VMS Industries to raise Rs 25.75 crore from its IPO

VMS Industries

• VMS Industries Limited is coming out with a 100% book building; initial public offering (IPO) with equity shares of Rs 10 each in a price band Rs 36-40 per equity share.
• At least 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% would be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open on May 30, 2011 and will close on June 2, 2011.
• The shares will be listed on BSE only.
• The face value of the share is Rs 10 and is priced 3.6 times of its face value on the lower side and 4.0 times on the higher side.
• Book running lead manager to the issue is Ashika Capital Limited
• Compliance Officer for the issue is Hemal Patel.

 Profile of the company:

VMS Industries was originally incorporated as ‘Varun Management Services Private Limited’ on December 2, 1991 under the Companies Act, 1956 at Bhavnagar. The name of the Company was changed to ‘VMS Industries Private Limited’ vide fresh Certificate of Incorporation dated May 22, 2007. Subsequently the Company was converted into a public limited company and its name was changed to ‘VMS Industries Limited’ vide fresh Certificate of Incorporation dated January 29, 2010. Initially the object of the company was carrying on the business of providing different kinds of consulting and information technology services. During 1992- 1994, the company was engaged in computerization of land revenue records of Bhavnagar Municipal Corporation. Thereafter, in the year 1995-96 the Company undertook the assignment of computerization of Ration Cards and Ration Shops of Bhavnagar Municipal Corporation. The present business mainly consists of two business segments, Ship Recycling Activities and Offshore business activities & supporting services

The Ship Breaking Industry was revived in the year 2003-04 and therefore it decided to diversify its activities. During the year 2004, Gujarat Maritime Board auctioned vacant plots and under open bid it have been allotted vacant Plot No. 160 at Alang-Sosiya Ship Breaking Yard admeasuring 1350 sq. meter on a lease basis. However, the company could not start ship breaking activities due to change in policy for ship recycling plant, requiring higher size (2700 sq meters ) of plot and therefore it could not get permission for utilization of plot from GMB. Meanwhile, in the year 2007, the plot size was enlarged to 2700 sq. meter as per the instructions given by the Inter Ministerial Committee constituted by Hon. Supreme Court, by merging the adjoining Plot No. 159 and the company was permitted to use the merged Plot No. 160M for a period of 5 years with effect from 17.03.2007 to 16.03.2012 and subject to renewal thereafter.

IPO Grading:

ICRA has assigned an IPO Grade 1/5 to the proposed IPO, indicating poor fundamentals to the initial public issue of the company.

Proceeds are being used to:

To raise capital for the following business and operational requirements of the company:

• Purchase of Machineries to be installed at the existing Ship Recycling Plot.
• Setting up of Corporate Office at Ahmedabad
• Meeting Long-term Working Capital Requirement
• Meeting the Issue Expenses.

 Industry Overview:

Until the late 20th century, ship breaking took place in port cities of industrialized countries such as the United Kingdom and the United States. Today, most ship breaking yards are in Pakistan, Bangladesh, and India. Turkey performs just a handful of demolitions each year. Though western countries have developed superior technologies, which result into high productivity, Asian countries have come up a low cost proposition for two reasons. One, relatively the manpower is very cheap in these countries. So even at a lower productivity rate, operations in these countries prove to be relatively cheaper. Second, western countries have very high standards of safety, which calls for costly measures for ensuring safety.

Ship Recycling is not new to India for it has been known of this activity ever since 1912 in Kolkata and Mumbai. The ship recycling activity in those days was a part of the larger colonial economy like plantations and mining. Steel scrap was worthwhile even then and countries that had yards to recycle ships were often considered to be economically fortunate. Indeed, ship recycling became very important at the end of the two World Wars, especially after the World War II. Further, after the oil boom in the Middle East, oil became a much transported commodity and large oil tankers added to the fleet. Refrigeration techniques that grew around the early 1950’s, too led to the emergence of the large refrigeration vessels. All of these started to age by the middle of 1970’s and the ship recycling activity reached new heights in the Western countries. When the first economic recession came around 1984 and the fleet owners thought that it was better to scrap ships than to maintain them, there was a huge backlog of ships to be demolished. With the recession on, labour appeared to be far too costly and steel scrap yielding far less prices, ships had to look for cheaper labour elsewhere. India, stepped in at this juncture.

The re-rolling mills were already facing an expansion around the middle of 1970’s and they now grew up very fast in North and West India. The rerolling mills were driven mainly by the boom in the construction sector in these parts that emerged as a result of rapid urbanization. Ship recycling became a source of steel scrap, whether for melting or directly re-rollable material in the re-rolling mills. In terms of price, ship-breaking scrap historically is more expensive than scrap from railways or other melting scrap, but it is cheaper than ingots from the electric arc furnaces and the billets and the semis from the integrated steel plants. Hence, ship-recycling scrap conventionally has proved to be a direct competitor of the integrated steel mills in their market for semis.

One of the reasons why the ship recycling activity became a boon for India was that, the middle of 1980’s was a time of the rise of electric arc furnace and a rise in demand for steel melting scrap. The re-rolling mills were already facing an expansion around the middle of 1970’s and they now grew up very fast in North and West India. The rerolling mills were driven mainly by the boom in the construction sector in these parts that emerged as a result of rapid urbanization. Ship recycling became a source of steel scrap, whether for melting or directly re-rollable material in the re-rolling mills. In terms of price, ship-breaking scrap historically is more expensive than scrap from railways or other melting scrap, but it is cheaper than ingots from the electric arc furnaces and the billets and the semis from the integrated steel plants. Hence, ship-recycling scrap conventionally has proved to be a direct competitor of the integrated steel mills in their market for semis.

The ship recycling activities create economic opportunities for thousands of labourers and contribute to the economic growth of regions. The average life of a ship is about 27 years. Once a ship loses its economic life, it has to be replaced with a new one. Practically 100% of the ship is recycled. Ship breaking can be claimed to be a sound sustainable industrial activity. Ship demolition remove large volumes of obsolete tonnage from fleets which otherwise require to huge monetary consideration to manage if not dismantled. As per the 2007 report of working group for ship repair industry for 11th Five Year Plan (2007-2012), the industry has the potential of Rs. 2440-2790 crore per year.

Peer Group Comparison (Rs. in Millions)

Pros and strengths:

Experienced Promoters cordial relation with workers- The company’s promoters are having an operating track record of about two decades, and part of its senior management and actively involved in the day to day operations of the company. They have strong relationship with the suppliers and the customers. Apart from this the company enjoys cordial relations with its workers and there has been no labour union of workers. Further, there have been no strikes, lock-outs or any labour protest in the past. It has have qualified, experienced and dedicated team and skilled workforce. Hence the company’s promoters, senior management with their experience in business will enables it to execute the projects successfully.

Diversified client base- The company cater to various clients based in different geographical locations, and are from different industries. Its strategy is to cater to a wider spectrum of customers, which insulates it from the risks associated with dependency on any particular class and or limited industrial customers.

Locational Advantage - The company’s Ship Recycling plot is located at Alang-Sosiya Ship Breaking Yard, Sosiya Village, Bhavnagar. The location has a very high inter-tidal gradient. This enables the ship to beach right at the shore during high tide and when the tide recedes the ship stands almost at a dry-dock. This reduces the total working time on each ship. The plot also enjoys the benefit of relatively moderate rainfall and shelter from strong tides and winds and also absence of rocks around the area. Well connectivity to the road and close proximity of Bhavnagar facilitate it the efficient movement of its products.

Tax Incentives - The shipping activities are covered under section 115V of Income Tax Act, 1961 of Tonnage Tax Scheme. Company’s Tug is being eligible for the benefits under section 115V of Income Tax Act, 1961.Under this section, per day deemed income will be calculated on the basis of net registered tonnage of vessel, irrespective of actual income. Thus the average Income tax rate under this section will be approximately 1/10th of the Income Tax rates prescribed under the Income Tax Rules.

Risks and concerns:

Yet to place any order for ship recycling plot- The company has not placed the orders for the entire equipments required at its Ship Recycling Plot aggregating to Rs 5.20 crore. It is having proposal to purchase the equipments at its Ship Recycling Plot aggregating to Rs 5.20 crore, which is approximately 21.67% of the Issue Proceeds and is subject to risk on account of inflation in the price. It has received the necessary quotations from the vendors for the supply of the equipments and will be placing the orders at an appropriate time. Any delay in placing of orders and procurement of the same will delay the schedule of implementation which may have an adverse effect on the operations and profitability of the Company. There may also be a possibility of delay at the suppliers’ end in providing timely delivery of these equipments, which inturn may delay the schedule of implementation.

Dependence on external agencies- The company’s proposed business plan is dependent on performance of external agencies, like civil contractors, equipment suppliers who are responsible for construction of buildings, installation, commissioning and testing of equipments. If the performance of these agencies is inadequate in terms of the requirements with respect to timeline and quality of performance, it may require to replace these external agencies even, which could result in incremental cost and time overruns of the proposed business plan, and in turn could adversely affect the business operations and profitability.

Geographical concentration risk- The company’s ship recycling operations are geographically concentrated at Sosiya Ship Breaking Yard s the  ship recycling unit is located at Sosiya Ship Breaking Yard, in Sosiya Village, Bhavnagar District, Gujarat and any significant social, political or geological disruption in this area, or changes in the state or local governments, even on a short term basis, could impair the operational ability which could have an adverse effect on the business and results of operations.

Forex and interest rate fluctuation risk- The company is exposed to interest rate risk and foreign exchange though it currently do not enter into any swap or interest rate hedging transactions in connection with its loan agreements. But it may enter into interest hedging contracts or other financial arrangements in the future to minimize the exposure to interest rate fluctuations. Any increase in interest expense due to factors beyond its control, such as governmental, monetary and tax policies and domestic and international economic and political conditions, may have an adverse effect on the business prospects, financial condition and results of operations.

Outlook:

VMS Industries is mainly into business of Ship Recycling Activities and Offshore business activities & supporting services. The company is having experienced management having an operating track record of about two decades also the company has not faced any labour unrest in pat which is a common and frequent issue in that business. The company is having a diversified client base spread in different geographies and industries. Also the company’s Alang-Sosiya Ship Breaking Yard has a locational advantage, above all the company’s business activities gets tax incentives, its Tug is eligible for the benefits under section 115V of Income Tax Act.

On the concerns side the company is relatively new in the business and require various statutory and regulatory licenses, permits and approvals to operate its business. Also, the funds requirement and deployment of the proposed business plan is based on management’s internal estimates and have not been appraised by any bank or financial institution or any independent entity. Not only that the proposed business plan is dependent on performance of external agencies.

The shares of the company are being offered in a price band of Rs 36-40. The company expects to raise about Rs 25.75 crore from the issue. Based on the EPS of Rs 2.77 the P/E comes at 13x at the lower of the price band and 14.44x at the upper end of the price band.  The company is having a capable management team and the aggressive plans to expand its ship recycling activity and off-shore supporting services. The company’s strategy is to consolidate its position in Gujarat and penetrate across the country. The strategic location of its Plot at Alang- Sosiya will provides it with significant advantages and efficiencies, resulting in lower overheads and cost effectiveness. On the flipside the company is having limited experience in ship-recycling business and presently holds a limited operation space. The ship recycling business is likely to achieve high rate of growth in near to medium term but it has moderate profit margins due to fierce competition also the industry is fragmented, and is characterized by high competitive intensity, so despite of company having an aggressive business plan we will suggest an avoid in the issue.