CRISIL assigns 5/5 grade to Thejo Engineering IPO

In a pioneering initiative, CRISIL Research, India's largest independent and integrated research house, has assigned India's first SME Fundamental Grade to the proposed IPO of Thejo Engineering Ltd (Thejo). The exercise is a step forward in CRISIL's endeavour to help SMEs access newer channels of funding, in this case, listing on EMERGE – NSE's (National Stock Exchange of India Limited's) SME Platform. EMERGE is an exclusive trading platform for SMEs facilitating flow of equity capital to companies on a growth path, but not large enough to list on the main exchange.

CRISIL Research has assigned the SME Fundamental Grade of 'SME 5/5' to Thejo's IPO, indicating that the fundamentals of the company are 'excellent' compared to other SMEs in India.

The SME fundamental grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The SME fundamental grade is not a recommendation to buy, sell or hold the graded instrument, or a comment on the graded instrument's future market price or its suitability for a particular investor.

Mukesh Agarwal, President, CRISIL Research said, “CRISIL has pioneered many products aiding the development of the SME sector. Fundamental Grade will provide investors with a credible and independent view on the SME getting listed and, therefore, help the SME in attracting equity investment.”

The assigned SME fundamental grade of 'SME 5/5' reflects Thejo's established position in the niche operations of bulk material handling, mineral processing and corrosion protection applications in power, cement, steel, ports and mining industries, which has secured it a diversified client and revenue mix. We expect Thejo to benefit from growth in end-user industries, and increased preference for outsourcing material handling operations.

The SME fundamental grade is strengthened by Thejo's experienced and well-qualified management. Its ability to innovate has helped the company to have a competitive edge. The SME fundamental grade also incorporates Thejo's planned expansion in international markets such as Australia and Africa. However, we expect the company to face competition from large domestic and international players.

Thejo operates in a cyclical industry, making it susceptible to economic slowdown; its production declined 12% and 22% in FY09 and FY10, respectively. During FY07-12, while overall volumes remained flat, revenues grew at a CAGR of 25%. Also, there is a risk of business loss through channel earlier partners - Thejo's dealer in Australia (which contributed 12% of FY12 sales) was acquired by a competitor in February 2011. Though Thejo was able to maintain its business in FY12, it remains a key monitorable. Volatility in raw material (rubber) prices and foreign exchange rates may also affect Thejo's profitability.

While Thejo's revenues grew to Rs 1,096 mn in FY12 at a four-year CAGR of 26.5%, adjusted PAT grew higher at 64% CAGR to Rs 62 mn due to operating leverage. RoE improved to 27.1% in FY12 from 9.1% in FY08. It reported EPS of Rs 52.2 in FY12. The company has net debt-to-equity of 0.8x with an interest coverage of 3.7x in FY12.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment

Read More