Sandhar Technologies : IPO

IPO opens on March 19 and closes on March 21, 2018. The fresh issue of 9.1 million shares along with the offer for sale (OFS) of 6.4 mn shares is aimed at raising Rs 5 billion from the primary market. 

About the company, Sandhar Technologies is engaged in the business of designing and manufacturing a diverse range of automotive components, parts and systems which are focused on safety and security systems of vehicles.

The company manufactures its products from 31 manufacturing facilities across eight states in India, two manufacturing facilities in Spain, and one manufacturing facility in Mexico. This apart, it also has an overseas assembly and packaging centre located in Poland and a R&D centre located in Gurugram, Haryana.

The company's customer profile consists of 79 Indian and global original equipment manufacturers (OEMs) across various segments and global automotive component suppliers such as Autoliv, Bosch, and CTS

Pros: Sandhar Technologies is the leader in the two-wheeler locking systems market, and the commercial vehicle rear view market in India and  one of the two largest manufacturers of operator cabins in India, along with being the largest player in the excavator cabins market .

The company has a diversified product portfolio. It presently manufactures 21 categories of products such as lock assemblies, mirror assemblies, operator cabins for off-highway vehicles, aluminium spools, spindles, and hubs. It also manufactures other product categories including wheel assemblies, handle bar assemblies, brake panel assemblies, sheet metal components and painted parts such as door handles, panels for televisions, and cabinets for air conditioners.

The company has long-standing and growing relationships with Indian and global OEM customers which include some leading companies such as Ashok Leyland, Honda Cars, Doosan Bobcat, Escorts, Hero, Komatsu, TAFE, Tata Motors, TVS, and Volvo. It has also grown its client base over the last few years to include OEMs such as Caterpillar, CTS, Hyundai Construction, International Tractors, JCB, Kobelco, Mahindra & Mahindra, and SML Isuzu.

Cons : . High client concentration... Sandhar depends on OEMs and a limited number of customers for a significant portion of its revenues. The top two customers of the company constituted more than 50% of its consolidated revenues during FY17. Any loss of a major customer could pose a significant threat to the company and also adversely impact its financial condition.

The company also has high segment concentration as it significantly relies on the two-wheeler OEMs. The revenue from two-wheeler OEMs constituted around 58% and 54% of the total consolidated revenue for the six months period ended September 30, 2017 and FY17, respectively. Accordingly, any changes in the demand scenario for the two-wheeler market could significantly impact on the company's revenues.

High debt on books... As of December 31, 2017, the total amount outstanding by the company stood at Rs 5,158 million. While the company intends to utilize around Rs 2,250 million of the fresh proceeds to repay its outstanding debt, it will still be left with total outstanding borrowings of around Rs 2,900 mn. The outstanding debt will require significant cash flows and also have a negative impact on the net profit margins of the company going forward.

The company is also exposed to the cyclicality risk the automobile sector face.

Highly competitive market. The automotive component industry in which the company operates is very competitive. There is pricing pressure from OEMs. They pursue price reduction initiatives every year with the suppliers. Given the intense competition, suppliers need to be cost effective without compromising the quality of the product. This competitive nature of the business could further put pressure on margins and profitability of the company.

Valuations :

Particulars (FY17)	Sandhar Technologies	Minda Corporation	Gabriel India	Fiem Industries
Return on Networth (%)	13	11.4	19.7	9.9
Net Profit Margin (%)	2.4	2.1	4.9	2.3
Debt / Equity Ratio (x)	1.3	1	0	0.6
Price to Earnings (P/E) Ratio (x)	43.3	59.5	25	33.3

Consider the above , at Rs 332 Sandhar Technologies Ltd is valued at 43.3 times its FY17 earnings, which is steep higher. We may buy it from secondary market at lower price.