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Thejo Engineering – First SME IPO – Review and Recommendation

September 4, 2012

The Govt and SEBI has done only one commendable job in the last 3 years, making all necessary arrangements for SMEs in India to go Public in a separate SME Section opened by the National Stock Exchange of India.

Thejo Engineering was established as a partnership in 1974, Thejo’s mission was to provide maintenance of conveyor belt systems and since then has come a long way. Pioneers in the cold vulcanization technology, Thejo is one of the few companies in India with facilities for manufacturing, sales and servicing of specialised engineering products. Thejo today is India’s only comprehensive solution provider in the bulk material handling, conveyor systems, mineral processing and corrosion protection sectors.

Objects of the IPO
Thejo is currently unable to serve the requirement of many clients due to capacity constraints. Increase in capacity would lead to an immediate increase in sales and profitability. Thejo is venturing into the Australian service market through a wholly owned subsidiary. It would allow the Company to tap into the heavily expanding and under serviced iron ore mines of Western Australia. Thejo has initiated formalities for forming a JV with a reputed Brazilian firm for marketing it’s products there. The Company is installing a PU plant which would allow it to improve profitability and target export markets.

Financials of Thejo
Net Sales of the company has grown from Rs 45.68 Cr to Rs 115 between 2008 to 2012. During the same period PAT has grown from mere Rs 0.86 Lakh to Rs 8.99 Cr. While the NPM of the company is still very low at 5.8%.

Thejo’s D/E ratio, as of FY12 is less than 1.0, which would allow the Company to raise funds at low cost in the future. The low D/E ratio is expected to increase profitability due to low interest payments even in a high interest rate environment. The Company has generated increasing return on equity – from 9.91% in FY07 to 38.42% in FY12.

Book Value of the Share is Rs 211.

Valuation and IPO Details
Consolidated EPS for the twelve month period ended March 31, 2012, excluding exceptional items, was Rs 56.57. The price band for the IPO is Rs. 402 – Rs. 430 per share, implying a trailing P/E of 7.11 at the lower end of the price band and 7.60 at the upper end. . At a price band of Rs. 402 – 430, P/BV multiple is only 1.82x – 1.85x.

The Company, considering its low paid up equity capital and large reserves, is a likely candidate to do a bonus issue.

Recommendation
CRISIL has assigned a 5/5 rating for Thejo. Since this is the first of its kind on the SME Platform, we recommend only investors with High Risk appetite to subscribe to the IPO. We are not really sure how SEBI Plans to control Price Rigging in such Stocks which has extremely low float and easier to manipulate the prices.

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