CRISIL assigns 4/5 grade to Veto Switchgears SME IPO
Oct 19 2012, 21:06 | By Moneycontrol.com
CRISIL has assigned a CRISIL SME fundamental grade of 'SME 4/5' to the proposed IPO of Veto Switchgears and Cables Ltd (Veto). This SME fundamental grade indicates that the fundamentals of the company are superior compared to other SMEs in India.
Veto Switchgears and Cables Ltd (Veto) manufactures and sells wires, cables and electrical accessories. The company has a diversified product basket, which includes around 20 product categories. It sells electrical accessories under the 'Veto' brand, and wires and cables under the 'Vimal Power' brand. In FY12, wires and cables contributed 54% to Veto's revenues and the rest was contributed by electrical accessories.
Veto has an extensive presence in Rajasthan and derives 70% of its revenues from the state. The company is also present in Delhi, Gujarat, Madhya Pradesh, West Bengal and Assam and has nearly 2,400 dealers. 'Veto' and 'Vimal Power' are well known brands in the north western region of India. The company leverages its dealer network by introducing new products or variants of existing products.
Veto stands to benefit from the healthy growth expected in its products due to a) rise in disposable per capita income of Indians leading to growth in real estate and construction sectors, b) increasing preference of Indian consumers for branded products, especially in the electrical accessories and consumer appliances segment, and c) government policies focusing towards improvement of electricity supply, especially in rural areas.
Veto's promoters have a long standing presence in PVC (polyvinyl chloride) wires and cables business which has enabled them to expand the electrical accessories business and increase the dealer network in the domestic market.
Veto's scale of operations is small and its product offerings are limited compared to big players in the industry viz., Havells, KEI Industries, Anchor, and others, which limits its bargaining power with dealers/distributors. We believe the company's plan to establish itself in other geographies is likely to take some time because it will have to invest in advertising and brand building.
Veto's operations are working capital intensive as reflected in its working capital cycle of 200 days. It has to maintain an inventory of two to three months in anticipation of orders. It also gives credit of around 100 days to its dealers to counter intense domestic competition. However, it gets minimal credit from its suppliers which include suppliers of copper and PVC/PVC compounds.
Veto has strong inter-linkages with its group entities and in the past has extended and received interest free loans from promoters and other group companies. However, Veto's reliance on related parties for debt funds has reduced over a period of time, as the company has substituted these loans with bank loans.
Copper accounts for nearly 45% of Veto's total raw material costs. The company is entirely dependent on a single supplier for sourcing its copper requirements. The company's margins may be adversely affected in case it is unable to pass on the increases in copper prices to end consumers.
IPO Details: The proposed IPO is in the form of fresh issue of shares up to Rs 250 mn. Veto plans to use the maximum amount for long term working capital requirements (Rs 158 mn), modernisation of its existing facility in Hardwar (Rs 47 mn), and brand building activities (Rs 20 mn); the remaining to be used for general corporate purposes and to meet issue expenses (not available at the time of grading).
Disclaimer: This report has been sponsored by the National Stock Exchange of India Ltd. A CRISIL SME Fundamental Grading is a one-time assessment and reflects CRISIL's current opinion on the fundamentals of the graded equity issue. A CRISIL SME Fundamental Grading is neither an audit of the issuer by CRISIL nor is it a credit rating. Every CRISIL SME Fundamental Grade is based on the information provided by the issuer or obtained by CRISIL from sources it considers reliable. CRISIL does not guarantee the completeness or accuracy of the information on which the grading is based. A CRISIL SME Fundamental Grade is not a recommendation to buy / sell or hold the graded instrument; it does not comment on the issue price, future market price or suitability for a particular investor.
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