Issue Details

Issue Price   :  Rs. 126 – Rs. 133 No of Shares  (FV Rs.10) : 4.5 million Issue Size     : Rs.567 million – 598.5 million Issue opens-closes  :  19th July 2010 – 21st July 2010 Listing    : BSE and NSE Market Cap   : Rs. 1,615.32 million – Rs.  1,705.06 million EPS (Annualized FY11 E) : Rs. 7.62 P/E Ratio   : 17.44 times

 

Business Model

Midfield Industries (MIL), promoted by Madhu Mohan Reddy is a south based packaging solution company. It is engaged in the manufacture of industrial packaging consumables like high tensile steel strapping, various seals for different applications, collated nails and corner boards. Its end to end packaging solutions find wide application in industries like steel, aluminium, glass, copper, paper, automobile, white goods and refractory etc.

The company has entered the capital market to fund expansion of capacity at its existing facilities, to set up new facilities, to augment long term working capital needs and for other general corporate purposes. The manufacturing facilities of the company are located at Hyderabad and Roorkee in Uttaranchal.

IPO Positives :

• Niche market : The company seems to have carved out a niche for itself in the steel strapping segment of Industrial Packaging with a limited comparable substitutes (polymer straps) for steel strapping. Being an end to end packaging solutions provider, the fortunes of the company are directly dependent on the performance of the manufacturing sector (especially from heavy engineering sectors like steel, aluminium, glass etc.)  Moreover, the demand for  industrial  packaging remains strong, especially in the Middle East. Midfield’s plans to set up a production facility in Sharjah, UAE thus augur well.
  
  Nevertheless, the fragmented nature of the industry with low entry barriers appears to limit the growth prospects of the company.
  

IPO Concerns:

• Vulnerable to Raw Material cost fluctuations :  Steel is the basic raw material for the company and any increase in its prices is likely to have a negative impact on the operational performance. Notably, raw material costs was close to 64 per cent of the total sales turnover in FY 2010.  Moreover as the company does not enter into long term contracts for its raw material requirement and with steel prices pointing northwards, the margins are likely to be impacted adversely
  
  
• Highly Working Capital Intensive : The company’s debtors have increased over the last fiscal while creditors have collected their payments sans proportionate delay. This suggests that the company has low bargaining power with customers as well as suppliers and this could lead to enhanced requirement for working capital. 
  
  
• Negative Cash Flows : The company had negative cash flow in FY06, FY07 and FY09 on account of higher working capital, mainly due to higher inventory and receivables.
  
  
• Concentration of Revenues : Steel strapping which is the flagship product of the company contributed about 65 per cent of the total sales for FY10. Thus any weakening in the demand for its products will adversely impact the earnings of the company.
  Client concentration risk : Though the company boasts of catering to the demand of more than 500 customers, its top 10 clients contributed about Rs. 430.98 million or close to half the total sales for FY10.
  
  
• Increasing Exchange rate risk : While the revenues from export comprises close to 10 per cent of total sales in FY 2010,MIL is  exposed to rate risk to that limited extent currently. However, MIL’s plan to set up a high tensile steel strapping facility at Sharjah increases its exposure to foreign currency risks.

Concluding Remarks :

While there are no comparable listed players, the company is demanding a forward P/E multiple of more than 17 times and its estimated Market Cap / Sales ratio approximates 2. Notably the listed international parent (Illinois Tool Works) of the de-listed Indian subsidiary (ITW Signode) which has diversified operations across industrial packaging space trades at a P/E of less than 15 times.

Although, the prospects of the broader packaging industry appear satisfactory, the growth prospects therein of the smaller steel strapping segment seems to be limited. Unless MIL diversifies into other high growth packaging segments, it is unlikely to enthuse discerning investors.

theIPOguru’s  Verdict  :
 
 INVESTOR TYPE