Investors can refrain from subscribing to the initial public offering by Shilpi Cable Technologies (Shilpi), a manufacturer of radio frequency cables and other accessories for the telecom sector.

The absence of a sufficient track record in operations, limitations in scaling its products business and heavy competition from established larger-sized players pose challenges for the company. This apart, Shilpi is also faced with a substantial debt in its books.

At Rs 69 (upper end of the price band), the share would trade at over 15 times its annualised half-year earnings of FY11 on a fully diluted basis.

The company has no peers in the listed space.

Shilpi Cable commenced production in January 2008. But in the next month operations were halted on account of a dispute between the promoters.

Production began in September 2008. As a result of truncated operation, the company suffered losses for two successive financial years.

FY10 is the only full-year in operation for Shilpi Cable, when it posted revenues of Rs 259.4 crore and net profits of Rs 9.5 crore. In the first half of the current fiscal, the company generated revenues of Rs 171.4 crore and profits of Rs 7.4 crore.

Business challenges

Shilpi manufactures RF cables, low voltage power cables and accessories. RF cables are predominantly used to carry signals from antennas in mobile towers to base stations.

The demand for towers is increasing with new operators coming into the telecom fray, the launch of 3G and impending start of wireless broadband services. . Tower companies such as Indus Towers(110,000 towers), Reliance Infratel (50,000 towers) and a host of independent tower companies have sought to increase tenancy.

Indeed, the demand environment looks robust for the company.

Product Line

But it must be noted that Shilpi's offerings form a very small part of passive tower infrastructure. There is limited scope for scaling up the value chain with its product line.

Tower structures and shelters that house the base stations, battery banks, air-conditioner, diesel generators and invertors are some of the chief constituents in a mobile tower of high monetary value.

Apart from not being in any of the higher value offering in the passive infrastructure space, Shilpi does not offer services in any significant way — which a turnkey provider such as GTL does. This would limit annuity revenues from maintenance and delivery of other services.

This apart, there is significant competition that the company has to contend with, leading to significant pricing pressures.

Players who are much larger than Shilpi such as Andrew Telecommunications and Microqual Techno have a significantly larger client base.

These players also have a services component in their portfolio that makes for a better business-mix compared to Shilpi.

Cost escalation

Shilpi imports more than 73 per cent of its raw materials, predominantly copper, LLDP and HDPE. These are used for manufacturing cables that the company supplies.

Metals such as copper have risen in price by over 30 per cent in the last one year. Any further rise in prices will significantly affect margins as raw materials constitute 76 per cent of the company's revenues.

Shilpi has over Rs 107 crore in secured and unsecured loans in its books. Its debt-equity ratio as of September 2010 is 2.1 and its interest cover is around two times.

With rising interest rates, the company may have to contend with higher financial charges, thus affecting margins. With a limited capability, it is hard to asses the cash-generating and debt-repayment capability of Shilpi.

Interestingly, there is no move to repay any of the debt from the proceeds of the about Rs 55.8 crore that the company hopes to raise from the issue.

Issue details

Shilpi'a IPO is priced in the range of 65-69. The offer closes on March 25.

D&A Financial Services is the book running lead manager for the issue.

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