The Hindu Business Line : Technocraft Industries: Avoid

While the demand for Technocraft's diversified business is encouraging, the scale of operations, competition and penetrating new markets may pose a challenge.

Investors can refrain from subscribing to the initial public offering (IPO) of Technocraft Industries (India). The offer is being made in the price band of Rs 95-105 to finance expansion of capacities in its three divisions: Drum closures, pipes/scaffolding and yarn business.

At the stated price band, the price-earnings multiple works out to 7-8 times the 2005-06 consolidated per share earnings on the existing equity base.

While the PE multiple appears reasonable given its growth prospects, as a diversified play, the company may command a PE lower than peers in each of these businesses.

The positives linked to this offer are Technocraft's strong export presence in the drum closures division, good growth prospects for its pipes division and scope for improving margins through branding efforts in the yarn division.

The drum closures segment accounted for 27 per cent of revenues and 40 per cent of profit before interest and tax (PBIT).

The pipes (including scaffolding) division contributed 42 per cent of revenues and 26 per cent of PBIT and the yarn division chipped in with 26 per cent and 28 per cent of revenues respectively.

On the flip side, however, the scale and size of operations is likely to work to its detriment in the pipes and yarn division.

In addition, the volatility in raw material prices may be a cause for concern.

The competition is also likely to be fairly stiff in the domestic and export markets. In its drum closures division, the company plans to focus on the Chinese market for exports.

However, given the high duty structure and the fragmented steel capacities in China, penetrating this market may pose a considerable growth challenge.

The consolidated financial performance in 2005-06 too was hardly encouraging, with a 3 per cent drop in revenues and 2 per cent decline in post-tax earnings over 2004-05. The post-tax earnings have also stagnated in a narrow band in the last three years.

Offer details: The company is raising Rs 79-87 crore to part-finance its drum closure division (raising its bungs and flanges capacity by 36 per cent to 1,360 lakh pieces and clamps by 15 per cent to 230 lakh pieces), scaffolding division and set up a new yarn mill which will increase the spinning capacity to 61,104 spindles. It is also installing a 15 MW power plant to reduce its overall power costs.

The book running lead managers are Anand Rathi Securities and Centrum Capital. The offer opened on January 18 and closes on January 23.

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