CRISIL assigns grade 2/5 to Automark Industries IPO

CRISIL Research has assigned a grade of 2/5 to the proposed IPO of Automark Industries (India).

The report says, "The grade indicates that the fundamentals of the IPO are below average relative to the other listed equity securities in India. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The offer price for the issue may be higher or lower than the level justified by its fundamentals. The grade is not a recommendation to buy, sell or hold the graded instrument, its future market price or suitability for a particular investor. To arrive at the overall grade, amongst various other parameters, CRISIL has considered the company's business prospects, its financial performance, management capabilities and corporate governance practices."

"The assigned grade takes into account Automark's leading position in the organised segment of the road marking industry. Automark is present across the value chain in the road marking industry - it not only manufactures and sells thermoplastic material and road marking machineries but also takes on road marking contracts. The company has an in-house R&D facility to ensure manufacturing of superior quality homogeneous products and adherence to specifications mentioned by National Highway Authority of India (NHAI) and the Ministry of Road Transport and Highway. Automark has successfully executed more than 4 mn sq. mt. of road marking, including more than 50 projects for NHAI. The grade also factors in increased government thrust to improve road infrastructure in the country, which will provide large opportunities for established road marking players like Automark. Further, the management's more than 40 years of industry expertise supports the grade."

"The grade is constrained by low entry barriers given the absence of any major technology or capital investment requirement in the industry. As a result, the industry is dominated by unorganised players who constitute ~60-70% of the industry; the sizeable presence of unorganised players leads to pricing pressure. The grade is constrained by Automark's high working capital requirement due to high debtor and inventory days, which necessitates continuous raising of funds. The company also plans to set up a material manufacturing unit in Kenya and Uganda, which could be a challenge since it does not possess relevant experience in the overseas market. The grade is further constrained by the company's significant dependence on the top management as most of the key managerial people as well as independent directors have been inducted recently."

The report also says, "During FY11, the company reported turnover of Rs 677 mn and net profit of Rs 20 million, which translated into a net margin of 3.0%. Its revenues registered a CAGR of 50.5% during FY07-11. RoE and RoCE were 16.9% and 19.6% during the same period. It posted an EPS of Rs 1.7 at the end of FY11, while its book value per share was Rs 15.6."

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