Somi Conveyor Beltings is into manufacturing of conveyor belts. The company’s unit is located in Jodhpur, Rajasthan. Its commercial production of conveyor belts is around 1,67,660 metres per annum.
Plans
The company intends to set up a new unit for manufacturing of rubber conveyor beltings with an installed capacity of 1,72,080 running metres per annum at Tanawara village, in Jodhpur, Rajasthan. This new unit will enable it to manufacture rubber conveyor belts of a width ranging from 1,400 mm to 2,000 mm. Its existing plant at Jodhpur manufactures rubber conveyor belts of a width of around 1,200 mm.
Investonomics
Conveyer belts are used in various industries such as coal and lignite, iron ore and mining, cement, power, steel, fertiliser, and sugar. Rajasthan is known for its rich reserves of chemicals and stones, which form the basic raw material for the cement and mining industry.
This has led to establishment and growth of companies such as Shree Cement, JK Cement, Ambuja Cement, Laxmi Cement, Birla Cement, Mangalam Cement, ACC, Hindustan Zinc, and Chambal Fertilisers. And hence considering that these companies require conveyor belts for their material handling, Somi Conveyor Beltings has locational advantage.
Rubber, nylon fabric, and other chemicals form the main raw materials in the production of conveyer belts. These raw materials form a major part of its total expenditure. It ranges between 85%-90% of the total expenditure. Hence, increase in the price of the rubber and rubber chemicals can adversely affect the profits of the company.
During the year ended December 31, 2007, the company’s sales stood at Rs 10.91 crore, which if considered on an annualised basis is 5.49% lower than sales of Rs 15.40 crore during the year 2007. The increase in raw material and oil prices has resulted in the flat performance.
Add to these manufacturing expenses, its the net profit that has slowed down. Its profit after tax for December 31, 2007, which stood at Rs 95.80lakh, and if annualised and compared with the figures of the previous year (Rs1.34 crore), is lower.
The company is expanding its capacity from 1,67,660 MPA to 3,39,740 MPA. Its capacity utilisation for FY07 has been around 65%. The company is concentrating on securing orders from the public sector, which are issued on the basis of the bidding process.
This will enable it to gain access to large orders. It has secured orders from public sector undertakings such as Karnataka Power Corporation Limited, a Government of Karnataka undertaking and Andhra Pradesh Power Generation Corporation Limited, a Government of Andhra Pradesh undertaking, Western Coalfields Limited, and Bharat Cooking Coal Limited.
In the cement sector it has orders from companies like ACC and JK Cement, and players from the power, coal, and mining sector.
Valuation
On the valuation front, the company quotes a P/E of around 43(x). It has no peer companies to compare. The company is looking to expand its production, but its capacity utilisation is relatively low.
Its topline growth rate has been declining and margins have only recently improved and its sustainability is a concern. Investors must also note that since its production is done on an order basis, there is no assurance on a constant and consistent flow of revenues.
CARE has assigned an “IPO Grade 2” to the proposed initial public offering of the company, which indicates “below average fundamentals”. Investors must note these facts before investing.