Like the trend seen in most recent IPOs, retail investors have rushed to lap up the Rolex Rings IPO from the word go, with the retail portion being oversubscribed within a few hours of opening on Wednesday. But for those waiting to take a decision, there is no reason to rush. With IPOs a dime a dozen to choose from and limited funds at your disposal, Rolex Rings is not a compelling buy despite its reasonable valuation at about 25 times FY21 earnings (peer MM Forgings and Ramkrishna Forgings trade at about 35 times trailing earnings). Investors can wait for traction in revenue and profit growth, as well as for the company to come out of the debt restructuring programme to take a call on investing in the stock.
Business
Rolex Rings manufactures bearing rings (58 per cent of revenues) and auto components (such as wheel hubs, shafts, spindles and gears (42 per cent). It caters to bearing makers such as Timken, Schaeffler, SKF, NRB and NBC in India. Its auto component business is mainly export focused (56 per cent of revenues), targeted at auto parts suppliers as well as auto makers, including those in the electric vehicle (EV) space. Rolex is raising Rs 716 – 731 crore from the IPO, of which Rs 660-675 crore is an offer for sale from Rivendell PE.
Concerns
The top and bottom-line numbers don’t inspire confidence. Revenue has dropped from Rs 904.3 crore in fiscal 2019 to Rs 666 crore in the year ended March 2020 and then to Rs 616.3 crore last fiscal, thanks to a slowdown in the automotive industry initially, followed by the Covid outbreak. Profits have moved up steeply from Rs 59 crore in fiscal 2019, to Rs 86.9 crore in FY21 (Rs 52.9 crore in FY20). However, a sharp fall in interest costs due to repayment of loans as well no tax outgo due to MAT credit entitlement has helped the bottom line in FY21. But for this, the EPS would have also been lower, pushing up the valuation of the stock.
Secondly, the operating margin in FY21 has been the weakest, at 18.2 per cent, vs 19.6 per cent in FY20 and 22.9 per cent in FY21. A combination of poor demand as well as an increase in the price of steel, the key raw material (especially in FY21) has impacted margins. According to the company, input price fluctuations are reviewed with export customers every quarter and with domestic clients every month and the changes, passed on. However, with prices of commodities, including steel, on a bull run and demand still not in full throttle both domestically and globally, margin pressures in the next few quarters must be watched closely. A higher proportion of value-added products (such as those that require machining and higher precision or EV supplies, for instance) – which are mainly present in export business - could help cushion margins. The company is targeting export contribution to go up to 60-65 per cent. About three-fourths of its working capital (WC) exposure is in US dollars and Euro in the form of pre- and post-shipment finance. This acts a natural hedge to forex fluctuation risk, to an extent.
The third concern is on the debt front. After raising debt of Rs 220 crore in 2007 for an expansion worth Rs 350-400 crore, the company came under the Corporate Debt Restructuring (CDR) programme, following the crash in demand led by the global financial crisis of 2008. Beginning with Rs 470 crore under CDR, the company now has only Rs 23 crore, which is expected to be repaid this year. Capacity utilisation of just 34 per cent in its forging lines and no big capex requirement in the near-term augurs well for the company. However, debt to equity ratio is on the higher side at 0.7 times as of FY21, though down from 1.8 times in FY19.
Being under CDR has affected the company on the WC front, with Rolex not being able to shore up its WC borrowings, despite the increased size of operations. With the company’s credit rating taking a knock and some banks in its consortium lenders under the PCA framework, WC borrowing has been hard to come by so much so that it delayed servicing debt in 2018/2019. In FY21, due to extended timelines for receivables following the Covid outbreak, debtor days moved up to 101 days from 70 days in the last two years, bringing back pressure on WC. The company is looking to ease this pressure a bit by raising Rs 56 crore from the IPO (the fresh issue component) for WC purposes. It expects the situation to improve once it comes out of CDR. Equity shareholding of the promoter and promoter group at 58.99 per cent as on date of prospectus is pledged with the consortium.