Manaksia IPO Analysis

Manaksia manufactures value-added metal products and metal packaging products. The company, promoted by Basant Kumar Agrawal and other family members in 1984 as Hindusthan Seals to manufacture metal closures, later diversified into metal products and mosquito coils. It has 18 manufacturing facilities: 15 in India and three abroad (two in Nigeria and one in Ghana).

 

The business of the Manaksia can be categorised into metal products, packaging products, mosquito coils, and engineering and other goods. The metal products include aluminium alloy ingots, rolled sheets/coils, galvanised steel sheets/coils, color coated metal sheets and sponge iron, while packaging products comprise roll-on pilfer proof (ROPP) caps, crown closures, plastic caps and metal containers. Manaksia also undertakes contract manufacturing of mosquito coils for reputable brands.

 

Metal products comprised 72.5% of the product mix, packaging products 14.4% and mosquito coils 8.6%. The balance (4.5%) was engineering and other goods. Metal products contribute the highest margin. The total capacity for aluminium products is 55,900 tonnes, value-added steel products 58,000 tonnes, sponge iron 60,000 tonnes, and MS ingots 53,760 tonnes. The aggregate capacity to produce mosquito coils is 3,000 million coils at the five units in India. Capacity utilization of 66% was achieved for aluminium products, 62.9% for value-added steel products, 45.4% for sponge iron, and 32% for MS ingots in the year ending March 2007 (FY 2007).

 

With an outlay of Rs 115.50 crore, Manaksia proposed to de-bottleneck aluminium rolling mill, and invest in certain equipment for speciality alloy plant and additional machinery for the steel cold rolling plant at its Haldia, West Bengal, unit. The company also intends to repay Rs 60 crore of the Rs 285 –crore debt used largely to finance net current assets. For funding these plans and general corporate purposes, it has lined up a follow-on public offer (FPO) of Rs 217 crore to Rs 248 crore, comprising fresh issue of 155 lakh shares in the price band of Rs 140 to Rs 160 per share.

 

Strengths

 

    * Has undertaken various new projects, at different stages of completion, in FY 2007. Benefits of these projects will accrue in the coming years. These projects include a 12,000-tonne each aluminium colour-coating lines in Kutch in Gujarat and Nigeria, respectively (commercial production started in May 2006 and November 2006, respectively). Other projects consist of lead and copper alloy ingot plant in Nigeria (commercial production started in November 2006); 50,000-tonne cold-rolled Coils plan at Haldia (scheduled date of commercial production is December 20'07), and 24,000-tonne steel galvanising plant in Nigeria (scheduled date of commercial production is December 2007).

 

    * Vertically integrated across a number of products, resulting in reduction in manufacturing cost. For aluminium rolled products, for instance, backward integrated was undertaken by setting up an increasing the aluminium products capacity at Haldia in FY 2005 to overcome dependence on Pennar Aluminium's production facility, which was being used to manufacture aluminium. For the sponge-iron capacity, MS ingot facility was set up at Haldia to consume a significant portion of the sponge-iron production. Is setting up a steel cold-rolling plant at Haldia to meet the raw materials requirement for galvanising operation at Bankura near Durgapur and Nigeria.

 

    * Its metal-management skills and innovations in manufacturing and product enhancement have enabled it to manufacture advanced metal packaging products and retain and add customers like Hindusthan Coca Cola Beverages (Coke), Reckitt Benckiser, Dabur India, Jyothy Laboratories, Eveready Industries and McDowell Group and other major beer and liquor manufacturers. The aluminium division has attracted reputed alloy ingot users like TVS Motor, Orient Fans and Toyota Tsusho Corporation as customers.

 

Weaknesses

 

    * Does not have long-term contracts with customers of the metal and packaging divisions. Typically services purchase orders without any commitment to future work orders. Derives a significant portion of the revenue in the packaging and mosquito-coil segments from a few clients. Supplies about 60% of its crown and cap production to Hindusthan Coca-Cola Beverages. Loss of any customer will adversely impact business. For instance, one of the customers for mosquito coils (Jyothi Laboratories) intends to start in-house production. This may impact the financial performance, though not significantly.

 

    * Faces substantial competition from producers of cheaper alternative packaging products. The demand for metal packaging products has also been impacted due to increasing preference for plastic packaging products and containers. The market share for plastic beverage containers has grown substantially over the past several years. The metal packaging industry has also witnessed intense price competition since the past few years.

 

Valuation

 

Over the four years ended March 2007, revenue grew at CAGR of 15.3% and net profit 36%. Enjoys decent operating profit margin (OPM). The top line was Rs 453.28 crore, OPM 19.5% and net profit Rs 50.82 crore in the five months ended August 2007. Though OPM has slipped in comparison with FY 2007, it is expected to improve as exports benefits from the Nigerian operations will be taken into account at the end of the current fiscal.

 

There is policy in place to hedge for metals against orders from customers to insulate from significant risk due to fluctuation in metal prices. Further, the aluminium alloy business uses about 60% raw material requirement as scrap, which is not much related with price movement at the London Metal Exchange and trades at discount to LME prices depending on the demand-supply matrix. The cost of raw material consumed is just about 53.1% of the sale of manufactured products.

 

On annualised EPS of Rs 17.5 in the five months ended August 2007 on post-issue equity capital of Rs 13.91 crore, the P/E works out to 8.0 – 9.1 at the price band of Rs 140–Rs 160. There are no other listed comparables.

 

The shares are listed on the Calcutta Stock Exchange (CSE). However, there has been no trading since the last three years.