Reblog: Sansera Engineering IPO review

• Originally SEL lined up its secondary offer in 2018, but finally enters the market now.
• Dilution in promoter’s stake remains a major concern. 
• The issue is by way of offer for sale, no fresh equity is being raised. 
• Based on its financial data, the issue appears reasonably priced.

Preface:
The company originally filed its offer documents for the same number of shares as OFS in August 2018 to mobilize around Rs. 1400 cr. and also received SEBI node, but it skipped the issue amidst uncertainties prevailed in the markets as claimed. At that time there were five BRLMs for fundraising exercises. It refiled offer documents in June 2021 and is now finally entering the capital market with its secondary offer with three BRLMs (Credit Suisse and BNP Paribas are not on the list). If we weigh both DRHPs, then the company has posted consistent growth in its top line but the bottom line marked inconsistency. However, based on financial data since FY16, the company remained cash-rich and did not want any fresh funding. The major concern that remains is the diminishing promoter’s holding which will come down to 36.56% from 43.91% post this issue. It’s worthwhile to note that while the secondary market was in a sluggish mood, this IPO mulled a collection of Rs. 1400 cr. and now when the secondary market is in pink of its health, they are planning mobilization of Rs. 1283 cr. i.e. they have reduced the valuation and kept something on the table for new investors.

About Company:
Sansera Engineering Ltd. (SEL) is an engineering-led integrated manufacturer of complex and critical precision engineered components across automotive and non-automotive sectors. Within the automotive sector, it manufactures and supplies a range of precision forged and machined components and assemblies that are critical for engine, transmission, suspension, braking, chassis and other systems for the two-wheeler, passenger vehicle and commercial vehicle verticals. Within the non-automotive sector, the company manufactures and supplies a range of precision components for the aerospace, off-road, agriculture and other segments, including engineering and capital goods. SEL supplies most of its products directly to OEMs in finished condition, resulting in significant value addition by it.

SEL is one of the top 10 global suppliers of connecting rods within the light vehicle segment (passenger vehicles with a gross vehicle weight of 3.5 tonnes or less, “Light Vehicle”) and one of the top 10 global suppliers of connecting rods within the commercial vehicle (“CV”) segment for CY 2020. (Source: The Ricardo Report).

Within India, it is one of the leading manufacturers of (i) connecting rods, crankshafts, rocker arms and gear shifter forks for two-wheelers and (ii) connecting rods and rocker arms for passenger vehicles. Specifically, SEL is the largest supplier of connecting rods, rocker arms and gear shifter forks to two-wheeler and also the largest supplier of connecting rods and rocker arms to passenger vehicle OEMs in India. (Source: the CRISIL Report).

The company sold components across 69 product families during Fiscal 2021 as compared to 51 during Fiscal 2019. Within India, its customers include nine out of the top 10 two-wheeler OEMs and the leading passenger vehicle OEM based on production volume for Fiscal 2021. (Source: the CRISIL Report). Globally, SEL’s customers include six out of the top 10 global Light Vehicle OEMs and three of the top 10 global MHCV OEMs based on production volumes for CY 2020. (Source: The Ricardo Report).

As per management, the company is now all set to take on any challenges in product shift as well as its mix as they are ready with required plants, equipment and the process.

Issue Details / Capital History:
For listing benefits and providing exit to some of its stakeholders, SEL is coming out with a pure secondary offer of 17244328 equity shares of Rs. 2 each via book building offer to mobilize Rs. 1282.98 cr. at the upper price band. The company has fixed a price band of Rs. 734 – Rs. 744 per share. The issue opens for subscription on September 14, 2021, and will close on September 16, 2021. Minimum application is to be made for 20 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 33.56% of the post issue paid-up capital of the company.

SEL has kept shares worth Rs. 9 cr. (approx. 127120 shares at the upper cap at a discounted rate) for its eligible employees and offering them a discount of Rs. 36 per share. From the residual portion, it has kept 50% for QIBs, 15% for HNI and 35% for retail investors.

Joint Book Running Lead Managers to this issue are ICICI Securities Limited, IIFL Securities Limited and Nomura Financial Advisory and Securities (India) Private Limited. Link Intime India Pvt. Ltd. is the registrar of the issue.

Having issued initial equity at par, the company raised further equity in the price range of Rs. 1550.00 to Rs. 1998.60 (per share of Rs. 2 each) between March 2006 and January 2012. It has also issued bonus shares in the ratio of 2.077 for 1 in September 1994 and 12.45 for 1 in July 2018. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 6.75, Rs. 9.09, Rs. 11.34 and Rs. 16.97/ Rs. 119.19 and Rs. 119.20 per share.

Being offer for sale, the post issue paid-up equity capital of SEL remains the same at Rs. 10.28 cr. At the upper price band, the company is looking for a market cap of Rs. 3822.51 cr.

Financial Performance: 
On the financial performance front, on the consolidated basis, SEL has posted turnover/net profits of Rs. 1640.81 cr. / Rs. 98.06 cr. (FY19), Rs. 1473.14 cr. / Rs. 79.91 cr. (FY20) and Rs. 1572.36 cr. / Rs. 109.86 cr. (FY21). Though its top-line marked growth, the bottom line posted inconsistency. According to the management, due to a slowdown in the auto sector, they marked a downturn in their performance for FY20, but recovered soon despite pandemic and posted growth in FY21 following its diversification in other product lines and product mix.

For the last three fiscals, SEL has posted an average EPS of Rs. 18.42 and an average RoNW of 11.98%. The issue is priced at a P/BV of xx based on its NAV of Rs. 166.96 as of March 31, 2021. Based on its EPS of Rs. 20.55 for FY21, the issue is priced at a P/E of 36.20 making it a fully priced issue. If we consider average EPS of Rs. 18.42 for the last three fiscals, then the asking price is at a P/E of 40.39.

Comparison With Listed Peers:
As per the offer document, SEL has shown Endurance Technologies, Minda Industries, Sundram Fasteners, Suprajit Engg., Bharat Forge, Motherson Sumi and Mahindra CIE as listed peers. They are currently trading at a P/E of 44.24, 104.11, 40.60, 24.94, 61.29, 79.66 and 155.86 (As of September 09, 2021 closing).

Dividend Policy:
SEL has not paid any dividend for the last three fiscals and up to the date of filing their RHP. It will plan a prudent dividend policy based on its financial performance and future prospects post listing. 

Merchant Bankers’ Track Records:
The three merchant bankers associated with the offer have handled 43 public issues in the past three years out of which 17 issues closed below the offer price on the listing date.