand from these markets, the margins may continue to remain thin on account of small size of orders and relatively less value-added nature of products. Moreover, focus on exports carries with it the risk of exchange rate fluctuations.

India is emerging as an outsourcing hub for global auto majors and OEMs for sourcing auto components. But the fact that most of these big companies are moving towards vendor rationalisation (reducing the number of suppliers by sourcing from few large ones) to strengthen their supply chain would act against the small players such as SGF. While the organised sector continues to remain a key threat, competition among small players which is likely to intensify and put pressure on margins on account of price declines.

At a time when the forging industry is facing excess supply, low capacity utilisation and possible slowdown in the demand growth, the move by SGF to enhance capacity may take time to yield the desired results. The success of this capacity addition depends on the demand for the new products in the overseas markets. Unless the company is able to procure large-sized orders or higher margins per order, the incremental gains may not justify incremental costs.

The performance of most companies in the peer group has been erratic over a full business cycle, which is reflected in their capacity utilisation and financial performance. In the light of these factors, an investment in the IPO can be avoided for now.

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