Sanghvi Forging''s issue looks expansive compared with its peers. Investors with high risk appetite can subscribe to the issue

Vadodara-based Sanghvi Forging and Engineering (SFEL) plans to raise Rs 36 crore through an initial public offering (IPO) to partially fund its 15,000 million tonne per annum (MTPA) open die forging unit. This unit will enable the company to supply large single piece forgings, majority of which are currently being imported in India. But when compared to other forgings manufacturers, the issue appears expensive.

Business
Sanghvi Forging manufactures and exports forging products for the non-automotive sector. With an installed capacity of 3,600 MTPA it caters to clients like Mazagon Dock, IOCL, HPCL and GAIL among others with product offerings, which include forged flanges, closed and open die forgings and machine components. Since its products are used by a variety of sectors such as oil and gas, power, shipbuilding and defence, it is less prone to industry downturns.

The key raw materials used in its production process include carbon steel, alloy steel and stainless steel, which is sourced from domestic as well as foreign markets. SFEL procures the required raw materials at the time of securing the order and hence is not exposed to fluctuations in input prices.

The company is now in the process of changing its product mix by reducing its focus on high-volume-low-value standard products to made-to-order products, which have higher margins. These products, which can weight up to 40 tonne each, will be made from its new 15,000-mtpa open die forging unit.

The proposed project will reduce the lead time for major customers in India which are currently importing a majority of their forging requirements, thereby enabling SFEL to better leverage its client base.

Financials
Over the past four years, SFEL''s net sales have grown at 17% whereas net profit has grown at 18%, when compounded annually. It has been consistently improving its operating profit margin from 13% in 2006 to 20% in the nine months ended December 2010. The company has been steadily generating cash from its operations over the years from Rs 50 lakh in 2006 to Rs 2.83 crore in 2010. In the first three quarters of FY10, operating cash flow almost tripled, which is a point of concern, since sales growth have not kept pace.

Valuations
At Rs 85, Sanghvi Forging quotes at 17 times its nine months earnings per share, when annualised. Compared with Ramkrishna Forgings and MM Forgings, which are available at 11 times and 5.2 times, respectively, their 12-month trailing price-earnings ratio, Sanghvi Forging is expensive.

Concerns
The company''s earnings per share has been gradually decreasing over the past three years. Further, due to the size of the IPO, only investors with a high-risk appetite should participate.