The Hindu Business Line : Hilton Metal Forging: Avoid

The project carries execution risks. Hilton Metal Forgings may find it difficult to command premium valuations that are in line with the big players.

ATTEMPTING TO move up the value chain.

Investors can refrain from subscribing to the initial public offering of Hilton Metal Forging being made at an offer price of Rs 70 per share. The positives linked to this offer are the buoyant demand for forgings in the export markets and good business relationships established by the company in the US and Europe. However, the risks associated with setting up a relatively new product line with significantly higher scale of operations, fragmented nature of the forgings sector, intense competition and volatility in raw material prices are the downsides associated with the stock.

Hilton Metal Forging is making this offer to part-finance the expansion of its existing forging capacity from 11,100 tonnes to 24,900 tonnes by installing additional plant and machinery.

In addition, part of the proceeds are to be used to meet the working-capital requirements.

According to the offer document, the company's original proposal envisaged the completion of this project by August 2007, which will now be completed only by February 2008.

Product range

The company's product range consists of flanges and stub ends. The key equipment used include a two-tonne hammer with a capacity of 1,500 tonnes per annum and 16-tonne hammer with capacity of 9,600 tonnes per annum.

While the capacity utilisation of two-tonne hammer stands at 81.7 per cent, for the 16-tonne hammer, it was only 5.1 per cent for 2005-06. In the offer document, the company has claimed that the under-utilisation is on account of the absence of a heat treatment shop and in-house die shop/tool room.

This is to be financed as part of the expansion project. Through the latest expansion project, the company plans to shift towards higher value-added products such as high-pressure valve bodies that have applications in the oil and gas and petrochemical segments.

While the company can leverage its existing business relationships in the US and European markets, its success will hinge on its ability to switching from its existing low-value products to a high-value range.

Given the high working-capital intensity of the project, sluggish offtake in the export markets can impact margins and profits significantly. In addition, the execution risks relating to the current project are also fairly high.

In the backdrop of these variables, a relatively mid-size company such as Hilton Metal Forgings may find it difficult to command premium valuations that are in line with the big players.

Offer details: Hilton Metal Forging is making this fixed price initial public offering at Rs 70, aggregating Rs 38.15 crore. The IPO is to be listed on the BSE and the NSE. Centrum Capital is the lead manager to the offer.

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