The Hindu Business Line : Kew Industries: Avoid

The offer carries a high risk element given its small size of operations and stiff competition from the unorganised sector and larger established players

Investors can avoid the IPO of Kew Industries, as the pricing is on the higher side for a company that operates in a low-margin, highly competitive, capital-intensive business.

At Rs 30 per share, the offer price is at 10 times the expected per-share earnings for FY-08 estimated per share earnings on an expanded equity base.

Risk element

The offer carries a high risk element given its small size of operations, stiff competition from the unorganised sector and larger established players, and the low entry barriers to the business.

As the company does not have a dominant position in the industry or an established global market, unlike some of its larger peers, the business risks are high.

Its vulnerability to a downturn is also high. Orders from the Defence and Railways are usually unpredictable.

According to the offer document, the company has a good order book and is looking at a healthy growth rate post-expansion.

However, there are concerns. Much of the capacity expansion is to be completed by December.

Revenue from additional capacities may be reflected only in the full-year earnings numbers for FY-08.

Rising costs of raw materials may affect margins, as there is little pricing flexibility. Client concentration is another risk. Tata Motors and Ashok Leyland are the two main clients and account for close to 70 per cent of Kew Industries' sales. The company has a presence in the lower end of the value chain, where growth is completely volume driven and scaling up is a challenge.

Given that automotive manufacturers have the upper hand in pricing and sourcing, suppliers face margin pressure constantly.

As raw material prices may edge up further, the risks are higher.

The company commenced exports two years ago. However, unlike a number of auto component players that have managed to create a global footprint either by acquiring companies or by creating a reliable outsourcing market, it may take a while for Kew's exports to start contributing in a big way; it is still in the process of exploring new markets.

With a market capitalisation of just Rs 38 crore, the Kew stock may also not attract institutional interest.

Hence, active trading may be constrained by liquidity. Given these risks, we believe investors can give the offer the go by.

Offer Details

Kew Industries is making the IPO to raise Rs 21 crore to fund the expansion and modernisation of its manufacturing facility and to finance the additional working capital requirement.

The company makes cast iron products for tractors, commercial vehicles, shell casings for the Defence sector and components for the Railways.

The issue is priced at Rs 30 per share.

The company plans to issue 70 lakh shares. The present issue would more than double its equity base.

Chartered Capital and Investment is the lead manager to the offer. The issue closes on September 1.