The Hindu Business Line : Nitin Fire Protection Industries: Invest

Long-term investors with a penchant for high risk can consider investing in the initial public offering (IPO) of Nitin Fire Protection Industries (NFPIL). In the price band of Rs 171-190, the offer is priced at 14-16 times its likely FY-08 per-share earnings on the post-offer equity base. Engaged in the business of providing fire protection and security systems, NFPIL's decision to increase focus on cylinder manufacture and re-fuelling systems is likely to drive future growth, given the positive demand environment for CNG (compressed natural gas) cylinders in both the domestic and foreign market.

Investment rationale

NFPIL operates in two business segments — fire protection, safety and security systems, and high-pressure seamless cylinders. In the fire protection business segment, it is an end-to-end solutions provider with capabilities in manufacturing, designing, commissioning and maintenance. Given the growth in urban housing and commercial real-estate coupled with rising investments in industrial projects, the revenue contribution from this segment is likely to improve. Further, its client base, which consists of companies such as ONGC, Reliance Industries, Credit Suisse and Nokia, also lends more visibility to the segment's earnings.

In the seamless cylinder manufacture segment, NFPIL caters to the domestic market demand through its subsidiary, Eurotech Cylinders, which in turn contract manufactures from China. The demand for such cylinders from both OEMs (original equipment manufacturers) and retrofitters (conversion agents) is likely to remain buoyant what with the Supreme Court mandating the use of CNG as fuel for heavy vehicles in New Delhi and 28 other highly polluted cities.

However, NFPIL is likely to face stiff competition from Everest Kanto Cylinders, which enjoys more than 80 per cent market share in the country. This apart, the lack of CNG infrastructure in cities could also prove to be a constraint.

To cater to the export market, NFPIL has started an SEZ (special economic zone) at Visakhapatnam through its wholly-owned subsidiary, Nitin Cylinders. Proceeds from the IPO will be used to set up the manufacturing unit at Visakhapatnam.

In addition to this, the emergence of gas-rich nations such as Pakistan, Bangladesh, Myanmar as major importers of CNG cylinders is also likely to contribute to the increasing demand. With demand fast outpacing supply, NFPIL's foray into cylinder manufacture appears promising.

Revenue contribution from this venture is, however, likely to materialise only from the second half of FY-08. Additionally, its plan to make and sell fuel dispensers could also add to the revenues. For the year ended March 2007, the consolidated revenues of NFPIL stood at Rs 100.5 crore, registering a growth of about 47 per cent over the previous year.

Earnings during the same period rose by about 53 per cent to Rs 10 crore. It is to be noted that the earnings per share, on a fully diluted basis, stood at about Rs 8.

Concerns

NFPIL, being a relatively new entrant to seamless cylinders, is likely to face difficulty in establishing its market presence. Lack of substantial pricing power due to increased competition in the global arena could also lead to muted profitability in the near term.

This apart, cylinder manufacturers enjoy relatively low bargaining power with their raw material suppliers, the makers of seamless steel tubes. Thus, any rise in steel price is likely to be passed on to the cylinder manufactures. Hence, NFPIL's capability in sourcing raw materials could be crucial.

Offer details

The offer is open from May 15 to May 18. The company seeks to raise Rs 64 crore through this offer. Karvy Investor Services and UTI Securities are the lead manager to the issue.