A business model less dependent on capex spends of clients and value additions through backward integration make the initial public offer of Thejo Engineering an attractive bet.

The company provides repair and maintenance services for conveyors in the mining, steel, ports and cement sectors. It also manufactures allied products used in these services, besides other products for bulk material handling, mineral processing and corrosion protection in these industries.

At the price band of Rs 402-430, the price to earnings ratio works out to around nine times its expected FY13 earnings on the post-issue equity base. Strictly speaking, Thejo Engineering has no comparable peers. Though companies such as Elecon Engineering, McNally Bharat and TRF have a presence in this segment, they operate at another end — manufacturing material handling equipments.

Capacity expansions

The company plans to raise Rs 19 crore through the issue for capacity expansions, setting up an R&D unit and for investment in a subsidiary in Australia to cater to the fast-growing mining industry there. After the issue, the shares will be listed on the SME (Small and Medium Enterprise) platform of the NSE, the ‘Emerge’.

Considering the nascent stage of the business and the minimum application amount of Rs 1 lakh required for investors in this platform, this offer does not suit small investors. However, those with a high risk appetite and an investible surplus of Rs 1 lakh or more can invest.

Business

Thejo Engineering has about 70 per cent market share in the organised market for services. This segment brings in about 45 per cent of the revenues, while products contribute to the rest. Services, in the form of annual maintenance contracts, relates to belt conveyor maintenance, belt splicing, reconditioning.

Over a period of time, the company has integrated backward into the manufacture of products such as conveyor belt repair equipment, accessories, cleaners required to carry out these services. Besides, it has also branched out into manufacture of rubber and polyurethane products for applications such as spillage control and impact and abrasion protection in the user industries. A third of the product segment revenues come from exports to Australia and Africa.

This business model endows the company with an advantage. For one, the service business is less affected by a slowdown in the economy or a pause on capex spends by the user industries, as maintenance for existing equipments has to go on. Thanks to wear and tear, the products segment also benefits from the demand for its replacement during maintenance efforts, whether it is used by the company itself when they provide the service or whether it is sold outside.

Besides, the company has also added value to its service segment offerings by providing conveyor installation related services for new projects, which would come in handy once economic growth revives. Apart from yielding better margins, they also serve as a captive customer base for maintenance services later on.

Financials

For the year ended March, the company’s revenues stood at Rs 118 crore, and adjusted profits, at about Rs 6 crore. In the last three years, revenues have grown at a compounded annual growth rate (CAGR) of 24 per cent and adjusted profits, at a CAGR 72 per cent. The current debt-to-equity ratio stands at 0.83 per cent, which will come down to about 0.77 after the issue.

Given its expansion plans, the company may be burdened with higher costs, besides depreciation charges in FY13. However, the benefits are expected to reflect in the earnings beginning FY14.

> vardhini.c@thehindu.co.in

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