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Tuesday, May 15, 2007

Nitin Fire Protection Industries IPO Analysis


Nitin Fire Protection Industries, promoted by Nitin M Shah alias Sanghavi, was incorporated in 1995 in Maharashtra to manufacture fire extinguishers. The company presently provides fire protection, and safety and security by offering end-to-end turnkey solutions. This business is carried through two wholly owned subsidiaries and one partnership concern.

The other business of high-pressure seamless cylinders is presently carried through wholly owned subsidiary Eurotech Corporation, which outsources the manufacture of these cylinders to China. CNG gases are transported to CNG stations through CNG cascades. The company also manufactures these cascades.

Recently, Nitin Fire Protection Industries floated another wholly owned subsidiary Nitin Cylinders to set up a manufacturing unit of high pressure seamless cylinders at the Vizag special economic zone (SEZ) primarily to cater to the export market. The company has planned a capacity of 5,00,000 units per annum at this plant, which will come up in two phases. The first phase of 2,50,000-unit capacity is scheduled to commence production in May 2007, while the second phase is scheduled for commissioning by October 2007. The total cost of this expansion is estimated at Rs 118.08 crore. The company is coming out with an initial public offer of equity shares to partially finance this expansion.

The high-pressure seamless cylinders primarily cater to the industrial, medical, fire-fighting and beverages segments. However, with the advent of CNG as an alternative eco-friendly automotive fuel, a new segment has opened up, which is growing rapidly in India as well as globally.

To further benefit from the evolving market for CNG applications, Nitin Cylinders also intends to make and sell fuel dispensers. It has entered into an MoU for technology transfer with Kraus Global Inc., Canada, and for the supply of its proprietary products in India, Bangladesh and the UAE.

Nitin Fire Protection Industries picked up a 10% stake in the consortium along with petroleum giants such as GSPC (20%), Gail (20%), HPCL (20%,), BPCL (10%), Hallworthy (10)% and Silverware (10%) for the exploration and prospecting of crude oil block RJ-ONN-2004/1, admeasuring a contract area of 4,613 sq. km, in Rajasthan. The cost of operating the oil block is estimated at about US$ 30.67 million out of which the company's share works out to US$ 3.07 million (over Rs. 13 crore).

Strengths:

  1. Operating from SEZ will help in effectively tapping global markets for high pressure seamless cylinders.
  2. The demand for high-pressure seamless cylinders to carry CNG will continue to grow at a high rate due to the global shift to CNG as an automotive fuel.
  3. The business of CNG cascades and the tie-up for manufacturing CNG fuel dispensers for domestic markets hold immense potential for future with a number of city gas distribution projects planned. The availability of natural gas is expected to double in the next two years.

Weaknesses:

  1. Will need to establish its brand image and marketing network in the export markets.
  2. Foray into oil exploration looks diversionary and may lock up funds in unrelated business.

Valuation:

The price band for the IPO is Rs 171 to Rs 190, which translates into a P/E of 21.0x at the lower band and 23.3x at the higher band on the consolidated EPS (on post-IPO equity) of Rs 8.2 for the year ended March 2007. Around 51% of the consolidated profit comes from the fire protection business and the balance from the cylinder business. The proposed project is in the cylinder business. The nearest comparable company in the cylinder business is Everest Kanto Cylinders, which already commands substantial market share in this business, is currently trading at Rs 1168, with P/E of 37.6 times consolidated nine-month annualised EPS. The strong financial and stock market performance of Everest Kanto after listing is likely to augur well for Nitin Fire Protection in the short term