Emkay Taps SME: Financials justify price, returns uncertain

Emkay Taps: Financials justify offer price though returns hinge on many factors!, says VS Fernando
When machine tool players in the listed domain have only a mediocre performance to show, the Nagpur-based Emkay Taps and Cutting Tools Ltd has achieved a record operating margin of over 46% in first 10 months of FY15. Notwithstanding the company’s impressive track, one cannot be too optimistic as there is still a lot to be looked into.

The OfferThe present issue is an `offer for sale’ of 4,71,200  equity shares of Rs 10 each at a price of  Rs 330 a piece. The offer is made by the promoter group for an aggregate amount of Rs 15.55 cr. Whereas Ajayprakash Kanoria and Alka Kanoria offer 64,250 shares and 1,24,910 shares respectively,  Ajayprakash Kanoria HUF is offering 2,32,040 shares and group company Nagpur Tools Pvt Ltd is selling 50,000 shares. The IPO constitutes 26.5% of the company’s tiny equity base of less than Rs 1.78 cr. Investors have to apply for a minimum of 400 shares (Rs 1.32 lakh). The entire issue is underwritten by the lead manager, Hem Securities. The issue manager’s associate company, Hem Finlease Pvt Ltd, has been appointed as `market maker’.  

Issue Object

The objects of the IPO are to achieve the benefits of listing the shares on the Stock Exchange and to facilitate the sale of shares by the selling shareholders. According to the offer document all expenses in relation to the IPO would be paid and shared by the selling shareholders except listing fees and advisory fee which will be paid by the Company.

History & Milestones

The two-decade old Emkay Taps and Cutting Tools Ltd (ETCTL) has been promoted by Ajayprakash Kanoria (58), the chairman and managing director of the  company, who holds a Bachelor‘s degree in Commerce from Nagpur University besides having passed intermediate level of Chartered Accountancy course. Kanoria is said to have an experience of 35 years in the cutting tools industry. He has reportedly acquired the technical expertise from his father when he joined his family business.

ETCTL was incorporated in 1995 with the main object of taking over the business of a proprietorship concern - Emkay Tools owned by Ajayprakash Kanoria HUF. Emkay Tools was carrying on business of manufacturing of various types of machine tools which were reportedly sold in the US markets. ETCTL took over the assets and liabilities of Emkay Tools as a going concern with all its rights and obligations with effect from April 1996.

The company commissioned a Wind Turbine Generator (WTG) having a capacity of 1.25 MW in Hassan District (Karnataka) in 2008. It went for imported CNC machines from USA and Germany in 2009. The company added two more Wind Turbine Generators having a capacity of 1.6 MW (800 KW each) in Jaisalmer District (Rajasthan) in the year 2010.

Business Profile

Emkay manufactures HSS (high speed steel) threading tools which are largely used by automobile industry and its ancillaries. Emkay’s customers include prominent names such as Bajaj Auto, Endurance Technologies, Mahindra & Mahindra, Bharat Forge, etc. Emkay claims to offer complete range of taps. Whereas thread types like Acme, Stub Acme, 60-Stub Acme and Buttress threads are provided as per customer specific requirements, Non-Standard Taps as per customer drawings are also provided by the company on specific request from the clients. Emkay’s products claim to have longer life, better price, improved geometrics and faster cutting speed which are ideal for tapping on CNC machines.

Emkay reportedly sources its raw material viz. High Speed Steel and other essential products from the international market, from prominent names such as Bohler International GmbH, Austria, Era Steel Commentry, France, Villares Metals SA, Brazil, Gloria, Taiwan, GKW Powmex Steels, etc. The major factors that play important role in Emkay’s business are product quality, pricing and client servicing. Internationally, competition comes from low-cost products, which are manufactured in China, and quality products from Germany, Italy, Japan, etc.

Financial Track

Operationally, Emkay’s performance is very impressive. Though the company’s equity base has remained less than Rs 1 cr, its current revenue and profitability are very attractive at Rs 36 cr and Rs 10 cr respectively. The company’s operating margin has been above 31% for the past 6 years and it stood at as high as 46.5% in the first ten months of fiscal 2015. Net operating cash flow has been positive for the past six years. The company has significantly reduced its borrowings. Even after providing Rs 3 cr for depreciation and Rs 4.5 cr for taxation, it posted a net profit of Rs 8.63 cr for the 10 months up to January 2015.

However, the last six years’ trend indicates some unpredictability. The company’s top line has been static between Rs 30-35 cr. Net profit, which was at Rs 4.19 cr in 2010, rose to Rs 8.35 cr in 2012 but dropped to Rs 4.92 cr in 2013. Also, the company could have easily provided the full fiscal 2015 results in the offer document instead of a truncated 10 month period. Will the last two months be in line with the previous 10 months, thus remains to be seen.        

Promoter Holding & Cost Of the equity capital Rs 177.78 lakh, the promoters would hold Rs 130.66 lakh post-offer. The average cost of acquisition of shares by the promoters before the offer for sale was Rs 37.20 a share. As the core promoters would receive more than Rs 13.50 cr for their dilution of about 23% against their total investment cost of Rs 5.50 cr, their post-IPO cost would be negative Rs 8 cr for their residual stake of 59%. Hence, once the lock-in lapses, if they want, the promoters can dump their holding in the market even at a throw-away price as they have nothing to lose.Valuation  

How does Emkay’s offer price compare with the industry peers in the listed domain? The offer document states, domestically there are no listed companies in India which are engaged in the same business with an equivalent product mix as Emkay’s. Nonetheless, the offer document admits that Emkay faces stiff competition from Indian players like Addison & Co, Indian Tool Manufacturers, Miranda Tools (Ashok Piramal Group), etc.

There are few listed players in the machine tools industry. However, the top three are currently struggling to find a bottom line. In fact, as compared to the overall performance of listed machine tools players, Emkay’s financials are very impressive. The company’s current net worth itself amounts to over Rs 55 cr which may well justify a market cap of Rs 58 cr that the company is asking for. Nevertheless, Emkay’s Price-Fixed Assets and Price-Revenue multiples are far higher than the listed machine tools players. 

Lead Manager’s TrackEmkay has hired Hem Securities to manage its IPO. The investment banker claims to have been awarded by BSE as one of the top performing Merchant Bankers for the year 2013-14. They say the award was conferred to recognize the contribution of Hem to the progress of Indian Financial Markets.

What’s the track record of the merchant banker? During the mid-nineties primary market boom, Hem managed five IPOs of which four are not traceable today. The one which is traceable is currently quoting at 44% discount. The last two mainframe IPOs handled by Hem too have inflicted huge losses. Tijaria Polypipes, offered at Rs 60 in September 2011 is currently languishing below Rs 4!

No doubt Hem has brought out 13 IPOs - the highest on the SME Platform of BSE. But, what is the performance of IPOs handled by Hem? Of the 13 SMEs, two have dropped below the offer price and many do not find regular quotes.

The first SME IPO, Samruddhi Realty, has been traded for only 143 days out of 562 days of listing. This scrip has not found any quote after 10th July. Tentiwal Wire was traded just 63 days out of 384 days and the scrip has not been traded since December 29, 2014. The first IPO of 2015, O.P. Chains has been traded for only 16 days out of 67 days and the scrip has failed to get a quote after June 30, 2015. When companies with large equity base fail to attract investors on the SME platform, will Emkay with a tiny free float of 4.71 lakh shares fare better? The track record of Hem-managed IPOs does not exude much optimism.  

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