Vishal Bearings - Track record justifies premium

By VS Fernando

The IPOThe present IPO is a fresh issue of 12.96 lakh shares of Rs 10 each at price of Rs 25 a piece. Of the IPO quantity, 72000 shares are reserved for the market maker. The equity capital, which was at just Rs 25 lakh at the end of fiscal 2015, was enlarged to Rs 3.5 cr through a bumper 13:1 bonus in May 2015. The IPO, constituting 27%, will further increase the equity capital to Rs 4.8 cr.  Investors will have to apply for a minimum of 6000 shares (Rs 1.5 lakh). The entire issue is underwritten by the lead manager, Hem Securities, who has also been appointed as `market maker’.   Issue ObjectThe company proposes to utilize the issue proceeds (Rs 2.86 cr net of issue expenses Rs 38 lakh) for working capital. Lineage The Rajkot-based Vishal Bearings Ltd (VBL) was founded in 1991 by Gordhanbhai Changela, father of the present promoters. The company reportedly started manufacturing bearing rollers in the year 1992 under Unit-1 in Shapar village near Rajkot. It established a second unit in the year 1995 and expanded the capacity by setting up a new plant in 2006. In 2011, VBL also ventured into wind power by installing a wind mill with 250 KW capacity which is being used for captive consumption. The company manufactures taper rollers, cylindrical rollers, spherical rollers and certain components of taper rollers. Over the years, VBL claims to have developed required expertise and upgraded its technology by adding several automatic and imported equipments which has boosted the quality of its products. According to the offer document, the company has been identified as “Direct Online Supplier” for cold headed components-rollers by National Engineering Industries Ltd – a C K Birla group company where VBL’s products reportedly go directly for manufacturing of bearings without checks on quality and specifications. VBL claims to supply finished bearing rollers across India. The company caters to reputed bearing manufacturers and OEMs in diverse industries such as rail, light vehicles, heavy trucks, industrial processors, gear drives, energy and industrial distribution segments. The company also exports cylindrical rollers to customers in Germany, Hungary and Turkey. The company’s production facility located at Shapar (Veraval) has an installed grinding capacity of 2200 tons of cylindrical and taper rollers and 144 mln pieces p.a. each of bearing rollers. The company’s key raw material suppliers are ASCOINDUSTIES SAS France, Dongbu Special Steel Co., Overseas Alloy Steel, etc. VBL’s major customers include NRB Bearings, SKF India, Turbo Bearings, Texspin Bearings, NRB Industrial bearings, Timken, National Engineering Industries, etc.  Financial TrackThe company’s sales have increased at a CAGR of 16% in last five years, from Rs 11.43 cr in fiscal 2010 to Rs 27.20 cr in fiscal 2015. During this period, Operating Profit has increased from Rs 1.85 cr to Rs 6.42 cr at a CAGR of 23%. The company’s EBITDA margin is impressive at 20% though it has fallen from 25% in 2014. Another noteworthy aspect of VBL is that the company’s operations have generated positive cash flows in last five years. Until last year, VBL had a tiny equity base of Rs 25 lakh on which it paid a dividend of 400% in FY14, 528% in FY12 and 250% in FY11. In May this year, equity was enlarged to Rs 3.5 cr through a bumper 13:1 bonus which drained the reserves by Rs 3.25 cr leaving out only Rs 90 lakh in the books. As against a net worth of Rs 4.4 cr, the company’s net block stands at over Rs 14 cr. VBL is highly geared with a total borrowing of Rs 18.35 cr of which Rs 14.87 is long term loans.   ValuationWhereas the promoters’ cost of holding is just Rs 1.26 a share, VBL is asking the public to shell out Rs 25 for its share. The IPO price discounts the company’s current earnings a little over seven times which compares well in the bearing industry. Menon Bearings, whose equity base and operating margin are very close to VBL, commands a P/E of around 19 times. Austin Engg whose OPM is a fourth of VBL is quoted at 7.4x it earnings. Considering these, VBL’s price appears to be reasonable.   Lead Manager’s TrackVBL will be the seventeenth SME IPO handled by Hem Securities, which has the distinction of managing the largest number of IPOs on the SME platform. Of the 15 HEM-managed IPOs already listed, five are currently quoting below the offer price. While Samruddhi Realty, Atishay Infotech and Dhabriya Poly have fetched handsome returns, R&B Denims and Tentiwal Wire have fared poorly. Nearly a half of Hem’s IPOs have failed to get quotes even once in three trading days.