The Hindu Business Line : Austral Coke: Avoid

Investors can avoid investment in the initial public offering (IPO) of Austral Coke and Projects Ltd., considering the high execution risks and cyclical nature of the business, though prospects for volume growth are bright.

At Rs 196 (upper end of the price band), the offer is priced at 13-15 times the expected 2007-08 earnings per share, computed on the post-offer equity base. This is almost on a par with the valuation enjoyed by Gujarat NRE Coke, which has a larger scale of operations now.

The Kolkata-based Austral Coke is mainly into the manufacture of low ash metallurgical coke (LAMC) and refractories, apart from equipment rental and textile trading.

The company plans to use the IPO proceeds to finance its expansion in coke manufacturing facilities, acquisition of coal mining licences in India and abroad, prepaying debt and setting up an 8 MW captive power plant.

The expansion project is proposed to be financed almost entirely through this offer. Only about 2 per cent of the total outstanding debt is sought to be pre-paid through the proceeds of the IPO.

Financials

Austral Coke registered revenues of Rs 274 crore, with net profits of Rs 35.17 crore in the 11-months ended February 2008 (full year numbers are not disclosed).

However, only 45 per cent of these revenues (Rs 124 crore) came from manufacturing operations, the rest came from textile trading, equipment rentals and other businesses.

The company’s track record in coke manufacture is relatively short and in the three years since 2004-05, the company managed revenue CAGR of 88 per cent in the manufacturing business, while net profits (before extra ordinary items) expanded from Rs 2 crore to about Rs 35.2 crore.

Demand potential for LAMC appears quite good in the light of the ongoing capacity expansion in the steel and cement sectors. The domestic demand for the product has been met significantly by imports, with Gujarat NRE Coke being the only large domestic player in this business.

However, the business is cyclical, with coke prices being highly sensitive to demand from user industries. Prices of coking coal, a key input, are also subject to sharp swings, making for a volatile earnings record for companies in this business.

According to the offer document, the company, which is now producing 1.75 lakh mtpa (metric tonnes per annum) of coke has recently added another 2 lakh mtpa in 2008. This IPO is set to fund another expansion of 1.50 lakh mtpa.

The rapid scaling up of capacities within a short period poses execution risks, as results of even the second expansion are not yet available. Austral has entered into an MoU with a group company — Gremach Infrastructure Equipment & Projects Ltd — for prospecting, mining and commercial activities in Mozambique.

Business risks

Apart from generic issues such as cyclicality of the met coke and steel industries and fluctuations in the international prices of inputs, there are company specific challenges such as lack of forward integration and execution risks. In the coal mining and equipment rental businesses, there are potential conflicts of interest with group companies also engaged in this line of activity.

The proposed coke project site is in red category zone of the Pollution Control Board. The offer document states that in the case of any environmental/other policy issue, the management may decide about the relocation of the project site.

Issue Details

The issue opened on August 7 and closes on August 13 and the issue size is Rs 119-142 crore. The price band is Rs 164-196.

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