The company is a relatively new entrant in the railway wagon refurbishment business and could face intense competition from more well-established players. Dependence on Tata Motors presents a client concentration risk for its commercial vehicle business
Number of shares: 12.24 crore shares
Issue duration: 30th September-5th October
Issue Price: Rs125 - Rs127 per share
Face value: Rs10 per share
Minimum order quantity: 55 shares
Listing: BSE, NSE
Lead book running managers: ICICI Securities Ltd and Edelweiss Capital Ltd
Its EPS for FY10 stood at Rs4.48 per share. The PE works out to 27.90 at the lower end and 28.34 at the higher end of the price band. The pricing looks steep.
Commercial Engineers and Body Builders Co Ltd (CEBBCO) is entering the capital market to raise Rs153 crore through a 100% book building issue. Private equity players New York Life Investment Management India Fund (FVCI) II LLC
(1,285,101 shares) and Commercial and Automobiles Pvt Ltd (243,486) will offload a total of 15,28,587 shares.
The company produces vehicle and locomotive bodies for diverse applications for road and railways transportation. It also conducts refurbishment of railway wagons and manufactures components for railway wagons, coaches and locomotives.
The company has bagged orders for manufacturing different vehicle bodies from original equipment manufacturers (OEMs) such as VE Commercial Vehicles Ltd (a joint venture between the Volvo group of companies and Eicher Motors Ltd), Ashok Leyland Ltd, Asia MotorWorks Limited, Man Force Trucks Private Ltd and Hino Motors Sales India Private Ltd (belonging to the Toyota group of companies), all of which also manufacture fully-built vehicles. For FY2010 and FY2009, its net sales from the commercial vehicles division were Rs121.16 crore and Rs109.36 crore respectively. As of 15 July 2010, its order book in the commercial vehicles division was Rs525.53 crore and in the railways division was Rs98.15 crore. The company is promoted by Kailash Gupta and Ajay Gupta.
Its cash flows were in the red in FY10 and FY09 at Rs0.30 crore and Rs17.39 crore, respectively.
Objects of the issue
The company plans to incur capital expenditure for the railway project at Gram Imlai in Jabalpur district at a cost of Rs80.30 crore. The combined wagon and EMU coach manufacturing facility will have a production capacity of approximately 1,200 wagons and 150 EMU coaches per annum. The total cost of the railway project is Rs130.30 crore which would be implemented in 2 phases. Phase-I of this project involves setting up the wagon manufacturing facility, while Phase-II of the project is for the EMU coach manufacturing facility. The funding will be through a mix of net proceeds, internal accruals and debt. It will prepay loans of Rs59.05 crore.
Rating agency CRISIL has assigned an 'IPO Grade 2' to the issue indicating 'Below Average Fundamentals'. The report notes that CEBBCO is a relatively new entrant in this segment and could face stiff competition from existing incumbents in the refurbishment and wagon businesses. Post the commissioning of its wagon capacity, it would account for just around 4% of the total wagon capacity as of 2008-09. Its ability to bag orders remains contingent on how well the company is able to establish strong contacts within the Indian Railways. Organised players in the fabrications business as well as existing wagon manufacturers could easily cater to the Indian Railways' demand for both refurbishment and new wagons as the business is neither very capital intensive nor requires a long gestation period and orders are tender driven.
In FY 2006, 2007, 2008, 2009 and 2010, it derived 56.32% (Rs28.24 crore), 86.36% (amounting to Rs82.59 crore), 73.91% (Rs88.11 crore), 69.23% (Rs77.57 crore) and 52.46% (Rs95.93 crore) respectively, of its net sales from Tata Motors Ltd.
In FY 2009 and FY 2010, it derived 2.39% (Rs2.67 crore) and 27.49% (Rs50.27 crore), respectively, of its net sales from the Indian Railways.
The commercial vehicles industry is cyclical in nature. A substantial part of its sales are realised during the second half of the financial year due to low demand in monsoons from mining and road-construction sectors.
It faces competition in the commercial vehicles division from the unorganised sector.
The IPO is expensively priced.
Its ‘Fundamental Strategy Index Portfolio’ claims to offer superior returns based on Nomura’s proprietary quantitative model. To hard-sell the product to customers, it is showing astronomical back-tested performance
When the market is extremely bullish, you can trust the self-serving portfolio management services (PMS) companies to come up with innovative techniques to make you rich with their often poorly-conceived and ill-fated products. Some proudly exhibit historical performance through a convoluted display of returns vis-a-vis the benchmark, while others show off a hypothetical scenario of past returns based on simple back-testing of the product. ICICI Prudential is aggressively pushing one such PMS product.
The ICICI Prudential PMS Fundamental Strategy Index Portfolio will create a portfolio based on the Nomura India Fundamental Strategy Index, which selects its stocks according to a quantitative stock-selection methodology. This is an index of 20 stocks selected based on a proprietary quantitative strategy which combines eight fundamental parameters.
The product tries to grab the eyeballs of the investor by showing off the phenomenal back-tested historical performance of the Fundamental Index. Sure enough, the numbers displayed are mind-blowing. According to the product document, if a portfolio had been operational since 30 January 1998, it would have yielded astronomical returns of 5,893% (till 16 July 2010) as compared to the Nifty return of 559%, or 10 times better than the Nifty during this period!
Not only this, it claims a part of the back-tested performance (since April 2009) as live performance, making a case for another round of mis-selling. ICICI Direct which is aggressively selling this product, is even promising a 50% return per annum to prospective investors. PMS are always aggressively (mis) sold at the height of a bull market and this time is no exception.
The Nomura index attempts to identify and optimise fundamental parameters that the market is giving importance to. Note that we are not talking normal fundamental factors but fundamental factors that the "market is giving importance to". This looks too clever. Either the stock picking is based on fundamental undervaluation or rising price trend (which captures what the market is interested in). Combining the two would seem a bit dubious.
Nomura's method screens a universe of top 100 listed stocks by market capitalisation and ranks them on each of the identified fundamental parameters. These include price to earnings, price to book value, price to sales, EV (enterprise value) to sales, EV to EBIT (earnings before interest and tax), EV to FCF (free cash flow), dividend yield and market capitalisation. Apparently, these parameters have been selected based on an analysis that indicated that a combination of these eight parameters was able to forecast most of the stock outperformance.
The strategy assigns weightages to each of these fundamental parameters every quarter. While doing so, it supposedly takes into account the most recent trends, giving more weight to the fundamental factor that the market is assigning importance to, on a quarterly basis. A weighted average composite score is given to each stock in order to identify stocks that scored well across all the fundamental parameters. The top 20 stocks that have the best composite score across all factors are then included in the index.
ICICI Prudential claims that the portfolio not only offers high returns but also minimises risk through built-in controls like equal allocation to stocks, volatility adjustment and drawdown events. Since no one stock has a higher allocation, the portfolio claims to be diversified enough to mitigate any event risk. The portfolio also decreases exposure to equities with increase in volatility. While the allocation to equities is never less than 65% and not more than 100%, any excess funds are invested in interest-bearing instruments for that quarter. The drawdown event is built in, to react proactively to a sudden change in market conditions. This is triggered automatically if the strategy underperforms Nifty by more than 10% within a quarter. In this scenario, the equity allocation for that quarter is switched to a portfolio that replicates the broad index like S&P CNX Nifty. These strategies look fine on paper, but their efficient execution remains a major concern, what with the dubious history of many PMS products in the past. In this case, for instance, the top 20 would possibly include stocks like Infosys and State Bank of India which have got their once-in-a-lifetime lift. It would be ridiculous to extrapolate their performance into the future.
While the principle of portability will definitely help policyholders, a number of issues need to be sorted out before it can see the light of day
Mediclaim portability, under which one can carry over one's 'no-claims' or 'low-claims' medical insurance record to any other provider, is not allowed currently. The issue surfaced once again after Insurance Regulatory and Development Authority (IRDA) chairman J Hari Narayan mentioned about the need for it yesterday at an insurance summit. However, according to industry experts, mediclaim portability will remain a distant dream, for a variety of reasons.
According to Dr Damien Marmion, chief executive, Max Bupa, the only way for portability to work is to have products with the same terms and conditions which also include a no-waiting period for pre-existing conditions. Besides, he feels that to deal with numerous complaints about health insurance, IRDA is thinking about portability as a quick-fix solution. "Instead of attacking the cause of the problem, IRDA is interested in addressing the symptoms," Dr Marmion said.
The CEO of Max Bupa also questioned how any insurance company with the current product portfolio could accept risk of policyholders switching from another company after paying premiums over the years and switching to a new insurer with no waiting period before raising claims. Moreover, the benefits from an insurer like Max Bupa can be more comprehensive than other company for the same sum assured, Dr Marmion told the media at the launch of its new product 'Family First Health Insurance Plan'.
Earlier, speaking at a CII insurance summit, Mr Narayan said, "It is high time that the insurance industry also moves to offer portability so that the mediclaim and motor insurance policyholders can switch their service providers. We have initiated a debate on the idea of portability and we would be arriving at a conclusion very soon."
Mediclaim portability is a great initiative for policyholders, but the ground reality will be complicated for its implementation. One major concern about mediclaim portability is its impact on increasing losses for insurers. Moneylife had reported about mediclaim portability and its issues in its 'Insurance Trends' column. (Please see: http://www.moneylife.in/article/8497.html).
Segar Sampathkumar, deputy general manager, New India Assurance Co Ltd, said, "In order to have portability, products by different insurers have to be aligned. There is already an initiative to have a common product which could then be portable across companies. Portability is indeed needed, so that a customer, especially at an older age, is not stuck with the present insurer, even if the service is not agreeable. But at the same time, we have to ensure that sufficient safeguards are instituted in the model so that no insurer could deliberately drive away elder persons out of his books. I am sure these issues would be addressed and resolved in the near future."
Only time will tell whether mediclaim portability is implemented or remains just a wish, like mobile-telephony portability, which was actually far simpler to implement and yet has not been done so far.