Automotive components manufacturer Rolex Rings opens its initial public offering for subscription on July 28. Majority of analysts advised subscribing to the issue with caution citing client concentration risk, corporate debt restructuring (CDR) and stretched valuations on normalised FY21 earnings with 17 percent tax rate.
The company is planning to mobilise Rs 731 crore through its public issue during July 28-30. Of which, it has already garnered Rs 219.3 crore from anchor investors on July 27, a day ahead of IPO opening.
The offer comprises a fresh issue of Rs 56 crore and an offer for sale of 75 lakh equity shares by Rivendell PE LLC. The fresh issue proceeds will be used for working capital requirements.
The price band for the IPO has been fixed at Rs 880-900 per equity share. At higher price band of Rs 900, Rolex Rings is demanding a price-to-earnings (P/E) valuation of 28.2x (to its restated FY21 EPS of Rs 31.9) with a market cap of Rs 2,451 crore, while its peers namely Ramkrishna Forgings and MM Forgings are trading at a P/E of 123.30 and 37.14, respectively.
Also read - Rolex Rings IPO opens today: 10 key things to know about the issue and company
"If we normalize the FY21 earnings (i.e. apply a tax rate of around 17 percent), the demanded P/E valuation comes out to be 39.4x, which we feel is stretched," said Choice Broking.
Moreover, the brokerage further said, "it is demanding enterprise value (EV)/Sales of 4.3x, which is at premium to the peer average of 3.9x. The overall outlook for bearing rings and auto components industries remains positive. However, despite its presence in the lucrative industrials segment, the higher demanded valuation is a concern for investors."
Thus Choice Broking assigned a 'subscribe with caution' rating for the issue.
Also read - Rolex Rings IPO | Grey market premium jumps 50% ahead of opening
Marwadi Financial Services also assigned 'subscribe (with caution)' rating to this IPO as company is one of the leading forging manufacturers with geographically diversified revenue base and is available at reasonable valuation as compared to its peers.
However, "the client concentration risk and CDR debt restructuring in the past keeps us cautious at the same time from a longer-term perspective," said the brokerage.
Rolex Rings is among the top five forging companies in India in terms of installed capacity. The company manufactures hot rolled forged & machine bearing rings and automotive components that are used across vehicle segments (including 2-wheelers, passenger vehicles, commercial vehicles, off-highway vehicles, electric vehicles) and other segments namely industrial machinery, wind turbines and railways.
The company supplies its products to automotive companies and leading bearing manufacturers such as SKF India, Schaeffler India, Timken India etc.
For Fiscal 2021, the company supplied bearing rings and automotive components to over 60 customers in 17 countries, primarily located in India, United States of America and in European countries such as Germany, France, Italy, and Czech Republic, and Thailand.
Currently, the company has 3 manufacturing units in Rajkot with an annual achievable capacity of 1,44,750 million tonne per annum (MTPA) in forging and 69 million parts per annum in machining.
The revenue declined by 7.7 percent CAGR during FY18-FY21, impacted by slowdown in business due to Covid-19 disruption. During the same period, profit before tax declined at 7.2 percent CAGR from FY2018-21, due to negative operating leverage and decline in revenue CAGR. After the company undertook a major capex of Rs 350 crore in 2009 (from which they expected a turnover of Rs 600 crore), the automotive Industry crisis started. Their capacities were utilised less than 20 percent, due to which they defaulted in payment of certain loan facilities. CDR forum approved restructuring of debts.
"The company would exit from the CDR scheme in March 2022, which would offer the company flexibility in managing borrowings and taking other business related decisions," said Sharekhan.
The brokerage further said the company significantly improved its financial profile with debt-equity ratio improving from 3.23x as of March 31, 2018, to 0.70x as of March 31, 2021, which is also reflected in the credit rating CARE BB, Outlook Stable.
This has been achieved through strong net cash flow from operating activities.
The company has strong return ratio profile with return on networth of 24.4 percent in FY21. The weighted average of return on networth for the last three years is 23.3 percent. "The company's strong, established relationships with leading original equipment manufacturers (OEMs), improved outlook of automobile industry, robust forging capabilities and gain from its manufacturing locational advantages would help in improving growth prospects in the coming years," said Sharekhan.
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