CRISIL assigns grade 1/5 to Modern Tube Ind IPO

CRISIL Research has assigned a grade of 1/5 to the proposed initial public offer (IPO) of Modern Tube Industries, which indicates that the fundamentals of the IPO are ‘poor’ relative to other listed equity securities in India, according to its research report dated August 18.

Vadodara-based Modern Tube manufactures stainless steel seamless and welded tubes, u-tubes and pipes. Its manufacturing facility - spread across 6 acres - is located near the GIDC Port (Gujarat). Although currently it has a capacity of 7,200 metric tonnes per annum (MTPA), up from its initial capacity of 180 MTPA in 2006, it continues to be largely a trading company.

The report says, "The assigned grade takes into account Modern Tube’s weak position in the seamless and welded tubes and pipes segment vis-à-vis established competitors like Zenith, Ratnamani Metals and Prakash Steelage. Despite scaling up its manufacturing assets, Modern Tube continues to operate largely as a trader (70% of revenues in FY10), due to which margins are low. Further, its debtor days are around 100, which is more than double the industry average of 30 to 45 days. Its asset utilisation rate is on the lower side as the company is in an expansion mode."

"The grade also reflects the promoter’s limited experience in manufacturing; he is highly experienced in the trading of stainless steel products. Further, Modern Tube portrays below average corporate governance. Independent directors’ engagement level in the business needs improvement," the report added.

"The grade takes into account Modern Tube’s growth prospects, as it is scaling up assets to supplement existing capacities. The same will enable the company to manufacture high-margin critical application products that will also help in increasing capacity utilisation rates."

Modern Tube plans to raise Rs 650 million through the IPO and will use the proceeds to expand manufacturing capacity from 7,200 to 14,400 MTPA.

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