Small player big price

Somi Conveyor Beltings (SCBL) promoted by Om Prakash Bhansali and family in 2000, is a manufacturer and exporter of rubber conveyor belts upto 1200 MM catering to the material handling needs of industrial players largely in cement, fertilizer, mining and other infrastructure sector.

Manufacturing unit of the company is located at RIICO, Sangaria Industrial Area, District Jodhpur, Rajasthan. The Company that has commenced its commercial production in February 2002 with an initial capacity of 72000 meters per annum (MPA) of conveyor belts has continuously invested on capacity augmentation and currently boasts of an installed capacity of 167660 MPA which can be stretched upto 200000 MPA depending on grade and user specifications. The company is currently expanding its capacity to 339740 MPA (up from 167660 MPA) by setting up a second unit at Tanawara at a cost of Rs 35.09 crore. This expansion will facilitate the company to produce rubber conveyor belts of 2000 MM width apart from augmenting its manufacturing capacity. The second unit is expected to start commercial production by Aug ’08.

SCBL manufactures conveyor belts according to the requirement of the individual customers. There are grades M-24, HR, SHR & UHR, FR which are as per Indian Standards IS 1891 (1994). SCBL’s clientele includes big names in Indian industrial sector such as ACC, JSW Steel, some of Aditya Birla Group Companies, Prism Cement, Shree Cement, JK Cement, Western Coal Fields, AP Power Corporation, Rajasthan State Mines & Minerals etc.

The company is taping the capital market to fund setting up of its second manufacturing unit, purchase of land and building (from promoters) for the office premises, meeting margin money required for the enhanced working capital and general corporate expenses.

Strengths

Promoters have long experience in conveyor belt industry for a period of more than three decades.

Demand for rubber conveyor belts is on strong wicket with strong investment under pipeline in steel sector as well as mining and infrastructure sector. Possibilities of orders have increased with allocation of captive coal blocks and cutting down of delay in placement of orders by Coal India and its subsidiaries. Moreover with strong relationship with its strong clientele the company could have strong flow of orders from huge replacement market as the rubber conveyor belt life time is not more than 12 months. Further more the new production unit will enhance the company’s ability to manufacture rubber belts till the width of 2,000 mm on par with the industry leader MRF.

Proximity to major market segment of cement and mining in North West and central parts of India and strong relationship with existing clients with annual maintenance contracts.

Weaknesses

SCBL’s current size of operations is very small as compared to industry leader. MRF for the fiscal ended Sep ’07 has clocked a sale of Rs 52.9 crore from the product of conveyor belts compared to a turnover of Rs 15.4 crore clocked by the company in fiscal ended Mar ’07.

Facing strong competition from both large organized players and unorganized players. As the company is just foraying into 2000 MM range of belts, its competitor MRF already have capacity to manufacture conveyor belts upto 2000 MM and moreover its has the advantage of scale with a 3000 MT conveyor belt plant with higher capacity utilisation of over 100% in fiscal ended Sep ‘07. Capacity utilisation of the company for the fiscal ended FY’05, FY ’06 and FY’07 stood at 50.6%, 51.7% and 64.9% respectively. A new plant under these circumstances can add pressure on profits of the company.

Hardening prices of natural rubber (accounts for 47% of product mix) and carbon black (28% of product mix), the key input in manufacturing of conveyor belt is likely to put pressure on company’s profitability. Since most of the contracts from public sector companies are tender based preferring L1 (award for lowest bidder) rather than quality, the company has to make a delicate balance of not loosing business as well as profitability.

The project is already delayed from original completion date of Sep ’07 for want of funds.

SCBL is purchasing land and building from its promoter to which it had been paying a low rent currently.

The company has violated licence provision of Factory Act 1948 and is involved in certain legal proceedings.

Valuation

On animalization of sales for nine month ended Dec ’07, the sales was lower by 5.5% yoyo compared to the sales of FY ’07 and this is largely on account of the delay in booking revenue of one large contract from AP Genco that got delayed on account of delay in pre dispatch inspection and delivery. Similarly the PAT for the same period also declined by 5% on annualised basis. The annualised EPS was Rs 1.1. At the offer price of Rs 35, the PE on annualised EPS works out to 32 times, which is absurdly high for this small company.

 Somi Conveyor Beltings: Issue Highlights

Somi Conveyor Beltings: Financials