Innoventive Industries LTD: Innovative Product Line

ICICI Securities Limited
IPO Review
April 27, 2011
Rating matrix
Innoventive Industries Ltd

: Unrated
Rating
Issue Details
Issue opens Issue closes for QIB bidders
Price band | 117-120

26-Apr-11 28-Apr-11 29-Apr-11 219.6 1.83- 1.88 crore [] [] [] 50 shares
Innovative product line

Innoventive Industries Ltd (IIL) was acquired by Chandu Chavan in 2002. The company is a multi-product engineering company engaged in the manufacturing and sale of precision steel tubes, tubular components, auto components, machined components and other steel products, which find application in diverse industrial sectors such as transportation, oil & gas, power, farm equipment and general engineering.
for Retail and Non-institutional bidders Issue size (| crore) No of shares on offer QIB Non-institutional Retail Minimum lot size
Investment rationale Expansion of manufacturing capacity for CEW tubes, other value added products
IIL is expanding its capacity from 23,265 MT to 76,701 MT by 2012. The funding for this expansion will be done from the proceeds of the IPO.
Objects of the Issue

Capacity expansion Repayment of debt General corporate purpose
(| crore)
163.00 50.00 7.00
Focus on technology based innovative products & cost efficient processes

IIL has strong in-house R&D capabilities and has successfully implemented the use of cold pilgering process to make CEW tubes directly from ERW tubes without the use of draw bench.
Fact Sheet
Pre Issue Promoter and Promoter group Bodies Corporate Public 70.3 29.7 Post Issue [] [] []
Expansion of product portfolio

IIL is also expanding its product portfolio by designing new products such as hydraulic cylinders, bearing spacers and drag linkages. These efforts and initiatives will help the company to expand its addressable market.
Financial Summary
| crore Total Income EBITDA EBITDA (%) Depreciation Finance Cost Tax PAT after MI FY08 325.4 34.8 FY09 371.1 61.0 FY10 425.2 111.5 9MFY11 457.0 119.1
Long-term relationships with multiple customers

IIL has established long term relationships with customers like Bajaj Auto, Salem Steel North America, LLC, Bharat Heavy Electricals, Thermax Ltd, Lindsay International and Alstom Projects Ltd. Its ability to satisfy its customers requirements helps the company to expand business from its existing customers as well as attract new customers. Exhibit 1: Financial Snapshot
| crore FY08 325.38 34.82 FY09 371.10 61.01 FY10 425.15 111.46 9MFY11 457.02 119.14 Total Income EBITDA EBITDA (%) Depreciation Finance cost Tax PAT after MI Net profit (%)
Source: RHP, ICICIdirect.com Research
10.7 7.1 15.6 5.7 8.0
16.4 11.6 35.3 7.7 14.1
26.2 16.3 56.0 7.7 34.3
26.1
16.5 53.3 11.4 36.9
Analysts name
Pankaj Pandey pankaj.pandey@icicisecurities.com Shraddha Shroff shraddha.shroff@icicisecurities.com
10.7
7.08 15.55 5.67 8.01
16.4
11.61 35.30 7.72 14.14
26.2
16.32 56.02 7.69 34.34
26.1
16.49 53.28 11.41 36.92
2.5
3.8
8.1
8.1
ICICIdirect.com | Equity Research

Company Background
IIL was acquired by Chandu Chavan in 2002. It is engaged in the manufacturing and sale of precision steel tubes, tubular components, auto components, machined components and other steel products, which find application in diverse industrial sectors such as transportation, oil & gas, power, farm equipment and general engineering. The company has six manufacturing facilities located across Pune and Silvassa. The key clients of the company are Bajaj Auto, Bharat Heavy Electricals, Thermax Ltd, John Deere India, Sundaram Industries Ltd, Gabriel India Ltd and Alstom Projects Ltd. IIL has three subsidiaries namely Sankalp Forging Pvt Ltd (51%), Saicon Steel Pvt Ltd (51%) and Arihant Steel and Metal Wires Pvt Ltd (100%).
Exhibit 2: Subsidiaries
Key Subsidiaries Sankalp Forgings Private Limited (Sankalp or SFPL) IIL stake 51% 1)Engaged in manufacturing fully machined ready to assemble parts such as machined tubing, coupling, casing couplings, pup joints, cross overs etc, which are used in oil rigs/oil wells 2)Engaged in manufacturing open die and closed die forgings, castings used in precision engineering components, oil fields and automobile components 1)Engaged in converting hot rolled steel coils (HR coils) to cold rolled steel coils (CR coils) and selling the finished product to diverse industries for various applications 2)Engaged in manufacturing and selling laminates and stampings, primarily to electrical industries
Saicon Steel Private Limited (Saicon or SSPL) IIL stake 51% Arihant Steel and Metal Wires Private Limited (ASMWPL) IIL stake 100%
Engaged in manufacturing of steel wires using steel scrap generated in our various manufacturing plants
Page 2

Exhibit 3: Product Portfolio
Product Basket
ERW Precision Tubes
CEW Tubes
Auto Components
Power Equipment Components 1)Manufacture membrane strips and energy tubes 2)Used in boilers and heat exchangers
Oil Country Tubular Goods (OCTG): 1)Manufacturesfull y machined ready-to-assemble parts such as machined tubing, couplings, casing couplings, etc 2)Used in Oil & Gas sectors
Other Steel Products 1)Manufacture, through our subsidiaries, cold rolled (CR) sheets, metal wires, laminates and stampings 2)Used in transportation, consumer durables, energy and general engineering sectors
1)Manufacures from mild and carbon steel alloys 2)Caters to transportation, power and general engineering sectors
1)It is the value added product manufactured using cold pilgering process 2)Caters to power, farm equipments, transportation and general engineering sectors.
1)Manufacture a variety of machined components, press fabricated parts, welded components and assemblies 2)Caters to transportation and farm equipments sector
Objects of the issue

The company aims to utilise the funds for the following purposes: Exhibit 4: Objects of the issue
Capacity expansion Repayment of debt General corporate purpose
(| crore)
163.00 50.00 7.00
Page 3

Investment Rationale
Expansion of manufacturing capacity for CEW tubes, other value added products
The company is currently undertaking de-bottlenecking of its existing facility at Pimple Jagtap, Pune where it is expanding its capacity from 23,265 MT to 28,785 MT by the end of FY11. Post debottlenecking, the company plans to further expand the capacity to 76,701 MT by 2012. To fund this expansion, the company will use the proceeds raised from the IPO.
Focus on technology based innovative products, cost efficient processes

The company has strong in-house R&D capabilities and has successfully implemented the use of cold pilgering process to make CEW tubes directly from ERW tubes without the use of draw bench. The company will continue to focus on introducing technology based innovative products, which will result in significant cost saving for the company. This will also enable the company to ensure that the customer gets high quality products.
Expansion of product portfolio

IIL sees significant opportunities in certain applications where seamless tubes, bars and non-ferrous tubes and tubular components can be replaced with its CEW tubes and machined components. The company is also expanding its product portfolio by designing new products such as hydraulic cylinders, bearing spacers and drag linkages. These efforts and initiatives will help the company to expand its addressable market.
Long-term relationships with multiple customers

Customer satisfaction is the focus of IILs product development and process improvement. IIL has established long term relationships with its customers like Bajaj Auto, Salem Steel North America, LLC, Bharat Heavy Electrical, Thermax Ltd, Lindsay International, Alstom Projects Ltd. The companys product development team gets involved with customers at the product conceptualisation stage to help customers achieve their desired quality and cost parameters. Its ability to satisfy its customers requirements helps the company to expand business from its existing customers as well as attract new customers.
Key concerns
High leverage
As on December 30, 2011, the debt of the company stands at | 356 crore while the debt-equity ratio is ~2.39x, which is significantly higher compared to the industry average.
Inability or delay in obtaining patent
IIL has innovated in the use of cold pilgering process to make CEW tubes directly from ERW tubes. The company has applied for a patent of this process. However, failure in obtaining the same can result in competition risk and resultant pressure on the companys margins.
Page 4

Exhibit 5: Profit and loss
(In | crore) Particulars Sales Other income Total Revenue Expenditure Raw Materials Staff cost Other mfg expenses Selling exp EBITDA Dep EBIT Interest PBT Add profit from associate Tax PAT Less unrealized profit on stock Less share onf MI Profit after Minority Interest OPM NPM
FY08 323.06 2.32 325.38 288.24 229.67 8.21 34.40 15.95 34.82 7.08 30.06 15.55 14.51 0.15 5.67 8.99 0.43 0.55 8.01 11% 3%
FY09 361.96 9.14 371.10 300.95 232.41 15.30 30.98 22.26 61.01 11.61 58.54 35.30 23.25 7.72 15.53 1.39 14.14 17% 4%
FY10 421.48 3.68 425.15 310.02 228.43 21.50 35.47 24.62 111.46 16.32 98.82 56.02 42.80 7.69 35.11 0.77 34.34 26% 8%
9m FY11 453.17 3.85 457.02 334.03 260.18 17.43 34.72 21.71 119.14 16.49 106.49 53.28 53.21 11.41 41.80 4.88 36.92 26% 9%
Page 5

Exhibit 6: Balance sheet
| Crore Share Capital Equity Share Capital Reserves & Surplus Statutory Reserve Fund Revalution Reserves Debit balance in P&L Account Total Shareholders Funds Borrowings Secured Loans Unsecured Loans Total Deferred tax liability Minority interest Total Liabilities Fixed Assets Gross Block Less: Accumulated Depreciation Net Fixed Assets Capital Work in Progress Total Fixed Assets Investments Deferred Tax Assets Goodwill on Consolidation Current Assets Inventories Sundry Debtors Cash & Bank Balances Other current assets Current Liabilities and Provisions Current Liabilities Provisions Net Current Assets Misc Expenditure not written off Total Assets
FY08 363.84 0.06 0.03 (8.45) 355.49 8.60 48.49 57.09 0.24 11.79 424.62
FY09 368.84 0.06 0.03 (63.02) 305.91 8.11 47.65 55.76 4.05 8.78 374.50
FY10 576.24 0.06 3.39 0.26 (74.81) 505.14 113.52 55.27 168.78 0.32 74.15 748.39
9MFY11 826.24 0.06 3.72 0.26 (90.44) 739.84 144.17 33.60 177.76 37.09 954.70
74.86 1.54 73.32 0.69 74.01 268.67 12.83 25.10 0.22 4.00 135.24 94.26 1.19 69.12 424.62
82.96 8.34 74.62 1.30 75.91 221.98 0.03 13.72 38.68 5.38 12.88 50.36 42.70 1.73 62.86 374.50
140.48 34.22 106.27 1.62 107.89 100.93 0.38 228.78 101.23 144.99 18.52 128.34 75.92 6.73 310.42 748.39
303.48 52.09 251.39 3.36 254.75 112.13 0.86 315.99 111.00 192.07 7.59 105.17 136.60 9.57 269.65 1.31 954.70
Page 6

Exhibit 7: Sales vis--vis EBITDA margins
500 450 400 350 300 250 200 150 100 50 0 421 323 362 453 30% 25% 20% 15% 10% 5% 0% FY08 FY09 Sales
FY10
9m FY11
EBITDA Margins
Exhibit 8: Margins trend

30% 25% 20% 15% 10% 5% 0% 11% 3% FY08 4% FY09 EBITDA Margins
26% 17% 8%
26%
9%
FY10
9m FY11
Net Profit Margins
Exhibit 9: RoE & RoCE trends

50% 40% 30% 20% 10% 0% FY08 FY09 ROE
45% 28% 13% 33% 24% 16% 25% 21%
FY10 ROCE
9m FY11
Page 7

RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: 20% or more; Buy: Between 10% and 20%; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 7th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka, Andheri (East) Mumbai 400 093 research@icicidirect.com ANALYST CERTIFICATION
We /I, Pankaj Pandey PGDBM Shraddha Shroff CFA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.
pankaj.pandey@icicisecurities.com
Disclosures:
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