Maharashtra-based special steels and wires maker Supreme Engineering is issuing 65.55 lakh shares at Rs __ (undisclosed) to finance its working capital requirements, pay debt and acquire plant and machinery.
Is it worth subscribing to? Let’s find out:
MOAT
The company manufactures special steel for the defence, aerospace and heavy engineering sectors. 45% of its special steel orders are from the PSUs. The company makes products that require advanced technologies and it imports raw materials such as chromium and nickel, and any depreciation in the Rupee can hit its profitability.
Its Unit 2 makes wires for the oil& gas and automotive sectors.
It also faces intense competition from the biggies and smaller players.
We can say that the company’s moat is average quality.
AUDITOR’S QUALIFICATIONS
The company has not maintained records of stocks and fixed assets, and has deviated from ICAI’s guidelines. This is not a good sign.
Plus, as per point # 22 on Page 20 of the RHP, the company also hasn’t fully complied with ROC filings.
DEBT SITUATION
As on 30-9-17, the company’s debt was 62.77 crores.
Now let’s correlate it with the cash flows:
The company’s cash flows from operations is about 7-8 crores per year.
Assuming it grows by 10% after the IPO, we get operational cash flows of about 9 crores per year.
Let us also assume that the company will bring down its debt from 67 crores to 55 crores post IPO.
So, it will take 3-5 years for the company to bring down its debt to reasonable levels so long it utilizes the entire cash flow to retire debt.
It seems that the shareholders will have to wait it out before they can get any rewards from the company.
IN-HOUSE COMPETITION
The company says it faces intense competition from outside, and yet it permits in-house competition.
FINANCIAL CORRELATION
The company’s networth as on 30-9-17 is 24.4 crores and its BV is about 13.50.
So the assumption is that it will issue stock at 2-3 times the BV. The promoters cost of acquisition is about Rs 3 bucks a share.
Annual turnover is about 120 crores. Debtors are about 50% of sales and inventories are 55%. Both very high.
CONCLUSION
Though the product profile looks really good, it is not yet known how much the company would be issuing the stock at. Plus, based on the information in the RHP, and the observations above, I would wait for it to list.
