IPO Mughal Iron: Strong fundamentals justify 'subscription'
Mughal Iron & Steel Industries Limited (MISIL) is up for listing at local bourse offering 27.35mn shares (25% of post paid up capital). The book building will take place on 16Feb'15 with book building portion of 20.5mn shares (75% of the issue). The initial price band of the stock is Rs20- Rs34 with a premium band of Rs10- Rs24. The general public portion of the offer consists of 6.8mn shares (25% of the offer). In today's Value Seeker we discuss the key elements of this offer along with our recommendation.
Profitability up by 206%YoY in FY14
MISIL earned profit after tax (PAT) of Rs391mn (EPS: Rs4.76 Pre-IPO & Rs3.58 Post-IPO) in FY14 as compared to Rs128mn (EPS: Rs1.56 Pre-IPO & Rs1.17 Post-IPO) in FY13; up by 206%YoY. The profitability growth stems from higher revenue growth in FY14 and better control over costs. Revenue of the company depicted an upward trend which can also be witnessed in profitability growth (see the table attached) during last 4 years. The company has no cash dividend payment history.
Similarly key financial ratios of the company are also portraying very positive picture. ROE & ROA of MISIL holds an upward trend in last 4 years and settled at 29.5% & 5.5% respectively in FY14. In addition to this, gross & net margin of the company is also continuously improving. However, debt-to-equity ratio of the company has significantly jumped in last one year from 59:41 to 71:29 which is variable rate and is beneficial in declining interest rate scenario.
Key risks to the investment case
Although the company is facing certain risk factors but strong mitigating factors are also present to cope up with these risks. In our opinion, gas supply risk and power supply risk are the risks that require careful analysis by the investors. MISIL is equipped with 9.3MW gas fired power plant, captive 132kva grid and coal gasification industrial plant to tackle the above mentioned risks. Furthermore, the company is also considering coal based electricity generation to cut down the power cost.
Utilization of IPO proceeds
The company is expected to raise Rs547mn at lower band of Rs20 and Rs930mn at upper band of Rs34. These funds will be utilized to acquire induction furnace, BMR of Re-rolling mill and to meet working capital needs.
We recommend 'subscription' of the stock on account of i) up-trending revenue and earnings growth ii) strong financial ratios and iii) attractiveness on peer comparison.