MRO-TEK: Below Average

Score: Below Average

Krishnan Thiagarajan

MRO-TEK is making an initial public offering at Rs. 95 per share (floor price) to part-finance the expansion of manufacturing facilities at Electronic City, Bangalore, create additional marketing facilities, set up a corporate office and augment the long-term working capital resources.

Along with the public offer, an offer for sale of 2.6 million shares of Nandi Investments Ltd (a wholly-owned subsidiary of CDC Financial Services) and Development Investment Trustee Company (A/C Information Technology Fund) is also being made. While Nandi Investments had made the investments at Rs. 25, Development Investment Trustee had made investments at Rs. 60 per share.

What the offer document says:

Of the project cost of Rs. 36.91 crores, Rs. 4.61 crores (12.5 per cent of the total project cost) has been earmarked for expansion of manufacturing facilities, Rs. 12.80 crores (34.6 per cent) for setting up additional marketing offices and a corporate office at Bangalore and Rs. 15 crores (40.6 per cent) towards augmenting working-capital resources of the company.

The single largest holding of 35.71 per cent in MRO-TEK is held by Nandi Investments Ltd (a wholly-owned subsidiary of Commonwealth Development Corporation Financial Services). This is slated to decline to 19.58 per cent in the post-issue equity. The promoters holding in the post-issue equity will come down from the pre-issue levels of 30.89 per cent to 27.10 per cent.

Starting off with indigenously manufacturing line drivers and modems, MRO-TEK offers an entire range of WAN (Wide Area Network) and LAN (Local Area Network) products.

MRO-TEK has a strategic alliance with ZyXEL through which it has launched the ZyXEL range of ISDN data communications in the Indian market.

The product range of MRO-TEK comprises line drivers, digital modems, multiplexers, converters, dial-up modems,wireless LAN and modems, protocol analysers an security services through which it plans to target the backbone/telecom service provider and enterprise networking market in the country.

MRO-Tek has entered into a 49-:51 joint venture with RAD, Isarel, involving manufacture of printed circuit boards which house IP chips.

For the year-ended March 31, 2000, the turnover of MRO-TEK grew sharply to Rs. 106.04 crores from Rs. 35.52 crores the previous year. The post-tax earnings surged to Rs. 15.98 crores from Rs. 1.96 crores in the previous year. The proportion of traded goods to manufactured goods was 64:36 (Rs. 66.84 crores of traded goods to Rs. 37.19 crores of manufactured goods). The per share earnings for 1999-2000 worked out to Rs. 8.92 (on a face value of Rs. 5 each).

The company has projected a turnover of Rs. 200 crores and post-tax earnings of Rs. 32.02 crores for the year-ended March 31, 2001. The projected operating profit margin is 27.75 per cent and the per share earnings (on the face value of Rs. 5 per share) works out to Rs. 15.68.

Investment appraisal: The liberalised policy framework in the ISP, basic and cellular service market is expected to create a world of opportunity for players in the enterprise network and telecom backbone service provider market.

But the competition in the segments targeted by MRO-TEK -- Internet Access and ISDN, Wireless, Security, Last Mile and Muxes -- is likely to be fairly intense. In the key segments, networking MNCs such as Cisco, Lucent and Nortel are likely to play a significant role. As these players are already in the process of expanding their footprint in the country at a furious pace, the scope for making a dent in the higher value-added end-to-end solutions market may be tough. In the medium term, MRO-TEK may be marginalised to the lower end of the enterprise networking/telecom service provider market. This may affect both volume growth and result in lower operating profit margins in the medium term.

In any case, the total turnover of MRO-TEK is skewed in favour of traded goods. Although the company proposes to invest in manufacturing facilities through this offer to even out this skewed ratio to some extent, its contribution may be of limited value in the near term. Till then, the low operating profit margins in the trading business will keep the overall OPMs in a tight leash.

Even if the projected volume growth is achieved, improving the operating profit margins to around 27.75 per cent in 2000-01 from 22 per cent in 1999-2000 may be difficult. In this backdrop, the offer at a stiff price of Rs. 95 may not offer much scope for capital appreciation.

Industry Class :Computers -- Networking products

Issue Type :Equity -- Book-built portion

Offer price :Rs. 95 per share

Application amount :Minimum of 1,100 shares

Post offer equity :Rs. 10.21 crores (of Rs. 5 each)

Project Cost :Rs. 36.91 crores

Offer Opens on :September 4

Offer Closes on :September 9

Promoters :Sarangan Narayanan/Himadri Nandi

Lead Managers :DSP Merrill Lynch

Listing at :Bangalore/BSE/NSE