Investors with a high-risk appetite can subscribe to the IPO of Sandhar Technologies. At the price band of ₹327-332, this auto component player is looking to raise about ₹500 crore through this offer. While about ₹300 crore will be used to repay debt, the rest would be an offer-for-sale from private equity investor GTI Capital Beta.

The offer is valued at around 25 times the company’s annualised consolidated earnings for the first half of 2017-18 ( on the pre-issue equity).

The valuation compares favourably with other small-/mid-cap peers such as Fiem Industries, Minda Corporation and JBM Auto. These stocks trade at 23-28 their estimated earnings for the year ended March 2018.

Good prospects

Sandhar Technologies scores on the diversity of its product offerings. This variety gives the company the opportunity to cross-sell products to its customers and increase the contribution per vehicle.

The company is the leader in supplying locking systems for two-wheelers and rear view mirrors for commercial vehicles in India. The company is also one of the two large manufacturers of operator cabins in India (predominantly used in off-highway vehicles).

Locks and mirror assemblies together bring in about 35 per cent of revenues, while wheel/handle bar assembly, sheet metal/aluminium components, dies and moulds, cabins, etc. bring in the rest.

After hiccups such as demonetisation, the transition to BS IV emission norms and the switchover to GST, new vehicle sales volumes have seen a pick-up in the last few months. For the nine months ended February 2018, overall sales volumes have grown by 13.85 per cent year-on-year, compared with the muted 6.81 per cent increase seen last fiscal. Improving urban consumption from higher disposable incomes in the hands of urban consumers, budget measures to improve rural livelihood and the heating up of industrial growth imply that demand for new vehicles would continue to grow in double-digits in the near to medium term.

Sandhar will benefit from the upturn in the industry. It caters to almost all vehicle segments such as two-wheeeler, cars, commercial and off-highway vehicles. While Hero MotoCorp and TVS are the biggest clients, Royal Enfield, Honda Cars, Tata Motors, Ashok Leyland, Escorts, JCB, Caterpillar and Mahindra and Mahindra are also its customers.

The company is working to increase its offerings to include various technology-driven products, such as smart keys, auto relays, fuel filters, fuel modules and starter motors. To serve this end, the company has entered into MoUs with various parties abroad. Besides, it has also stepped up its in-house R&D efforts to bring out value-added products, such as auto-dimming mirror, inner rear-view mirror with reverse parking sensors and cameras, immobiliser, keyless entry, etc. These value additions will help improve operating margins over the medium to long term.

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Financials

Revenues have grown at a compounded annual growth rate (CAGR) of 8.8 per cent to ₹1,627 crore from fiscal 2014 to fiscal 2017. Net profits have grown at a CAGR of 19.75 per cent to ₹39 crore during the same period. Operating margins have remained at around 8-9 per cent in each of these years.

After the repayment of about ₹225 crore of long-term debt from the IPO proceeds, interest costs are expected to come down by ₹25 crore next fiscal, according to the management. Total interest cost has been at around ₹40 crore in the last few years. Long-term debt to equity ratio, which is on the higher side at 0.79 currently, will also get a breather due to this.

The offer is open from March 19-21.

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