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Cebbco ipo-011010
1. IPO Note | Mid Cap
October 1, 2010
CEBBCO AVOID
Issue Open: September 30, 2010
Join the ‘Ban’d wagon Issue Close: October 5, 2010
Commercial Engineers & Body Builders Company (CEBBCO) is one of the leading
Issue Details
designers and manufacturers of vehicle bodies for goods commercial vehicles
(CV) in India. The company is also involved in the refurbishment of railway Face Value: Rs10
wagons. It proposes to partially utilise the IPO proceeds to set up a wagon Present Eq. Paid up Capital: Rs42.9r
manufacturing unit. CEBBCO’s core business fetches a P/E of 25x on FY2012
Offer Size: 1.22cr-1.20cr Shares*
estimates at the upper price band. Moreover, to justify the implied market capital
Post Eq. Paid up Capital*: Rs54.9cr -
of Rs698cr, the company’s wagon manufacturing plant would have to operate at Rs55.1cr
100% utilization within one year and generate profitability in line with existing
Issue size (amount): Rs172cr
players, which we believe at the current juncture appears stretched. Hence, we
Price Band: Rs125-127
recommend Avoid to the IPO.
Promoters holding Pre-Issue: 67%
Opportunities galore: The Eleventh Five-Year Plan (2007-2012) has outlined a
Promoters holding Post-Issue: 52.0% - 52.2%
number of infrastructure expansion projects, including those in the rail and road
Note:*at Lower and Upper price band respectively
sectors. The CV industry and the railway transportation network is expected to
benefit from the pan-sector investments in infrastructure as CVs and trains are an
integral part of the construction process – from sourcing of raw materials, their
Book Building
transportation to installation and fabrication. Total investment in infrastructure
during the Eleventh Plan is projected at Rs205,615cr. In the wagon manufacturing QIBs At least 60%
business, at present, there are about 13 players. Six are in the public sector and Non-Institutional At least 10%
seven companies in the private and joint sector. It may be noted that the PSUs, Retail At least 30%
which account for 30-40% of market share of the wagon industry, have not been
able to execute the orders since the last three years.
Core business faces high competition from unorganised sector: CEBBCO’s core Post Issue Shareholding Pattern
business of manufacturing and supplying vehicle and locomotive bodies faces Promoters Group 52.2
intense competition from the large unorganised sector.
MF/Banks/Indian
FIs/FIIs/Public & Others 47.8
High contribution from single buyer resulting in low bargaining power: CEBBCO
derives significant revenues from its single largest customer, Tata Motors (TTML)
restricting its bargaining power. In FY2009 and 9MFY2010, the company derived
a substantial 69% and 49% of its total revenues from TTML, respectively.
Moreover, given intense competitive pressures, CEBBCO is compelled to sell its
products at low prices in turn impacting its margins. The company also doesn’t
have in-built clause in the contracts to pass through the fluctuation in raw material
prices.
New Business – Difficult to break ground: The company expects to partially utilise
the IPO proceeds to set up a manufacturing unit for wagons. However, we believe
that CEBBCO being a relatively new entrant in the business has yet to prove itself
in winning tenders, executing the same and generating profitability at par with the
existing players.
Sageraj Bariya
+91 22 4040 3800 Ext: 346
Email: sageraj.bariya@angeltrade.com
Please refer to important disclosures at the end of this report 1
2. CEBBCO| IPO Note
Company Background
CEBBCO is one of the leading designers and manufacturers in India of vehicle
bodies for goods CVs. The company produces vehicle and locomotive bodies for
diverse applications for road and railways transportation. CEBBCO is also involved
in refurbishment of and manufacture of components for railway wagons, coaches
and locomotives. The company operates through five factories, with four units
located in Madhya Pradesh and the fifth in Jharkhand.
The company's CV division caters to the needs of a broad spectrum of industries
and sectors, including mining, road construction, goods transportation, solid waste
management, municipal applications and the Indian Defence. The Railway division
refurbishes old wagons and manufactures of components for wagons, coaches
and locomotives.
Exhibit 1: CV division - Key product offering
Sector/Industry Products
Mining & Road Construction Tipper bodies
Tanker bodies
Goods Transportation Load cargo bodies
Refrigerator-fitted vehicle bodies and containers
Trailer bodies (including for box trailers, tip trailers, skeletal
trailers and flat bed trailers)
Solid Waster Management Skip-loaders
Garbage-bin collectors
Municipal Applications Water tanker bodies
Light recovery vehicle bodies
Garbage tippers
Defense Sector Troop carrier vehicle bodies
Prison van bodies
Water bowser bodies
Miscellaneous Applications Vehicle bodies for transportation of animals
Fire engine bodies
Ambulance bodies
Source: Company, Angel Research
October 1, 2010 2
3. CEBBCO| IPO Note
Issue Details
CEBBCO is tapping the IPO market with an issue size of Rs172cr (Rs153cr through
fresh equity issue, and balance Rs19cr through an offer for sale) in the price band
of Rs125-127/share, resulting in a public issue of 1.22cr and 1.20cr equity shares
of face value Rs10. This results in promoter shareholding dilution of 15.2% and
15.4% at the upper and lower price band, respectively. The company proposes to
utilise the IPO proceeds to set up a new manufacturing unit for its railway division,
pre-pay identified loans and general corporate purposes.
Exhibit 2: Objects of the issue
Particulars Rs cr
Capex for the Railway project 80.3
Loan repayment 59.0
General corp purpose
Total 139.3
Source: Company, Angel Research
Offer for sale is by Private Equity Investor New York Life Investment Management
India Fund (12,85,101 equity shares) and promoters (243,486 equity shares)
through the group company, “Commercial Automobiles Private Limited”.
Tata Capital (through Tata Capital Growth Fund I private equity fund) recently
bought 60,05,401 equity shares (14% of pre-issue equity) of CEBBCO from NYLIM
and promoter group trusts and company.
Exhibit 3: Shareholding pattern
Shareholders Pre-Issue Post-Issue
No of shares % No of shares %
Promoter 28,901,355 67 28,657,869 52
NYILM 7,988,964 19 6,703,863 12
Tata Capital 6,005,401 14 6,005,401 11
Public - 13,575,831 25
Total 42,895,720 100 54,942,964 100
Source: Company, Angel Research
October 1, 2010 3
4. CEBBCO| IPO Note
Recommendation Rationale
Core business faces high competition from unorganised sector
CEBBCO’s core business is primarily manufacturing and supplying vehicle and
locomotive bodies for commercial goods vehicle. The market is dominated by the
unorganised sector and hence we believe that the company faces intense
competition. Further, the Indian transportation/logistics market, which is
dominated by the unorganised sector are major buyers of trucks and CV’s used for
transportation of goods. Thus, cost plays an important role in choosing the vendor
of building the vehicle body. Usually, buying a product from an organised player
is always higher compared to the unorganised sector. Hence, higher cost acts as a
key deterrent for the CV buyers to opt for players like CEBBCO.
High contribution and weak bargaining power from single buyer
Historically, CEBBCO has derived significant revenues from its single largest
customer, TTML. The company derived 86%, 74%, 69% and 49% revenues from
TTML in FY2007, FY2008, FY2009 and 9MFY2010, respectively. Given the
competitive nature of the industry, CEBBCO is compelled to sell its products at low
prices, in turn impacting margins. Additionally, any delays in payment from TTML
are interest free upon overdue, which indicates the low bargaining power that
CEBBCO has with its key customers.
Inability to pass through raw material prices
CEBBCO’s primary raw materials include steel and hydraulic jacks, which its buys
more than a month in advance. The steel prices are highly volatile and cyclical in
nature, and the company doesn’t have an in-built clause to pass through the
fluctuation in the raw material prices.
New business – Difficult to break in
The company expects to partially utilise the IPO proceeds to set up a
manufacturing unit for wagons. However, we believe that CEBBCO being a
relatively new entrant in the business has yet to prove itself in winning tenders,
executing the same and generating profitability at par with the existing players.
October 1, 2010 4
5. CEBBCO| IPO Note
Industry Overview
CV industry on up tick
The Eleventh Plan has outlined a multitude of infrastructure expansion projects,
including those in the rail and road sectors. The CV industry and the railway
transportation network is expected to benefit from the pan-sector investments in
infrastructure as CVs and trains are an integral part of the construction process –
from sourcing of raw materials, their transportation to installation and fabrication.
Total investment in infrastructure during the Eleventh Plan is projected at
Rs205,615cr.
India is one of the largest markets for CVs in the world. Currently, upwards of 60%
of all freight traffic is transported by CVs across India’s vast road network. The
domestic players make up the lion’s share of domestic CV sales in India with TML,
Ashok Leyland and Mahindra & Mahindra accounts for 88% of the market.
Exhibit 4: CV sales trend
Particulars FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 1QFY10 1QFY11
Domestic
M&HCVs
Passenger 25,638 27,549 28,742 38,698 34,614 42,873 7,358 11,574
Goods 172,868 179,883 246,399 234,294 147,451 201,538 31,381 59,642
Total M&HCV's 198,506 207,432 275,141 272,992 182,065 244,411 38,739 71,216
LCVs
Passenger 19,982 22,317 23,779 27,682 26,779 34,421 9,598 11,566
Goods 99,942 121,826 168,503 188,140 173,854 252,373 48,374 67,095
Total LCV's 119,924 144,143 192,282 215,822 200,633 286,794 57,972 78,661
Total - Domestic 318,430 351,575 467,423 488,814 382,698 531,205 96,711 149,877
Domestic CV break-up (%)
Passenger 14 14 11 14 16 15 18 15
Goods 86 86 89 86 84 85 82 85
Domestic CV - % YoY
Passenger 9 5 26 (8) 26 36
Goods 11 38 2 (24) 41 59
Source: Company, Angel Research
According to SIAM, annual domestic sales of CVs have declined from 272,992
units in FY2008 to 182,065 units in FY2009. CV sales in FY2009 were severely
impacted by the global economic crisis. However, FY2010 saw a trend reversal
with the CV sales registering a strong rebound and posting 39% yoy growth to
244,411units. Thus, over FY2005-10 domestic sales register a CAGR of 10.7%.
October 1, 2010 5
6. CEBBCO| IPO Note
Marginal impact of law on unorganised players
Historically, the CV manufacturers (OEMs) only manufacture vehicle chassis and
sell it to the final customers, who then take the chassis to the independent garages
(i.e. unorganised sector) to complete the body building process. On account of the
defective body building by the independent garages, the vehicle chassis to known
to get spoilt with the blame for the same incorrectly directed back on the OEMs.
Hence, the OEMs began manufacturing fully built vehicles (FBVs) using a
combination of their own technological expertise as well as select body builders.
The results have been positive for the CV industry since a CV is built to a higher,
pre-agreed standard, which adds to the top- and bottom-line of the OEMs.
Nevertheless, the unorganised sector or independent garages have a cost
competitive advantage over the organised players owing to which a large part of
the market has remained under their hold. At the same time, the government has
been losing revenues by way of excise duties. Hence, in the Union Budget
2003-04, the government proposed additional duty of Rs10,000/chassis over and
above the 16% excise duty. Further, as per the excise rules, the government
permitted the organised body builders to offset their excise liability on the vehicle
bodies to the extent of the excise already paid by OEMs on the chassis forwarded
to them for building of the vehicle body around the chassis.
We believe that this law would have a marginal impact, as most of the transport
providers are single truck owners and are unorganised logistic service providers.
The unorganised logistic players possess higher operating cost advantages and
leverage (overloading, overall low operating cost, etc) compared to organised
player. We believe all these factors alleviate the unorganised players’ position as
against the organised players, due to which the unorganised players can forego
the Rs10,000 claim. Hence, over the long term, we see a marginal shift in the
body building business from the unorganised to the organised players.
October 1, 2010 6
7. CEBBCO| IPO Note
Indian Railways
Indian Railways (IR) is the backbone of India's logistic network. According to the
Total Transport System Study by RITES, 2009 carried out for Planning Commission,
IR carries around 35% of the total freight traffic of the country. As for coal, power,
steel, cement and fertilisers, the share is estimated to be as high as 70%.
Exhibit 5: Indian Railways - Growth in traffic (FY2004-09)
Particulars FY2005 FY2006 FY2007 FY2008 FY2009 CAGR (%)
Freight Loading
602 667 728 794 833 8
(mn tonnes)
% yoy 11 9 9 5
MTKM 407,398 439,596 480,993 521,372 538,226 7
% yoy 8 9 8 3
Originating Passengers
5,476 5,832 6,334 6,645 7,047 7
(mn)
% yoy 7 9 5 6
Passenger km 576,608 616,632 695,821 771,070 839,296 10
% yoy 7 13 11 9
Source: Company, Angel Research
The passenger and freight segments have grown consistently over FY2005-09. IR
possesses a large number of wagons, locomotives and coaches referred to as
rolling stock. The Railway Budget FY2010-11 has chalked out impressive plans for
IR to acquire 18,000 wagons through FY2011. This is in tandem to the Eleventh
Plan targets, which mentions that the additions in wagons would substantially
increase to around 60,000, a 79% increase on the additions during the Tenth Plan
(2002-2007). Indian Railways Vision 2020 has laid out more ambitious plans to
supplement the rolling stock by a total of 289,136 wagons by 2020. This is a huge
increase over the current levels and will require an enormous increase in
production, fueling demand for wagon manufacturing.
IR has been ordering 18,000-22,000 wagons on an annual basis. However,
delivery has been in the region of 13,000-15,000 only with the delivery of the
balance order delayed by almost 1.5 years. Meanwhile, freight traffic has been
growing and demand for wagons has only been on the rise. Thus, IR has been
facing wagon shortages. Hence, IR has outlined renovation plans for the existing
wagons. Hence, the Railways Budget FY2010-11 outlines refurbishment plans
across the entire rolling stock of IR. It highlights complete up-gradation and
refurbishment of the BOXN wagons (these are the open top transporter wagons
and make up one of the largest components of the rolling stock) to the tune of
16,580 units.
In fact, the outlay proposed in rupee terms for refurbishment of the BOXN wagons
has increased at a CAGR of 94.4% over FY2009-11, according to the IR. In
addition to these upgradation and refurbishment orders, there are orders for
complete renewal of the end and side walls and flooring of additional 11,710
BOXN wagons. This highlights the importance of wagon refurbishment for IR as it
attempts to expand the quantity of rolling stock inventory in circulation. The cost
advantages of refurbishment over the new wagons are a key factor in this, as
refurbishment costs (~Rs9lakh/wagon) per wagon are lower than the costs
incurred towards buying a new wagon (~Rs40lakh). Similarly, post refurbishment,
October 1, 2010 7
8. CEBBCO| IPO Note
the lifespan of the wagons increases by up to 12 years and through the use of
stainless steel in the reconstruction process, its overall weight reduces by
approximately 1 tonne, thereby increasing the carrying load per wagon for IR.
At present, there are about 13 companies operating in the wagon manufacturing
business in India. Six companies are in the public sector and seven companies are
in the private and joint sector. The public sector companies account for 30-40% of
market share of the wagon industry in the country.
PSUs have not been able to execute the orders and are continuously under
performing since the last three years. Every year, the PSUs usually have orders
much more than what they can manufacture. As on July 1, 2005, the total
outstanding orders of the PSUs stood at 7,100 FWUs (Four Wheeler Units), which
is more than a year of their production capacity.
October 1, 2010 8
9. CEBBCO| IPO Note
Outlook and Valuation
CEBBCO is one of the leading designers and manufacturers of vehicle bodies for
goods CV in India. The company is also involved in the refurbishment of railway
wagons. It proposes to partially utilise the IPO proceeds to set up a wagon
manufacturing unit. CEBBCO’s core business fetches a P/E of 25x on FY2012
estimates at the upper price band. Moreover, to justify the implied market capital
of Rs698cr, the company’s wagon manufacturing plant would have to operate at
100% utilization within a year and generate profitability in line with existing
players, which we believe at the current juncture appears stretched. Hence, we
recommend Avoid to the IPO.
October 1, 2010 9
12. CEBBCO| IPO Note
Cashflow Statement
Y/E March (Rs cr) FY05 FY06 FY07 FY08 FY09 FY10
Profit before tax 1.1 3.6 11.1 10.0 2.6 31.1
Depreciation 0.7 0.9 2.9 4.0 6.0 9.7
Change in Working Capital (1.6) (6.6) (29.0) (5.4) 22.7 (56.3)
Less: Other income (1.0) - - - - -
Direct taxes paid (0.2) (0.7) (3.9) (4.5) (2.1) (5.7)
Cash Flow from Operations (1.0) (2.8) (19.0) 4.1 29.2 (21.2)
(Inc)./ Dec. in Fixed Assets (0.2) (1.7) (2.5) (9.1) (20.0) (20.6)
(Inc.)/ Dec. in Investments 0.0 0.2 0.5 1.7 1.9 0.8
Inc./ (Dec.) in loans and advances
Other income (1.0) - - - - -
Cash Flow from Investing 0.9 (1.5) (2.0) (7.3) (18.0) (19.8)
Issue of Equity - - 1.8 30.0 - -
Inc./(Dec.) in loans 0.5 5.6 24.6 (4.6) (23.2) 47.6
Dividend Paid (Incl. Tax) - - - - - -
Others (0.4) (1.0) (2.5) (4.5) (5.4) (6.8)
Cash Flow from Financing 0.0 4.7 23.9 20.9 (28.6) 40.8
Inc./(Dec.) in Cash (0.0) 0.4 2.9 17.7 (17.4) (0.3)
Opening Cash balances 0.2 0.1 0.6 3.5 21.1 3.7
Closing Cash balances 0.1 0.6 3.5 21.2 3.7 3.4
October 1, 2010 12
13. CEBBCO| IPO Note
Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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October 1, 2010 13
14. CEBBCO| IPO Note
Address: Acme Plaza, ‘A’ Wing, 3rd Floor, M.V. Road, Opp. Sangam Cinema, Andheri (E), Mumbai - 400 059.
Tel: (022) 3952 4568 / 4040 3800
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