Issue opens: Wednesday, 27th January 2016
Issue closes: Friday, 29th January, 2016
Fresh Issue Size: Rs.4100 million
Face Value – Rs.10
Price Band – Rs.180 to Rs.186
Bid Lot – 80 Equity shares and in multiples thereon.
Valuation and Investment Rationale
The Initial Public Offer is having a price band of Rs.180 on the lower side and Rs.186 on the higher side. The price to earnings ratio is in the range of 27 to 28. The Price to Earnings ratio is expensive for the consideration of the IPO price in the range of Rs.180 and Rs.186. The growth for the next few years is already discounted in the asking price and does not leave much room for appreciation immediately after listing. The Company has been able to increase the revenues and profit from fiscal 2011 to fiscal 2015 at a CAGR of 18.16% and 37.09%, respectively. The company is expected to witness revenue growth in the range of 15% to 20% in the next few years as it builds on capacity from the IPO proceeds.
Precision Camshafts Ltd. is one of the leading players supplying passenger vehicle camshafts globally. Its market share has consistently improved from 5-6% in 2010 to 8-9% in 2014. The company enjoys preferred supplier status and has developed long term relationships with marquee global OEMs in the automobile sector. Its clientele list includes names like General Motors, Ford Motors, Hyundai, MSIL and Tata Motors. The company claims that as of FY 2014-15, it has supplied over 58 million units of camshafts in the last 10 fiscals and serviced various customers across different geographies. Apart from India, PCL supplies camshafts across various countries like the US, Brazil, UK, Germany, Austria, Hungary, Russia, South Korea and China.
The IPO size is small in terms of its offering and if the subscription is high the allotment would happen on a random basis for investors.
Objects of the Fresh Issue:
The Offer comprises a Fresh Issue by the company and an Offer for Sale by the Selling Shareholders.
The objects of the fresh Issue are:
1. Establishment of a machine shop for ductile iron camshafts at the EOU unit; and
2. General corporate purposes; and
3. Listing of Equity Shares to enhance visibility and brand image among existing and potential customers.
Company Business Overview
Incorporated in 1992, Precision Camshafts Ltd is world’s leading manufacturer and supplier of camshafts, a critical automobile engine component. Company supplies over 150 types of camshafts for passenger vehicles, tractors, light commercial vehicles and locomotive engine applications. Company has manufacturing facilities in Solapur, Maharashtra.
Company caters to both international and domestic market. Some of the long term clients includes General Motors, Ford Motors, Hyundai, Maruti Suzuki, Tata Motors and Mahindra and Mahindra.
Company has two manufacturing facilities in Solapur, Maharashtra. This includes an export oriented unit and a domestic unit.
Precision Camshafts has two joint ventures with Ningbo Shenglong PCL Camshafts Company Limited, for machining of camshafts and PCL Shenglong (Huzhou) Specialised Casting Company Limited, for setting up a foundry in China.
Precision Camshafts is promoted by Mr Yatin Shah and Dr Suhasini Shah, who have over 20 years of experience in the critical engine component manufacturing and have established strong business relationships with large global original equipment manufacturers. Company’s promoters are first generation entrepreneurs who started the business of manufacturing of critical engine component in 1992.
Risks Relating to the Business
The revenues are directly related to the production & sales of the automobiles industry, especially the passenger vehicle segment that accounts for 90% of its revenues. The risk here lies in the dependency on one segment of the Automobile Industry for generation of revenues. Any slowdown in the PV segment is likely to impact its performance.
The company primarily manufactures and sells cast iron camshaft. Hence, its inability to diversify its product offerings may impact its growth, going forward.
Also, its dependence on top two clients is a major risk for its performance. General Motors and Ford Motors account for 27% and 30% of its revenue, respectively.
Exports constitute 78% of the revenues for the company and currency fluctuation remains a significant risk.
In fiscal 2015, fiscal 2014, fiscal 2013, fiscal 2012 and fiscal 2011 the consolidated turnover (net) was Rs. 5,324.27 million, Rs. 4,673.57 million, Rs. 3,588.25 million, Rs. 3,026.13 million and Rs. 2,731.62 million, respectively. In fiscal 2015, fiscal 2014, fiscal 2013, fiscal 2012 and fiscal 2011 the consolidated restated profit was Rs. 623.63 million, Rs. 131.26 million, Rs. 239.19 million, Rs. 203.43 million and Rs. 176.56 million, respectively. The Company has been able to increase the consolidated turnover (net) and consolidated restated profit from fiscal 2011 to fiscal 2015 at a CAGR of 18.16% and 37.09%, respectively. The consolidated turnover (net) and consolidated restated profit was Rs. 2,533.70 million and Rs. 341.02 million, respectively for the six months’ period ended September 30, 2015.
The EBITDA margin and the Net Profit Margin for the Company were reported at 26.5% and 11.72% respectively for the financial year ended March 2015.
The company has a long term debt of Rs.873 million as on 30th September 2015.
Cash flow Statement
The net cash flow is positive for the financial year ended March 2015 period on account of robust cash inflow from operations. Operational Cash flow is positive and healthy for all the years from FY 2010-11.
Camshafts are required in all automobiles using an internal combustion (“IC”) engine, which includes 2-wheelers, 3-wheelers, passenger vehicles, commercial vehicles, off roaders and tractors. A camshaft and its associated parts actuate the opening and closing of the piston valves in an IC engine of an automobile. It is one of the critical components of an IC engine and the design of the camshaft impacts the engine’s power, efficiency, mileage and emission.
Camshafts are designed in such a way so as to open the engine valves at the correct time and to keep them open for the necessary duration for the desired engine performance. The camshaft design, weight, manufacturing process and machining requirement vary across vehicle categories depending on the desired engine characteristics. The camshaft generally lasts the life of the IC engine, although it may be replaced if it affects the engine’s performance significantly over time.
Camshaft manufacturing requires two units: (a) a foundry and (b) a machining and sand core shop. The manufacturing process is initially capital intensive and associated with a long drawn vendor approval process, making healthy capacity utilization critical.
Camshaft castings, or un-machined camshafts, are priced according to casting complexity and the material used, with prevailing raw material prices being taken into account. The machining process contributes to value addition of 100-200% depending on the complexity of the cam profile and grinding requirements.
Tier I camshaft suppliers provide camshaft castings or machined camshafts directly to the OEMs. Tier II camshaft suppliers provide camshaft castings to third party tier I suppliers.
Global Camshaft Market
Camshaft demand is dependent on automobile demand, as camshafts are required in all IC engines. The key segment, however, driving camshaft sales is the passenger vehicles segment. Passenger vehicles largely use either SOHC or DOHC engines, i.e. either single camshaft engines or double camshaft engines. Accordingly, assuming the demand of passenger vehicles is equally divided between these engines types, the global passenger vehicle camshaft sales volume is one and a half times the volume of passenger vehicles produced.
Many OEMs manufacture camshafts in-house or through captive associates/JVs. There is a growing trend of outsourcing manufacturing of camshafts. OEMs like VW and Toyota have large part of camshaft manufacturing in-house or procure it from captive associates, while OEMs like General Motors, Ford Motors, Hyundai and FIAT have outsourced majority of their camshaft production. Reliance on captive manufacturing is expected to reduce, going forward. However, in-house machining operations are preferred and many OEMs opt to simply procure camshaft castings from third party vendors.
Camshaft manufacturers with manufacturing abilities across technologies, and with machining set-ups are expected to benefit from the trend of manufacturing operations being outsourced by OEMs along with optimization of vendor network.