Cords Cable Industries IPO review

Cords Cable Industries, promoted by mechanical engineers Naveen Sawhney, D K Parashar and Rakesh Malhotra in 1991, caters to the growing requirement for high quality customised cables. Over the years, the company has been expanding its product range and has added a variety of specialty cables to its product range. The aim was to address specific requirement of industries involving modern process technologies, instrumentation and communication demanding the highest standards of precision and reliability and household users with assured quality and safety standards.

Recently, Cords Cable Industries increased its capacities for existing products (including low-tension cables) at Rs 13.20 crore. Production from the expanded facility started in January 2008. The product portfolio includes low-tension (LT) control and power cables (up to 1.1 KV); instrumentation, signal and data cables; thermocouple extension/compensating cables; panel wires/household wires/flexible cables and specialty cables (tailored for each application as per specifications of customers).

In view of the increasing demand for cables and the need for diversifying and expanding its existing range of products, Cords Cable Industries plans to add high-tension (HT) cables and rubber cables to its existing product range at an outlay of Rs 57.40 crore (Rs 5.19 crore has already deployed in this project). The commercial production from this expanded facility is expected to start from April 2009. For funding such expansion and for working capital and general corporate purpose, the company has lined up an IPO to raise Rs 38.56 crore to Rs 41.65 crore comprising fresh issue of 30.85 lakh shares in the price band of Rs 125 to Rs 135 per share. It will take on Rs 12.20-crore debt for the proposed expansion.

Strengths

• The organised cable industry has grown at an estimated CAGR of 25% in the last three years. This growth is likely to sustain over the next few years due to various favorable factors such as large-scale investment in power (generation, transmission and distribution), steel, refineries and other manufacturing sectors leading to huge demand for cables and investment in new sectors like metro rail, aviation, and wind power leading to demand for speciality cables.

• Has a diversified client profile including from the power, cement, refineries, steel, fertilizers and chemicals sectors. Is the approved vendor for many large caps such as NTPC, Bhel, Powergrid Corporation of India, Nuclear Power Corporation, L&T, Tata Steel, Reliance Energy, Tata Power, Hindalco, ACC, HPCL, GAIL, and Honeywell. Also has been approved by almost all top consultants like Kvaerner Powergas India, Toyo Engineering India, Engineers India, and Rites.

• Production from expanded facility to produce LT power cables and other products started in January 2008. Empanelled with most of the large corporates and top consultants comprising Bhel, Tata Steel, NTPC, L&T, Reliance Energy, Nuclear Power Corporation of India, and Cairns.

• The barriers to enter the cable industry are pre-qualification on technical grounds and proven track records. Pre-qualification with proven track record with consistent performance will help in selling products.

Weaknesses

• Power-cable producers are required to get pre-qualification on technical grounds and should have proven track record. This is a long drawn out process and needs substantial investment of time and money. At present, Cords Cable Industries has pre-qualifications for LT cables but not for HT and rubber cables to be manufactured after proposed expansion.

• Competition from large number of cable manufacturers in the organised as well as unorganised sectors and imports. Rising raw-material prices will also put pressure on margin.

• Contingent liabilities of Rs 51.09 crore not provided for. Net worth after the issue would be Rs 69.98 crore.

Valuation

Over the four-year period ended March 2007, revenue grew at a CAGR of 60% and net profit at a CAGR of 166%. Operating profit margin also improved to 15.2% in the six months ended September 2007 from 3.9% in the year ended March 2003. Order book stood at about Rs 77 crore end November 2007. Of this, around 50% comes from the power sector. The historical asset-turnover ratio of more than 6 expected to be maintained. The completed expansion may give additional revenue of about Rs 75 crore annually. Once commercial production after the proposed expansion from April 2009 would add about Rs 275 crore- Rs 300 crore to the top line from FY 2010.

On annualised EPS of Rs 9.4 in the six months ended September 2007 on post-issue equity capital of Rs 11.43 crore, the P/E works out to 13.3 – 14.4 at the price band of Rs 125–Rs 135. The trailing 12-month (TTM) P/E of listed peers Torrent Cables, KEI Industries and Universal Cables were 9.9, 16.6 and 15.3. However, they are comparatively large players. But KEI Industries and Universal Cables also make HT cables--- a product Cords Cable Industries intends to manufacture.