Porwal Auto Components — IPO Avoid

Investors can avoid subscribing to the initial public offering of Porwal Auto Components which is in the business of manufacturing castings. The fragmented nature of the foundry industry with a number of small players, competition from larger companies , unattractive margins and heavy dependence on one client, make the offer uninviting.

At the price band of Rs 68-75, the offer is priced at 15-17 times its likely FY-09 earnings on the post-issue equity. At the upper end of the price band, the company will raise around Rs 37.5 crore to fund its capacity expansion and set up a windmill for captive power consumption.
Business and plans

Porwal Auto manufactures ductile iron and grey iron castings and components primarily for the automobile industry. To cater to the growing demand, the company has expanded capacity up to 7400 tonnes in 2006-07.

The company plans to further increase installed capacity to 27,600 tonnes in FY 2008. 80 per cent of this installed capacity is to be utilized by 2009-10. With increase in capacity, the company expects to benefit from higher domestic demand for automobiles as well as the trend of overseas OEMs (Original Equipment Manufacturers) sourcing components from India.

But in a fragmented industry such as this, small companies will find it tough to compete with bigger players. The latter score over the smaller ones in terms of ability to execute larger orders, offer value added products such as machined castings and forgings and sub-assemblies and assemblies. These value additions also bring in better margins. Moreover, export growth for Indian component makers has come from high-end cast products and higher technology castings rather than from raw castings or forgings.

While the company too has plans to increase the supply of finished castings and scale-up its machined castings production, it will face stiff competition from established players. The company also needs to diversify its risks by supplying to other segments of the auto industry such as passenger cars and two-wheelers (to combat any slowdown in one particular segment ).

Currently, nearly 90 per cent of its revenues come from supplies to Eicher Motors for its commercial vehicles. L&T case equipment, Shakthi Pumps, Man Force trucks and a few others chip in with the rest. Eicher’s new joint venture with Volvo for the commercial vehicles business, may also create some uncertainty if the latter reviews the supply chain.
Financials

For the year ended 31 March 2007, the company recorded sales of Rs 34 crore, which grew by about 32 per cent from the previous year. This was primarily due to capacity increase. Net profits decreased by about 8 per cent to Rs 75 lakhs. Margins may also be under pressure in the short-term due to finance charges